Home' Trinidad and Tobago Guardian : March 3rd 2016 Contents BG14 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt MARCH 3 • 2016
We have paid lip serv-
ice to the topic of
cation for many
years. At this point
we have little to
show for it and, even as our oil and gas rev-
enues decline, we are still having nothing more
than "talk shops" on the topic.
Often repeated in this column is the view
that we are not even clear on what diversi-
fication means. In one camp, diversification
meant building a smelter plant, it meant further
industrialisation. The premise here was that
we use our oil and gas resources not just for
export but also as fuel for an industrial complex
that will allow us to export more than oil and
gas. Methanol, urea, iron and steel, plastics,
aluminum, and a host of other products would
be made from our industrialisation drive.
We could then utilise these products onshore
as well, where they will form inputs into mak-
ing car rims, shipbuilding, fabrication and
metal works etc more but for eventual export.
It all sounds reasonable, but what basis
other than providing cheap gas did we think
we could build out a value chain associated
downstream manufacturing to compete on a
global basis in terms of quality, size and scale?
We have achieved some of these objectives,
however, the industrialisation that we have
embraced remains commodity based. When
energy prices are low commodity prices will
likely fall so that does not constitute diver-
sification in the true sense of the word.
Beyond that is the competition from other
countries seeking to do exactly the same and,
in many instances, are doing it better. We have
steel plants in T&T but most of our steel for
domestic use is imported from China. We took
over a refinery from Texaco in the early 1980s
and have managed to run it into the ground.
We started building off shore platforms in
T&T as we promote local content but, after
a brief stint, those opportunities are moving
back to the US due to a number of issues
entirely within our control.
The bottom line: building things---whether
it is a smelter plant, a performing arts centre
or even a hospital---does not represent diver-
sification. Nor for that matter is diversification
the setting up of "growth poles" as was the
prescription over the past few years from the
other camp. This discussion on economic
diversification was even more nebulous than
what took place previously and the premise
seemed to be that opening up new economic
spaces around the country would lead to
growth and development in those areas which,
in aggregate, would lead to a bigger pie.
It is my view the reason why this entire
conversation is so muddled is because we
understand very little around what we are try-
ing to achieve. Even though one may lead to
the other, there is a fundamental difference
between economic diversification and the
diversification of government revenues.
Very often, we are talking about the latter
in the context of the former. The immediate
and pressing need for T&T is to find ways to
diversify government revenues away from oil
and gas royalties and taxes. This can come
through other taxes, changes to tax rates,
through better collections and even growth
in overall business activity.
Of course, all these issues are in train but
it is not being addressed in the appropriate
context. The discussion about economic diver-
sification and diversifying government revenues
are often lumped together when, in fact, they
are two completely different issues with dif-
ferent time horizons.
The next area of muddled thinking is when
we speak about economic diversification but
really mean export diversification. Export
diversification may, of course, be a subset of
overall economic diversification but the two
are by no means one and the same.
Currently, the majority of our exports are
oil and gas and its related products. We can
diversify our exports away from our natural
resources by developing manufactured goods.
We do have a reasonable base of light man-
ufacturers and there is also a perennial dis-
cussion as to how to assist our manufacturers
to expand into new markets.
Appreciate that if your population size
increases those same manufacturers may be
producing not for export markets but for
domestic consumption to a larger population.
Government revenues can be diversified if
there is more domestic consumption of more
locally manufactured goods, in part, by having
a larger population size.
We can be producing exactly the same things
as before but the mix of government revenues
changes because the onshore economy is larger.
There has been no meaningful discussion on
whether our population size and population
demographics are suitable for our economic
aspirations. This is, in part, because we have
little idea what we are aspiring to.
It should be made clear that when we speak
about local manufacturing it is more in the
context of export potential. There is nothing
wrong with that objective but the issues of
competing for regional and extra-regional
market share will always be a challenge when
there is insufficient local demand to develop
local economies of scale.
Further, many of the mature group of local
manufactures and exporters were gifted local
market access in the 1980s through import
and foreign exchange controls. Those com-
panies, while taking a level of entrepreneurial
risk, were offered protection by the State so
as to develop and grow. Today, as mature com-
panies, I will suggest that few have a presence
on the T&T Stock Exchange. Few of these pri-
vately owned companies headed by captains
of industry have seen it fit to allow public
participation in the wealth being created.
Part of the reason of course is the lack of
application of our tax codes so there is a view
that many companies may face tax exposures
if they were to embark on a process of a public
Appreciate the contradiction between export
growth and the diversification of Government
revenues if the Government has not been col-
lecting its proper dues from the private sector.
When we talk economic diversification in
the true sense we are talking about changing
the mix of inputs that drive the overall econ-
omy. We have an offshore economy and an
onshore economy. The latter speaks to oil and
gas production for export. The onshore econ-
omy speaks predominantly to light manufac-
turing, construction, retail and financial serv-
Construction has mainly been fuelled by
government spending either directly or by the
level of liquidity that has been injected into
the economy over the years which has pushed
interest rates down thus making property ven-
tures more affordable. Elevated levels of gov-
ernment spending have also created a thriving
retail trade, where import, distribute, storefronts
and consumption is the order of the day. The
value added overall is very small but the con-
sumption of foreign exchange quite large.
As government s ability to spend declines
construction demand and retail spending will
slow, a downward spiral ensues. In the end,
appreciate that we have had growth driven by
resource utilisation, we have had growth driven
by capital injections, what we have not had
is growth coming from better and more effi-
cient use of our labour resources.
Inducing growth from our human resources
is in my view the critical issue for T&T. The
2013 Financial Stability Report of the Central
Bank of T&T contained the following:
"According to the 2011 census, the aging
index, which is the ratio of persons aged 65
and older to persons age under 15 increased
to 43.5 per cent up from 16.3 per cent in 1980.
For T&T, life expectancy at birth has grown
from 58.3 years in 1950 to around 70 years in
2010. The long-term implication of this trend
is that a shrinking working population would
be required to finance a larger ageing population
that is living longer."
Current estimates suggest that 40 per cent
of T&T s population is over the age of 40 years
(my favourite economic statistic). With all the
economic modeling it is easy to forget that a
country will, ultimately, succeed or fail based
on its human resources: demographics is des-
tiny. Our demographics are poor and getting
worse. So, if we are truly going to diversify
the T&T economy we have to balance the
exploitation of natural resources and the cir-
culation of financial capital flows with the
sustainable development of human capital
(which means more than a GATE program)
and introduce systems of transparency and
merit to allow that human capital to participate
in wealth creation, produce and innovate.
There are already suggestions there may
not be enough people around to do what cur-
rently needs to be done. Imagine what happens
if that remains so for 10 more years and the
oil and gas is no longer there.
Please email your questions and com-
ments to Ian Narine via email@example.com
Missing the big picture
There is a fundamental
and the diversification
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