AS I SEE THINGS: Diversification is a must
AS SMALL, OPEN AND HIGHLY vulnerable countries of the Caribbean, developments in the global economy tend to have relatively stronger impacts on our domestic economies, making the need for structural adjustments much more urgent.
But perhaps more important, the fact that our economies cannot escape the severe implications of external shocks, the old advice of not putting all of your eggs in one basket should mean much more to us if we are serious about advancing the cause of our people and nations well into the 21st century and beyond.
The notion of not putting all of your eggs in one basket is a rather simple but effective guideline that all should embrace in order to enhance our chances of succeeding in our daily undertakings. More specifically, this idea speaks directly to the need for us to diversify our activities if only to allow for the spreading of risk and more effective management of outcomes.
Therefore, whether it is individual action, or business transactions undertaken by the private sector, or macro-economic policies implemented by the government, our societies would be much better off if we focused on a wider range of activities, rather than narrowing our engagements to a single or few issues.
For example, financial analysts always suggest to those involved in investments that portfolios should be chosen to reflect a combination of risky as well as riskless assets. That strategy is designed to ensure that the risks associated with the holding of such assets are spread across as many financial instruments as possible in order to safeguard the investors’ returns.
Hence, rather than investing mostly in one or two major companies’ stocks, a careful investor would want to diversify his portfolio to include some stocks; maybe a bit of real estate; and some government securities, be it treasury bills or bonds.
On the economic front, the story that is emerging with respect to the Russian economy should remind everyone in the Caribbean why diversification is important.
In short, over the years the Russian economy has evolved with the energy sector as the main focus of economic activity.
With the recent collapse in oil prices on the international market, the Russian economy has taken a beating, with massive reductions in gross domestic product, the loss of billions of dollars in international reserves, increasing inflation, and a weakening rouble.
What is perhaps even more alarming is the fact that with a weak currency, the country cannot take advantage of higher exports because, outside of the energy sector, there really isn’t much more to shout about in terms of domestic economic activity. The bottom line now is that unless oil prices surge on the international market, more economic hardships will befall Russia.
The Russian example can surely be used as another source of motivation for us here in the Caribbean to restructure our economies to make them more resilient. And that point has to be reinforced even though a report last week from the Caribbean Tourism Organisation was quite positive in relation to the performances of our various tourism industries in 2014.
The fact remains that our countries cannot and will not be able to sustain any meaningful level of economic growth and development, with continued reliance on one or two major areas of economic activity.
Hence, we must continue our efforts to diversify our respective economies. This is certainly not a new message, but it is one that nonetheless needs echoing until we get it right!
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