Home' Trinidad and Tobago Guardian : July 17th 2014 Contents BG18 | COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt JULY 2014 • WEEK THREE
The report from the Inter Amer-
ican Development Bank titled,
"Is there a Caribbean Sclero-
sis?" has generated some
newspaper coverage in T&T.
Coverage, yes, but not nearly
the required level of debate from a T&T con-
Below is an extract from the conclusion of
this document. If you have read it before,
please read it again. It is my view that what
is written below is very relevant to T&T.
From the report:
"The central question underlying this report
is whether the poor economic performance
of the Caribbean is due to the small size of
its economies and, if not, whether it is then
due to sclerosis.
"Is size the problem? No. The Caribbean is
a negative outlier among the world s other
small economies and is in relative decline with
respect to the others. Thus, while in the early
1970s real GDP in the Caribbean was four
times that of the average for small economies,
today it is 0.9 per cent. Without denying that
small economies indeed face problems that
larger countries do not, the relative poor eco-
nomic performance of the Caribbean countries
is specific to the region.
"Is the Caribbean problem one of sclerosis?
It would appear to be so. The sclerosis hypoth-
esis is that special interest groups devote their
resources to unproductive rent-seeking to
redistribute social wealth. By enlarging their
slice of the pie (real GDP), these interest groups
reduce the enlargement (economic growth) of
the total pie, which, in turn, reduces total
social gains. This happens by influencing policy.
"Small and politically stable societies like
those in the Caribbean foster the development
and institutionalisation of growth-retarding
special interest groups, which are then better
able to influence policy to redistribute resources
in their favour. Large discretionary tax expen-
diture (taxes waived), often used under the
banner of industrial policy, could be interpreted
as returns to these groups.
"The sclerosis hypothesis is supported by
opinion surveys of Caribbean businesspeople
(relative to others in small economies). They
think that corporate activity is dominated by
a few business groups rather than spread
among many; that anti-monopoly policies are
ineffective; and that the existing rules dis-
courage rather than promote foreign direct
investment, and hence foreign ownership is
low. They have a lower level of trust in politi-
cians, and opine that there is a greater degree
of unproductive rent-seeking, as government
officials engage in more diversion of public
funds and show greater favouritism.
"Caribbean businesspeople make more irreg-
ular payments and bribes than do businessper-
sons in other small economies. These are char-
acterisations that describe labour and factor
markets, policies, and policy institutions that
stem from the sclerotic hypothesis."
The first question posed in this document
was whether size was a problem in terms of
economic performance of Caribbean
In a T&T context the answer is clearly no.
History will recall T&T being at one time the
third richest country per capita in the Western
Hemisphere. It will show us later on as being
the third largest supplier of liquefied natural
gas to the world s largest economy, the United
Yet, what exactly do we have to show for
it? Not withstanding our energy resources,
what exactly is holding us back? Why is devel-
oped country status still an aspiration drowning
in political rhetoric as opposed to our current
The IADB cites an inverse relationship
between country size and economic growth
rates, but points out that this can be overcome
by greater openness, education and financial
development. For me, this is the issue that
lies at the heart of our problems.
These issues have been discussed in this
space on many occasions. Everything from
immigration policies, procurement legislation,
transparency in Government, capital market
development, to the reduction of transfers and
subsidies have all been discussed.
On the eve of another national budget, how
will these issues be addressed if at all?
The invisible hand
Almost two years ago to the day, I wrote
the following under the headline, "The invisible
hand." Please compare against some of points
raised in the IADB paper.
The "invisible hand" in the local economy
is the Government (as opposed to the norm,
which is the private sector). Our national budg-
ets have grown exponentially over the past
ten years and so Government spending as a
driver of economic activity has also increased
in a similar manner.
The enlightened self interest is not a case
of what I can do, but rather what I can get
with a government contract being the basis
of many entrepreneurial aspirations.
There are vast resources of pitch at our dis-
posal via the Pitch Lake. If you had an engi-
neering degree and was given a free choice,
would you deploy your skills and resources to
find new and innovative ways to use, package
and distribute asphalt or would you seek to
purchase some equipment and position yourself
for a contract to pave some roads around elec-
If we look around the answer is obvious
and unless and until we address this imbalance
and move the "invisible hand" towards the
functioning of the free market, we will be
talking about diversification and innovation
for decades to come with little to show for it.
Those who argue against the free market,
in my view, fail to appreciate that it is the
interference in the market by parties such as
governments that creates false incentives that
misalign actions away from the "greater good."
This is not to say that intervention is not at
times necessary. The issue here is determining
the balance in order to meet our economic
The free market is also about "creative
destruction" in that the forces of the market
destroy those that fail to manage their risks
properly and something new and more robust
will come as a replacement so long as the
overall need remains.
The problem, of course, is that in a democ-
racy "creative destruction" affects votes
because when people are hurt by the impact
of the forces of the market, they get angry
and turn to politicians to alleviate their woes.
Politicians feel compelled to act as their re-
election is at stake and so creates the vicious
cycle where more is spent, but less is pro-
The problem with "Big Government" comes
when they spend other people s money (tax-
payers ) on other people (unproductive rent
seekers). This is inefficient because the spender
of the funds have no interest in ensuring it
is being spent properly and the recipient of
the good or service (the public) has no input
into what constitutes quality.
This is why many of our public services are
in such a deplorable state. Worse still, we have
expanded and entrenched this system using
borrowed funds through budget deficits.
We hurriedly build and repair schools to
send children to school for free education right
up to the tertiary level. At the end of it, all
many employers are having difficulty recruiting
people with the proper skill set to do the
required jobs. Many then migrate and the
multi-decade-long investment in the human
resource is lost to the country.
In addition, a government can t have other
people standing unemployed as they impacts
votes, so the solution is to spend more money
on "make work" programmes to employ cit-
izens at largely unproductive wages. Immigrant
labour then steps in to fill the gap and since
we have no immigration policy on record, our
social services, such as police and hospitals,
etc, now have to cater to service an expanded
pool of constituents and so more resources
It is not an accident that subsidies and
transfers make up for 50 per cent of our bud-
geted expenditure. Yet these subsidies lead to
misallocation of resources that then require
additional subsidies to make up for the lost
Will it ever change?
Politicians will give good speeches on diver-
sification and divestment and about "opening
up the economy." They may be well intentioned
until they realise that ceding power to the
market means less control.
We live in a society where the extension of
political patronage is the key to ensuring loyalty
and so the check and balance of the market
is either stymied or overridden. Yet, as we are
now realising an underdeveloped market system
inhibits the creation of wealth, so all we are
left with is the transfer of wealth.
Will we ever resolve to take concrete steps
to changing the course?
Ian Narine is a broker registered with the
Securities and Exchange Commission.
Wealth creation or wealth transfer?
The problem with
"Big Government" comes
when they spend other
people's money (taxpayers')
on other people (unproductive
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