Home' Trinidad and Tobago Guardian : November 21st 2013 Contents NOVEMBER 2013 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
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in the energy sector.
Private domestic investment has been largely in housing
and real estate.
Between 2000 and 2008, real GDP growth averaged close
to eight per cent per year, with the energy sector growing at
about twice the rate of the non-energy sector. In the period,
inflation was broadly kept in check and there was a significant
decline in unemployment. The economy also registered fiscal
and external current account surpluses and a significant
increase in foreign reserves.
Constraints to diversification
I would wish to argue that this seemingly impressive macro-
economic performance, unfortunately, masks the many con-
straints to economic diversification that we actually face. Let
me discuss some of these.
First, we need to cautiously interpret our official estimates
of GDP and per capita. For example, the arithmetic shows
that we have a per capita GDP of close to US$20,000, but
a large part of this comes from the imputed profits of the
foreign energy companies and may not necessarily reflect
domestic living standards. For this reason, rather than per
capita GDP, per capita national income (NNI) or non-energy
GDP, may be a more appropriate indicator of true domestic
economic circumstance. There is no official estimate of NNI,
but World Bank estimates suggest a per capita national income
figure of about US$12,000, which still suggests a pretty decent
standard of living.
Similarly, the IMF and other commentators (including our
own Dr Roger Hosein) have analysed that our official unem-
ployment figure of around five per cent is influenced by a
high level of under-employment through government make-
work programmes and an over-manned state sector.
Our relatively strong budget position covers up certain struc-
tural weaknesses in our public finances that could undermine
medium term fiscal sustainability. These include a weak non-
energy tax base, an acute misallocation of budgetary resources,
in favour of subsidies and transfers at the expense of economic
and social infrastructure and poor project implementation.
Behind our small budget deficit of 2-3 per cent of GDP over
the past three years is a non-energy deficit of close to 20 per
cent of GDP, which is covered by energy sector revenues.
Given the size of this non-energy deficit, how will we handle
our public finances when our oil and gas resources are exhaust-
ed? In order to address this eventuality, other successful mineral
resource economies have kept their non-resource fiscal deficits
at more manageable levels -- around five per cent of GDP for
Chile and Norway and around ten per cent of GDP for Malaysia
Similarly, 90 per cent of our import bill of US$9.5 billion,
is covered by receipts from the exports of oil and gas. When
these export receipts begin to decline, as they will sooner or
later, our foreign reserve cushion of US$9 billion will first be
exhausted and after that, what?
By painting this dire scenario, I am trying to underscore
the need for macro-policy adjustments and for greater urgency
in our diversification efforts. However, because things look
good on the surface, there is little appetite for implementing
the difficult decisions that are critical for a concerted and sus-
tained diversification effort.
Research on the successful resource-rich developing countries
has shown that while there is no blueprint, economic diver-
sification requires certain basic preconditions. These include:
• A macroeconomic policy that ensures economic stability,
minimises the impact of resource-price volatility and seeks
to address Dutch Disease;
• High quality physical infrastructure in the form of roads,
power, water, ports and, very importantly, communications
• High quality human capital as reflected in the output of
our secondary and tertiary education system, complemented
by a flexible system of training institutions;
• Adequate investment in research and innovation, supported
by both the public and private sectors;
• A business-friendly environment that is attractive to both
foreign and local investment, and
• An effective, modern and transparent system of governance
(a discussion of which I would return to later).
While we have been making efforts in this direction, in my
personal view we are still some distance from meeting this
very high bar of minimum pre-conditions.
I think that we have achieved a fair amount of macro stability,
though I maintain we must continue to work towards estab-
lishing fiscal sustainability through tax reform (particularly
with respect to the non-energy tax regime) and through expen-
diture reform that seeks to reduce transfers and subsidies and
focus on critical infrastructure to enhance export competi-
Excess demand and Dutch Disease
The Heritage and Stabilisation Fund, formally introduced
in 2007, constituted an important step to reducing energy
price volatility (through the stabilisation component). In addi-
tion, by putting aside some of the energy revenues as long-
term savings, the HSF contributes to addressing the problem
of excess demand and Dutch Disease.
I am convinced that, with proper revenue and expenditure
reform, we could boost capital spending on infrastructure,
and still increase our savings into the HSF. (But that s a dis-
cussion for another day).
Let s not fool ourselves: the quality of our physical infra-
structure is poor compared to that of countries with our level
of per capita income -- and this is so across the board --
including our road network, power, water and, most importantly,
Similarly, notwithstanding ongoing efforts at improvement,
our business environment is still considered less attractive
than that of the more dynamic developing countries (or that
of the successful diversification countries).
According to the Global Competitiveness Index, for the
period 2012-13, T&T is ranked 92 out of 148 countries, while
Singapore is ranked No 2, Malaysia (24), Chile (34), Barbados
(47), and Botswana (74). Several Latin American countries are
ranked ahead of T&T.
