But there are dangers of over-reliance on financial services and tourism, as recent developments have shown. Offshore banking is being subjected to increasing scrutiny for tax evasion and money laundering. Tourism is highly sensitive to economic conditions and security considerations, and may be close to saturation point in some of the smaller island destinations.

According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), the way forward is to aim at high-technology activities and at service industry "clusters". But to attract investment in high-technology activities, far more than fiscal incentives will be necessary. First, governments will need to make strong investments in human capital in order to provide a well-educated and productive labour force. Second, local infrastructure services such as electricity and telecommunications need to be made more efficient and cost-competitive. Unfortunately, in these areas, privatisation has frequently had the opposite effect to the intended, due to limited competition, persistence of monopolies and small market size.

And third, there is a need to liberalise access to overseas markets. Developing countries like those of the Caribbean are already net exporters of services through the movement of natural persons in service occupations such as teaching and nursing.

ECLAC also argues for a service development strategy focusing on clusters rather than on individual industries, taking into account linkages with the productive sectors.

Banking, insurance and tourism, for instance, have close links with construction, telecommunications, transport and electricity. And educational and health services, the basis of human capital formation, are critical for the development of high-technology goods and service industries.

This approach calls for an offensive rather than a defensive attitude to service sector liberalisation. Costs and benefits would need to be evaluated not only looking at their impact on exports and imports, but also examining the potential effects on the quality and costs of service delivery and the scope for development of new industry clusters.

In this approach service sector liberalisation becomes part of an integral strategy for development through diversification. Equally important, it should be accompanied by regulatory schemes that promote growth, flexibility, transparency and healthy competition. And regulation should take care to preserve some discretionary authority for governments in the application of economic policies, given the vulnerability of the economies to external shocks.

Professor Norman Girvan is Secretary General of the Association of Caribbean States. The views expressed are not necessarily the official views of the ACS. Feedback can be sent to mail@acs-aec.org.

(ends)

September 27, 2002