Royal Bank of Canada Lunchtime Address: Towards an Irish-inspired Growth Model for the Caribbean
Date & Time: Thursday, May 25 at 2:00 p.m. – 3:30 p.m.
Due to the relatively small domestic capital pool, the Caribbean has pursued a growth strategy over the past few decades that seeks to encourage inward capital flows through Foreign Direct Investment and sovereign borrowing. The extent of the foreign capital investment driven transfer of wealth and knowledge, and the longer-term impact on living standards and poverty levels in the Caribbean, has arguably been weaker than we had hoped. There have also been large capital inflows to the offshore banking sector in the Caribbean, but the onshore impact of these capital flows is also arguably relatively weak. In any event, this offshore model has come under increasing criticism and forced adjustment which could signal its eventual demise. We know that infrastructure, industry, human capital, renewable energy, climate change resilience, and a private-sector led growth strategy for example, have been identified as key areas for investment, if we want to realize long-term inclusive, sustainable and equitable growth in the Caribbean. But such investment requires capital. With already overleveraged sovereigns and nervous banks in the region, where will this capital come from, if not abroad? But how do we address the shortcomings mentioned earlier in the existing FDI model, which is heavily reliant on concessions, arguably to the disadvantage of the domestic private sector? One idea, inspired by the Irish FDI model, is to invite publicly traded multinational corporations to locate in the Caribbean. But, instead of granting tax holidays or the usual concessions, the prevailing corporation tax rates are applied – but paid at least partially with equity. This makes FDI cheaper to the foreign multinational, since the bottom line and balance sheet implications of paying corporation tax with equity instead of cash, are very attractive. This equity is then placed in a Sovereign Wealth Fund, the assets and dividend flows from which can be used to support domestic investment needs as earlier identified. Given that this is an onshore and taxed FDI model, it will not attract the scrutiny of rabid offshore banking critics, and the Caribbean can benefit from first mover advantage now, and will be able to secure gains from this model, before other nations decide to compete.
Global Economist and Professor of Economics