And our most problematic factors, according to the survey
are: crime and theft, inefficient government bureaucracy, cor-
ruption, poor work ethic and insufficient capacity to inno-
Let me recognise that, in recent years, successive government
administrations have taken various piecemeal initiatives to
address the diversification challenge.
As noted earlier the HSF was a very important initiative;
an Economic Development Commission has been established
(Richard Young) as well as a Productivity Council; we have
launched a public/private sector partnership programme and
we have provided a range of tax and other incentives to attract
investment. However, in the face of fierce global competition
for foreign investment, these fall short of a consistent, com-
prehensive diversification strategy.
As you know, coming out of the stabilisation and structural
adjustment programmes of the 1990s, we adopted a private
sector driven development strategy, with the Government
acting as facilitator. There is much discussion as to whether
in the current global context, this strategy is still produce
meaningful diversification. Interestingly enough, most of the
resource-rich countries that were successful at diversification
implemented targeted government interventions to complement
While recognizing that Trinidad and Tobago is still short
on the preconditions, I think that there is sufficient evidence
to suggest that market mechanisms by themselves will not
be sufficient to achieve diversification.
Adapting a quote from Norman Girvan, which appears in
Terrence Farrell s very informative book, The Under-Achieving
Society, "...as long as it is easier and less risky to make quick
returns from importing, trading, fast food, restaurants, insurance
and finance, property and real estate development and fetes,
these activities will flourish and there will be little success at
In my view, therein lies the case for more activist government
intervention, though, admittedly, this is not without its risks
(government capture, even more corruptio, etc).
Weak institutions, poor governance
Recently researchers have begun to analyse the diversification
challenge faced by resource-rich developing countries not
solely in terms of the economic incentives, but through the
lens of political economy.
Alan Gelb from the centre of Global Development puts the
blame squarely on weak institutions and poor governance.
Gelb argues that "...large natural resource rents make "young"
democracies malfunction and there is a tendency for these
countries to lack accountability and be dominated by patronage
politics. They become hostage to economic policies that are
driven by short-horizon, patronage-driven electoral competition
and a non-transparent allocation of resource rents".
I don t know whether some of this resonates with you, but
it has certainly caused me to stop and ponder.
Does the disproportionate concentration of government
expenditures on subsidies and transfers and make-work pro-
grammes, as against economic and social infrastructure, have
anything to do with short-term patronage and electoral pol-
Our economy has serious skills gaps, particularly in the
public sector, yet patronage politics tend to keep many com-
petent managers and professionals from full participation --
resulting in the under-utilization of scarce human resources.
Some people argue that the expansion of make-work schemes
raises the supply price of unskilled labor, creates a dependency
syndrome and contributes to poor productivity -- which,
according to the Global Competitiveness, is one of our major
In line with Girvan s thesis, currently in T&T, many businesses
choose to engage in non-transparent competition for govern-
ment contracts rather than to opt for the more difficult and
risky route that leads to the development of new export busi-
T&T is rated very poorly on the corruption perception index
and while we are no Nigeria, there is a growing perception
that illegal payments are part of the cost of doing business.
In short, I would want to suggest that patronage politics
and resource-rent driven governance may be partly responsible
for our difficulty in attracting major investments in new non-
energy (high technology) export activities, which tend to carry
long gestation periods.
But where does that leave us? Does it mean that there is
no real hope of diversification? Are we confined to ambling
along hoping for the next oil and gas discovery? And will we
in the next 12, 15 or even 20 years, become another resource-
I certainly don t think that a meaningful level of diversification
of the T&T economy---one that will guarantee reasonable and
sustainable long term growth---is unattainable. While specific
recommendations for changing the current policy-mix are
outside the scope of this presentation, I would simply want
to end by re-emphasising some considerations - some prior
actions -- that would have an important bearing on how suc-
cessful we are in our efforts.
One, if diversification requires evidence-based, long-term
macro-planning, we urgently need a quantum improvement
in the scope, quality and timeliness of available economic and
social statistics. Neither the public nor private sector could
operate effectively in the present lacuna.
Two, enhancing the quality of our economic and social
infrastructure (electricity, ports, broad-band technology etc)
must be put as an urgent priority. We have the resources, we
have to find an effective way of planning and implementing
Three, improving the investment climate is central to building
international competitiveness. And it is time that we accept
that in addition to bureaucracy, that crime and corruption are
major blots on our investment climate.
Finally, many of the high performing Asian countries (and
Chile as well) were able to forge a national consensus involving
government and private sector and across ethnic and political
lines, to use resource revenues to underpin shared growth.
This approach required open dialogue between the relevant
stakeholders and astute leadership. It is not going to be easy
and it will take time. We, however, need to find a way of
making it happen.
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