Mary King
I welcome the appointment of the Economic Advisory Board by the current government, which has two advisory tasks before it; the first is to bring the economy into a reduced but more efficient and effective steady state given its dependence on the energy sector earnings that appear to be constrained, possibly, for the long haul; and secondly to reconstruct the economy, to diversify it, such that we do not depend on one related set of commodities.
The objective of the first task can be stated succinctly as to match the aggregate demand of the on-shore economy to the current and severely reduced supply of foreign exchange earned by the country. There is a view that we can successfully ride out this economic decline by maintaining government spending via borrowings and sale of assets. However, such spending simply exacerbates the demand on-shore for foreign exchange. Another view is that aggregate demand can be reduced by the devaluation of the T&T$ and another is that the same result can be achieved via fiscal means.
My concern is that despite the warning of Dr Rowley before the last elections that we need to tighten our belts, the last budget suggests that government spending and its fiscal measures will place little constraint on on-shore aggregate demand.
The reconstruction of our economy is a more difficult task since it seeks to encourage the on-shore current and potential businessman, entrepreneur, to move away from the lower risk commercial activities of using foreign exchange earned predominantly by the energy sector to provide the needs of the population, towards the more risky activity of globally competitive export companies in a diversified economy.
The fundamental characteristic of such a reconstructed economy is that it is adaptive, ie its entities should be capable of altering their structures, behaviour and interactions with others in response to the emerging economic pressures (global warming, climate change, depletion of natural resources and their drop in prices, shortage of clean water, the need to provide food security, deal with increasing crime). We may know what we have to do; the problem is how do we build these entities in this high risk and uncertain global and complex environment?
Being able to learn and acquiring knowledge are at the heart of being able to adapt. We appear to be very keen on learning, on education, and boast that some 60 per cent of our secondary school cohort proceeds to tertiary education/training.
However, much of this simply teaches us, if anything, how to handle known risks, known situations—ie it is associative learning. This makes us no match for competitors who can learn, invent, be innovative and so outperform us economically.
An important part of the required learning is the acquisition of the ability to recognise early signals from the economic environment, for example, that basic commodities are now cheap given the prolonged downturn in the global economy, that shale gas is now plentiful and its evolving technology will keep it competitive even in this current low price scenario for gas, and that the pressure of global warming and climate change will be the death knell of petroleum economies, even though such reserves exist.
But recognising these signals is not enough because they may not foretell the unknown economic risks and challenges. The skill we need to develop is to be able to collate the different signals, differentiate among them and in so doing learn, acquire, the ability to generalise and be able to respond to new signals from the environment that we have not seen before. This learning process of the details of the threats and opportunities aids the development of this adaptive capacity to respond to future and unknown threats; we may even be able to foresee a Taleb Black Swan!
But how do we acquire such learning/knowledge? Our schools, universities, training institutions give us formal knowledge—facts, figures, techniques via lectures and the like, the focus of our present education system. The other kind of learning is knowledge gained through experience and interaction—learning through successes and even failures.
This latter kind of learning builds on formal learning and gives us the capability to adapt in this continually changing economic environment—this kind of learning is necessary if we hope to be world class producers of chosen goods and services. Today, however, we are economically unprepared for global competition given out current skills and economic experiences.
On Friday, the Central Bank Governor confirmed that T&T is formally in a recession. This is due to the poor performance of the energy sector; the drop in prices across the board of petroleum products, the shortfall in production, in particular of natural gas, so impacting severely, negatively, on the earnings of foreign exchange.
The Governor also told us that the foreign exchange sold by the Central Bank to the on-shore is rapidly devoured, especially by the retail and distribution sectors, maintaining the view that there is a shortage of foreign exchange in the market. The on-shore demand for foreign exchange outstrips our earnings. Coupled with this are increasing inflation and the widening unemployment in the energy sector.
The recession simply reflects the phenomenon of our economy; it is an economic engine that runs on foreign exchange. When the foreign exchange ceases, this income is reduced, the engine stops (Dr DeLisle Worrell, Governor of the Barbados Central Bank).
This graphic statement demonstrates that any activity that does not contribute to the earning of foreign exchange does not contribute directly to the development of the economy. In other words, stimulating the on-shore economy, via, for example, by increasing local non-productive construction activity does nothing for sustainable economic development—it is a slave industry that depends on the earning of foreign exchange.
Hence the success of the government in getting the official ceiling for borrowing raised by TT$billion, to give it some fiscal space, will only put the economy on the path to sustainable growth if the financial resources now available to government are used in part to encourage the development of production in the country geared to earning foreign exchange.
Hence it was with disappointment that I heard the Minister of Finance, in expressing his view that economic development depends on creating proper local infrastructure, indicate government’s plan to build a highway to Toco and the port there to facilitate local tourism, travel to Tobago, a new airport in Tobago (which I presume may attract more tourists in an industry in which we are failing), a mass transit system, none of which directly addresses the medium to long term reconstruction/diversification of the economy, by the creation of a symbiosis of companies to earn foreign exchange.
In our small and open economy this is the only option we have to create a sustainable economy. Maybe the strategy is to simply use government spending via borrowings and our foreign exchange reserves to artificially support on-shore activity, hoping that the energy sector, both prices and production and the global commodity demands, will soon recover; recover before we have to seek IMF help! We seem to have a plan to borrow but none to earn.
Global experience has shown that there are two levels of symbiosis, clusters (and others positioned between these limits); those driven by the myriad use of a product(s)—a comparative advantage—and those by a local technology, particularly overspills of the technological innovations.
