TRINIDAD and Tobago is in a recession; we are short of foreign exchange earnings; our foreign exchange reserves are dwindling; people are being retrenched; firms are closing; local councils are underfunded. Some tell us that our dollar is overvalued; we need to devalue; we need to put tariffs on unnecessary imports. But, alas, we are also told that the Venezuelan immigrants are here and they can grow the economy even without the devaluation of the currency!
Indeed, we are in a recession caused by the continued drop in oil production, the shortfall in natural gas to both the LNG and the petrochemical sectors which is exacerbated by the entry of the much cheaper shale gas into the world market.
T&T is a small open economy and must export if it is to purchase the imports that it needs and which in a large way, together with government spending, keep the on-shore sector going, providing some 96 per cent of the country’s employment. Also, the energy sector that is now under constraint normally produces 85-90 per cent of our foreign exchange earnings: rents.
However, the underlying characteristic of the on-shore economy is that its private sector entrepreneurs provide domestic services and with the economic support systems, as a rule, use the rents to import, mark-up and sell to the population. In other words, the economic rules of the on-shore do not facilitate the innovative and export-oriented entrepreneur.
Consider the following scenarios: There is a sustained fall in foreign exchange earnings by the energy sector for use locally, rents. Hence, if there is no other source of foreign exchange, we cannot import the amount of goods/services to which we are accustomed; this is independent of whether the demand for these goods drops or does not drop!
If also, the dollar were to be devalued in order to reduce demand for imports by increasing their local prices, then we should expect a reduction in the on-shore economic activity. Since this sector employs the mass of people then we should also expect a reduction in employment – retrenchment as the labour available exceeds the labour required to meet the reduced commercial activity. We then should expect workers to be competing among themselves for the reduced number of jobs and hence a reduction in wages/salaries as the unions lose their bargaining power. This can continue until labour in general receives barely what it needs to survive—a race to the bottom. Some may say that the devaluation would encourage the on-shore export sector. But the rules of the on-shore economy discriminate against such high risk and necessarily innovative entrepreneurs.
If instead of a devaluation we had tariffs imposed on certain goods which could also succeed in reducing demand and increasing prices of the selected goods, we should expect the same scenario as a devaluation, even the creation of a black market for foreign exchange – again a race to the bottom. If, however, we were to use up our reserves and enter into debt as a short-term measure to keep the on-shore economy operating as usual, we should also expect the race to the bottom when these are no longer available (whether we devalue or impose tariffs or not) and there is no increase in rents earned.
It is interesting to note that the IMF, in considering trade among the larger nations, warns that devaluations will not fix a country’s economic problems.
Further, it deemed it counter-productive to mitigate perceived currency over-valuation by imposing tariffs from countries perceived to have undervalued currencies. To quote the IMF: “Currencies are neither the hammer nor nail” in fixing an economy. Many years ago, this sentiment was also put forward by Prof Michael Porter wherein he called for an increase in productivity, especially innovation.
The solution in our case has to be to improve the earning of foreign exchange. Hence, we see the focus of our government on trying to get new investment into the sector to look for gas and oil; and its recent MOUs with Barbados and Grenada to receive any gas that may be produced in these countries. The hope to use gas from Venezuela has faded as that country sinks deeper into chaos.
A new class of such entrepreneurs has to be created via the building of a national innovation system and an economic development board to encourage the higher risk innovative export entrepreneur.
Still, we are being told that the presence of the Venezuelan migrants on-shore could indeed be a vehicle to spawn new innovative export activities and so provide the foreign exchange income and even avoid a devaluation of the dollar.
However, at its last meeting, the Caribbean Development Bank told us that the lack of financing was identified as preventing the application of technology in regional agriculture. How is a young person who goes to a financial institution without collateral get the required funds? Where would a young graduate get this? It said that agriculture was underperforming because of low productivity… that countries which were involved heavily in technology have seen rapid increase in growth in the sector. The same comment could be applied to any on-shore export activity: the lack of finance, technology and hence low productivity, lack of competitiveness. Hence, an excess of labour, including the migrants, without the investments and technology, would lead to the same race to the bottom.
Indeed, the IMF tells us that the Colombian economy, its GDP, will benefit from the massive influx of Venezuelan migrants. The reasoning is that when they become assimilated they will need domestic services and when employed will provide taxes. In T&T such services will also increase the need for foreign exchange, exacerbating the situation.
Economic development, in our case, involving globally competitive products needs more than an abundance of labour willing to work for whatever wages, particularly now that the global economy is being pushed away from outsourcing in developing countries via global value chains that could jump-start the diversification in countries like ours. The alternative to creating on-shore innovative export companies in the absence of renewed rents from the energy sector is the race to the bottom!