The Challenge of Adjustment
By GREGORY McGUIRE
As is the norm, the first month of the year was characterised by the forecasts of the state of our economy from several quarters, local and foreign.
Statements have been issued by the Governor of the Central Bank, Standards and Poor’s, the IMF, Finance Minister Winston Dookeran and Planning Minister Mary King. The general consensus seems to be that the economy is poised for growth , but that the level of fiscal deficit needs to be contained in order to avoid an unsustainable escalation in national debt.
In the context of relatively positive reports, some interests, in particular labour and the Clico policy holder’s group, find difficulty in understanding why the Government continues to complain about the lack of “fiscal space” to meet the PSA demands. Others, particularly on the Government side are wondering why the economy continues to be sluggish. The problem seems to lie in the absence of a coherent strategy to move the economy forward. This in turn is a reflection of both the quality of the diagnosis and the nature of conversations being held with the population. In short, we have not developed a framework to meet the challenge of adjustment.
The macroeconomic data show some positive trends. Prices of crude oil and petrochemicals are currently at their highest level since 2008. Oil prices (WTI) averaged US$80 per bbl. over the year, the highest level in over a decade- bar 2008. Although oil production declined by 10 per cent compared to 2009, the increase in prices (30%) should have been sufficient to compensate for the lower output. Similarly, both methanol and ammonia prices climbed to levels only bettered in 2008. Even in the case of natural gas, while prices at Henry Hub languished below US$ 5.00 /mmbtu, in other destinations the link with crude oil ensured that netback values to T&T showed an improvement from 2009. Moreover, an often forgotten or unknown fact is that the LNG investments were made with the expectation of Henry Hub prices in the region of US$3-4/mmbtu.
So the problem in the economy cannot be the external account or the fiscal account since both are made secure by relatively high export commodity prices.
What has happened in Trinidad and Tobago is that over the last five years, the Government has absorbed all of its revenue surpluses in the pursuit of an expansionist programme. The growth in recurrent expenditure between 2004 and 2008 matched the increases in revenue. The problem is that some of that revenue, particularly in 2008, was due mainly to fortuitous high prices on commodity markets. The challenge the country now faces is how to adjust to a more normal flow of revenues while at the same time trying to stimulate growth.
Most of the prescriptions uttered over the past month seem to fall short in important ways. Most recognize that investor and consumer confidence are important ingredients. However, there is no real insight as to how one could win such confidence. For the IMF “the immediate requirement is to restore confidence by providing a supportive policy mix and addressing remaining weaknesses in the financial system. The directors agreed that the 2011 Budget is geared towards reinvigorating the economy. Once the economic recovery is well established, fiscal policy should aim at reducing public debt and rebuilding buffers in the medium term.”
The Finance Minister expects that confidence would return to the economy “consequent on those outstanding reviews”. He argues that “consumer spending and business investments must be strengthened and this Government is providing adequately the required support, including favourable credit conditions.:
Two underlying assumptions seem to inform these views. First is that the continuing high oil and commodity prices will again bring us salvation. The second is that the economy has a built in capacity for growth. Mr. Dookeran expects that “as the recovery continues, business should become more confident about expanding—by both upgrading facilities and hiring workers.”
The reality is that the lead sector of the economy is already performing at near full capacity with little room for increase in existing plant or in foreign exchange earnings. Moreover, we are already consuming most of the revenue and foreign exchange generated from that sector leaving little behind for capital expenditure. Therefore in the short to medium term, growth must be generated in the non-energy sector which employees 97 per cent of the working population.
There is no denying that confidence is a key factor but is confidence going to return magically because of positive reviews from international agencies? I think not. Confidence relies on trust. Trust can be built by conversing frankly and openly with the population on three questions: Where are we now? Where do we collectively wish to be? How best are we going to get there? In deliberately simplistic terms these questions form the basis for a sound strategy for going forward. The Government to date has made no such statement. There are mixed and sometimes conflicting signals coming from the Ministry of Finance, the Ministry of Planning and Economic and Social Reconstruction and the Ministry of Energy and Energy Affairs. On top of that, add the signals coming from the Prime Minister and the Minister of Worts.
Trust can be built by observing the values touted in the elections campaign – transparency, integrity, an end to corruption, nepotism and political patronage. The successive scandals over the eight months of the PP Government and the official responses to it do not instill confidence.
In any event, expansion in the non-energy sector requires more than just confidence. A vast number of non-energy goods-producing sectors are net users of foreign exchange and are therefore dependent on a vibrant energy sector to generate foreign exchange for their survival.
To its credit the Government seems to have recognized this and has appointed its National Innovation and Competitiveness Council. According to Minister King “the critical role of this council is immediate in that it has to seek measures to increase the productivity and, more positively, the competitiveness of our on-shore businesses”.
The Council needs to avoid falling into the trap of seeking to emulate other countries that are of higher rank on the competitiveness index.
Much of what is measured on the competitiveness index has to do with those institutions, laws, incentives, and infrastructure that facilitate direct foreign investment. Trinidad and Tobago has had one of the highest levels of foreign investment inflows in Latin America over the last ten years. But these were largely based on a competitive natural resource (gas) platform. The Council will have to spend some time mapping what might be required to specifically take budding T&T firms, first to regional and then to global level. Much of what has transpired as national policy for competitiveness in the past has focused largely on macro level initiatives. But as the late Lloyd Best has repeated said, emphasis should be placed at the level of the firm. We need to find out who is doing what where, and what kind of assistance they need to enhance their productivity and competitiveness.
We will discover that Best’s views resonates with Michael Porter, contemporary competitiveness guru, who argues that it is firms and not nations that compete. Where possible, greatest emphasis needs to be placed on firms that are not net users of foreign exchange but make most use of national raw material or have the capacity to generate high value-added locally.
We all agree that the productive capacity of the onshore sector of the economy must be expanded and brought to international competitiveness so that the economy as a whole can now export.
The challenge is, are we prepared to do the work required to properly plan and execute the appropriate strategy? Or will be go after the most simplistic solutions while waiting on a fresh round of offshore investment to deliver us from evil?