Home' Trinidad and Tobago Guardian : May 4th 2014 Contents MAY 4 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
ANALYSIS | SBG9
of the diversification determinants by order
of magnitude. The results show that real
exchange rate variations have the largest effects
on concentration patterns. In fact, a 1 standard
deviation increase in real exchange rate depre-
ciation leads to a 1.8 standard deviation decrease
FDI is the determinant with the second largest
potential impact on diversification. A 1 standard
deviation increase in FDI inflows is associated
with a 10.7 per cent increase in diversification.
The list of determinants with the largest potential
impact on diversification is followed by access
to finance in third place, and terms of trade
shocks in fourth place.
Additionally, a 1 standard deviation increase
in access to finance and terms of trade leads
to an 8.5 per cent decrease and a 7.0 per cent
increase in export concentration, respectively.
T&T is characterised by relatively large and
volatile capital inflows compared to other coun-
tries in the Latin America and Caribbean (LAC)
region. FDI inflows averaged 6.6 per cent of
GDP during 1988--2011, above the LAC average
of 2.4 per cent of GDP over the same period.
In the 1980s and 1990s, T&T was able to
maintain its position as a top performer in
terms of the amount of investments it was suc-
cessful in attracting. In the 2000s, however,
the number of countries showing very attractive
profiles for FDI as well as the diversity of prof-
itable sectors for FDI significantly increased.
Additionally, FDI inflows in T&T were severely
impacted in 2009 and 2010 by the global finan-
FDI in T&T has been mostly concentrated
in the energy sector, particularly in the oil sector
first, and, at a later stage, in the natural gas
projects following deregulation of the sector.
This transition helped the economy to diver-
sify its energy sector, but not the non-energy
sector (Eclac 2003). Later, the country succeeded
in attracting new investments in other sectors,
but this only slightly expanded the numbers
of economic sectors in the economy.
Not having a developed non-energy tradable
sector will probably continue to limit future
growth due to lack of externalities in production,
lack of forward and backward links, shortages
of learning by doing, and lack of entrepreneur-
Consequently, the country has taken measures
to stimulate the non-resource-based economy.
Over the last decades, the government of
T&T has taken numerous measures directly
aimed at encouraging FDI inflows into the energy
and non-energy sectors.
FDI was also implicitly considered a strategic
means of diversification because it was believed
FDI would also act as a source of revenue for
investments in physical and human capital,
which the country needed to support the devel-
opment of other sectors.
The economy maintained strong tax incentives
(bilateral investment agreements, double taxation
treaties, and reciprocal regulatory agencies
arrangements) and supported the implementation
of free trade zones (FTZs) to facilitate export
Given the high ratio of FDI to GDP in T&T,
evidence of the lack of diversification outside
the energy sector suggests that T&T has not
been able to fully maximize the potential benefits
of the large FDI it has received.
As Mohammed, Moya, and Sookram (2010)
indicate, the additional benefits that a foreign
investor can bring depend on whether that
investor generates spillovers to the rest of the
economy through employment, technology, or
The findings of Mohammed, Moya, and
Sookram (2010) also show that FTZs have
stronger spill over effects in countries where
the local technology can be complementary to
the FDI, and weaker effects in countries with
a wide technological gap. This may be a partial
explanation as to why FDI inflows have not
substantially fostered diversification outside the
energy sector in T&T.
The country s technological and human capital
are indeed still below its potential outside of
the oil and gas sectors. Linking FDI incentives
to human and technological capital development,
as well as finding various ways of engaging the
domestic and foreign private sector in this mis-
sion, would enable T&T to better seize the ben-
efits of FDI in terms of economic diversifica-
Has T&T been suffering
from "Dutch Disease"?
It is not actually knowing whether the coun-
try has suffered from Dutch disease, but the
extent to which the phenomenon has been
harming the country s development. Indeed,
Mohammed, Moya, and Sookram (2010) claim
that in T&T, Dutch disease is not a cyclical
phenomenon, but a permanent characteristic
of the economy, given the historical prepon-
derance of oil and gas in total exports over the
last three decades.
Artana et al (2007) argue that the Dutch
disease phenomenon accounts for only some
of the reasons why T&T has failed to signif-
icantly develop its non-energy sector. Artana
et al find several other factors that have limited
the expansion of economic activities in line
with the findings presented here.
First, evidence shows that natural resource
abundance has affected public policies. Fiscal
policy has been rather pro-cyclical in past
years, and even though prudent fiscal man-
agement mechanisms have been created lately,
the credibility of the authorities has suffered,
exacerbating the macroeconomic risk perceived
by business leaders.
Second, the unsatisfactory quality of edu-
cation appears to be another binding constraint
in their study. Insufficient innovation and tech-
nological readiness outside the energy sector
are listed as further impediments. Infrastructure
bottlenecks also constrain diversification.
Lastly, the rising criminality observed in
recent years also appears to discourage entre-
Conclusion and policy implications
T&T is successfully diversifying its energy
sector. With this, the country has converged
toward the world average level of export con-
centration for 1980--2011, and T&T is now
known as a global player in the oil and gas
industry, instead of being recognised solely as
an oil-based economy.
Nevertheless, further diversification away
from the oil and gas sectors remains an impor-
tant objective because it would reduce its eco-
nomic vulnerability to commodity price shocks
and help secure output growth for many years
after the full depletion of the countries limited
oil and gas resources.
While this analysis highlights openness to
FDI and access to finance as fundamental
determinants of economic diversification, the
available evidence suggests that FDI to T&T
has not led to significant dynamism and struc-
The key question for the authorities is thus,
how to transition from reinforced resource-
based activities to greater non-energy diver-
sification and new specialisation in the high-
value segments of energy activities?
Findings presented here suggest that T&T
should aim to attract more FDI in the non-
energy sector and take measures to increase
FDI-induced spillovers in the energy sector.
Based on the findings of the literature on
FDI determinants, this could be achieved by
participating more actively in regional trade
agreement initiatives, because this would
increase access to the international markets
that its local and foreign producers enjoy.
Improving the functioning of the domestic
financial markets could also facilitate the cre-
ation of new business activities and generate
While education in T&T is already recognised
internationally for its good quality, there is
scope to improve it further. Secondary and
tertiary education as well as research and devel-
opment are important for maximising FDI s
full benefits, and the authorities may consider
investing more in these domains.
Expanding the knowledge base of the econ-
omy would facilitate the development of new
activities and also make the country more
attractive to foreign investors.
T&T s technological capacity needs improve-
ment. An additional challenge for the country
would be to find a way for domestic and foreign
private sector entrepreneurs to participate in
this effort and also agree to transfer techno-
logical knowledge. Similarly, bilateral trade and
investments treaties, as well as institutional
reforms, are policy options the government of
T&T could seize to help reduce the concen-
tration of the country s economy.
Finally, a resource-rich economy that diver-
sifies its economic structure, its products, and
its partners---and that becomes less reliant on
its most abundant endowment---is also less
sensitive to macro-economic shocks transmitted
through large fluctuations in commodity prices.
And with resource extraction highly capital-
intensive, diversification creates additional
sources of employment for the labour force.
Indeed, recent research (World Bank 2013)
finds a positive association between rising eco-
nomic diversification and rising per capita
income for countries with per capita incomes
of up to US$20,000.
Beyond that level, economies tend to recon-
centrate, though high-income countries do
not reach the concen trations usually found in
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