Home' Trinidad and Tobago Guardian : November 21st 2013 Contents NOVEMBER 2013 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
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Editing and design: NATASHA SAIDWAN
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The issue of the diversification of the T&T economy
is back on the agenda for national discussion,
with contributions by former Central Bank gov-
ernor Ewart Williams and economist Mary King
in this publication and with substantial recent
comments on the issue by Richard Young, the chairman of
the Economic Development Board.
Clearly, the T&T economy will not diversify away from its
current dependence on primary energy exports such as oil,
natural gas, ammonia, methanol and iron and steel, unless
and until there is substantial and sustained new investment
in non-energy industries.
So, the question then becomes how is T&T, as a country,
going to encourage or engineer a tsunami of non-energy invest-
ment that is substantial and sustainable enough to replace the
energy sector as the country s principle source of income over
a period of about ten years?
Such a tsunami of non-energy investment is necessary
because of the possibility that T&T s natural gas---which has
led development for at least the last three decades---may have
entered a period of secular decline as a result of resource con-
straint and external threats.
For this tsunami of non-energy investment to be truly trans-
formative (which is both substantial and sustainable) it can
be argued that there must be at least preconditions:
• The investment must be used to develop industries whose
products are exported to the global market, as opposed to the
domestic or regional market. This is because there is a require-
ment that the new non-energy industries must generate enough
foreign currency to eventually replace the energy sector.
• The investment should be led by the private sector (both
foreign and domestic) and based on the ability of the new
non-energy industries to generate long-term profits.
It has become obvious to me that the current approach of
tax incentives and government facilitation will never be enough
to achieve the transformative non-energy investment that is
necessary to develop a post-gas economy.
Tax incentives and government facilitation have failed to
generate substantial and sustainable investment in the non-
energy sector in the last 25 years.
It can be argued that even if tax incentives and government
facilitation were doubled, they would still not be enough to
drive private-sector investment---especially by the local private
The main reason the local private sector has stayed away
from significant new investment in the last decade is because
the domestic private sector can generate strong and seemingly
sustainable profits by production aimed at the domestic and
Put another way, the local private sector is able to continue
with its approach of importation and distribution because the
energy sector---which facilitates access to foreign currency---
has made such an approach extremely lucrative with minimal
If it is possible to import a car for US$15,000 ($96,000)
and sell it on the local market for $200,000, why would any
private-sector investor in his or her right mind even consider
the possibility of emulating Elon Musk, the South Africa-born
entrepreneur behind electric car maker Tesla Motors?
If it is possible to borrow $25 million to acquire a fast-food
franchise and establish a restaurant next to a booming gated
community, who would want to go through the headache of
sourcing $25 million to construct a kitchen utensil plant using
melamine produced on the Point Lisas Industrial Estate?
It is the profitability of the domestic and regional markets
that severely reduces the incentive for any but the most daring
businessman to risk their capital in making new investments
in the local productive sector.
An analogous example of this risk aversion---and the reason
why incentives and facilitation will not work---is the length
of time it has taken to transform the local fuel market from
gasolene to CNG.
Despite years of incentives and facilitation, the only way
the change to CNG is going to happen is when ALL gasolene
subsidies are completely removed.
T&T citizens respond much more to the price and the prof-
itability of something than they do to incentives and facil-
The tendency of the local private sector to import and dis-
tribute instead of investing and innovating will continue as
long as importing and distribution is much more profitable.
How does the Government disincentivise importation and
distribution, while providing the appropriate framework for
a tsunami of new investment in the non-energy sector?
It is contended that if the cost of US$1 became more expensive
by one-third (US$1 to $8.56), the cost of most imports would
increase by 33 per cent, which would automatically make
importation and distribution less profitable.
Effectively, a 33 per cent devaluation is what we got in
April 1993 when former finance minister Wendell Mottley
took the decision to float the TT dollar.
In the 11 years from 1983 to 1993, the T&T economy expe-
rienced positive growth in only two years---1990 and 1991,
according to the Central Bank s Public Education Pamphlet
on Inflation, which was issued in 2006. Inflation was over 7
per cent in nine of those 11 years.
On the other hand, in the 11 years from 1994 to 2004, the
economy experienced positive growth in each of the 11 years
and experienced inflation rates below seven per cent in every
While there were other factors---such as tariff reduction and
the elimination of exchange controls---that contributed to the
positive growth in a low inflation environment that T&T expe-
rienced between 1994 and 2004, it can be argued that the
flotation of the T&T dollar contributed to forcing the local
private sector to retool their production centres to dominate
the local and regional markets.
Flotation created a disincentive to import and distribute.
The society was not thrown into turmoil after the flotation.
If the private sector responded to devaluation in 1993 without
"turmoil," why should the response 20 years later be any dif-
The argument against the policy of 1993 working in 2013
is that in 1993, it was acknowledged that the local economy
was in crisis as foreign reserves had virtually vanished and
the country was facing a new debt crisis.
But are we going to wait until we return to the pre-Easter
1993 crisis environment before facing reality?
If devaluation is added to diminution of the State sector
through privatisation, there would be much more space for
the local private sector to invest. An example would be National
If the Government eliminates the fuel subsidy, devalues the
T&T currency and privatises significant parts of the State
sector, the domestic economy would have a huge fiscal surplus,
a much stronger current account and, as a result, a rather sig-
nificant build-up in the country s foreign savings.
Such policies would be politically unpopular and therefore
are destined not to be considered.
Is diversification likely
Mary King, economist
Richard Young, the chairman of the Economic Development
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