Transcript Trinidad and Tobago

Competitiviness and Growth in
Trinidad and Tobago
D. Artana, S. Auguste, R. Moya, S. Sookram and P. Watson
Washington DC, September 20 th 2007
GDM Trinidad and Tobago
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Real GDP Growth Rates
35%
30%
25%
11.8% Energy
6.5% Non-Energy
4.4% Non-Energy Tradables
Energy
20%
15%
10%
Non-Energy
5%
Non-energy Tradable
0%
1997
1998
1999
2000
2001
2002
GDM Trinidad and Tobago
2003
2004
2005
2006
2
Evolution of the Capital Stock
2000 TT$, 1990-2003
60,000
Annualized Growth Rate
Millions of 2000 TT$
50,000
40,000
Energy
Non-Energy
Non-Energy Tradables
Non-Energy Tradables
(exc. CH y Ass)
13.2%
1.9%
4.8%
Energy Sector
1.7%
30,000
Non Energy Sector
20,000
10,000
-
Non Energy Tradable
GDM Trinidad and Tobago
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Capital Compensation at sector level
60%
Petroleum
Industries
50%
40%
30%
20%
10%
Non-Petroleum Tradable
Industries
0%
1991
1993
1995
1997
GDM Trinidad and Tobago
1999
2001
2003
4
• Capital compensation for non-petroleum
tradable industries in T&T is similar to
capital compensation for developed
countries (Poterba) but volatility is
higher.
• It seems risk adjusted returns for these
industries are lower in T&T
GDM Trinidad and Tobago
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GDM Decision Tree
Historically low growth and low investment in the non-energy (tradable sector)
Economic growth very correlated with energy prices. Energy dependance
Barriers to investment
Costly International
Finance
Lack of Opportunities
Costly Local
Finance
* Aggregate Financial * Financial constraints
Constraints
* Weak Regulation
* Poor Debt
* Banking system
Management
and regulations
Low
Appropriability
Low
Social Returns
* Corruption
* 'Forex' Risks
* Tax pressure
* Tax regulation
* Too-little self
discovery
* High Cost
(infr. costs)
* Externalities
* Spillovers
* Coordination failure
* Crime
GDM Trinidad and Tobago
Low Competitiviness
Low Supply of Compl.
Inputs (HK and Infr.)
6
Most Binding Constraints in the
GDM Decision Tree
from the Managers Point of View
Non-Energy Sector
Low I
Relatively low g
Barriers to investment
Costly
Finance
17.6%
Lack of Opportunities
Low
Low
Appropriability Social Returns
29.1%
53.3%
GDM Trinidad and Tobago
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Is it Costly Finance?
• National saving rate above the average for LAC with S>>I
• Large Capital Inflows (FDI/GDP highest in LAC)
• Sovereign debt investment grade since July 2005
• Financial system is sound (No crisis)
• International Benchmarking: low cost group
• Real Interest Rate: 6.3%
• Savings/GDP: 23.8%
• Spreads: 7.7%
• Survey Evidence: Not so costly to finance
– Bank Financing of new investment=52% (LATAM 30%, East Asia 36%)
– Average interest rate 12.5% (37-month loan)
– Average loan duration above ICS world average
– Collateral requiered (as % of investment) almost half of ICS world
average
GDM Trinidad and Tobago
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GDM Decision Tree
Historically low growth and low investment in the non-energy (tradable sector)
Economic growth very correlated with energy prices. Energy dependance
Barriers to investment
Costly International
Finance
Lack of Opportunities
Costly Local
Finance
* Aggregate Financial * Financial constraints
Constraints
* Weak Regulation
* Poor Debt
* Banking system
Management
and regulations
Low
Appropriability
Low
Social Returns
* Corruption
* 'Forex' Risks
* Tax pressure
* Tax regulation
* Too-little self
discovery
* High Cost
(infr. costs)
* Externalities
* Spillovers
* Coordination failure
* Crime
GDM Trinidad and Tobago
Low Competitiviness
Low Supply of Compl.
Inputs (HK and Infr.)
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Is it Low Social Returns?
1. Human Capital
2. Infrastructure
3. Global Competitiveness
4. Quality of Governance
GDM Trinidad and Tobago
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Human Capital
• Schooling indicators are relatively poor
– Low school life expectancy
– Below regional average in enrollment rates in both primary and secondary
education
– Very low enrollment ratio in tertiary education
• But returns to schooling are not extremely high except for tertiary
education
• Quality is an issue
• Defoort (2006): T&T has one of the highest emigration rates for skilled
workers in the world
• But Survey Results: Less educated workers are harder to find than
skilled ones and Poor primary school quality is more important than
poor tertiary level quality
• Limitation of the survey: look at the business needs given the actual
economic structure. It does not capture externalities and social rate of
returns
GDM Trinidad and Tobago
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Conclusions about Human Capital
• Puzzle? Brain drain, high return to
university level, very low enrolment.
– High return to complete tertiary education in T&T, but
still high wage differential with developed countries, for
people with low barriers to migrate
– Hendrik (2002) Compared to other countries, Human
Capital explains large part of the differences between
T&T and the U.S. wages (both stock and quality)
GDM Trinidad and Tobago
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Conclusions about Infrastructure
• Infrastructure somewhat expensive with some
problems related to quality
• Infrastructure quantity and quality not in line
(below) similar income level countries
• But according to managers ranking, there are
other “low return” factors more important than
infrastructure (e.g. human capital, lack of
access to foreign markets and poor
management)
GDM Trinidad and Tobago
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Its ranking in GCI is not in line with its income level
0.0
-20.0
MAL
CHI
-40.0
CR
GCI Ranking
ELSL
MAU
-60.0
BR
GTM
T&T
ARG
-80.0
-100.0
-120.0
-140.0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GDP per capita, PPP
Least Favorable aspects: Institutions, Infrastructure, Market Efficiency and
Innovation
GDM Trinidad and Tobago
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Investment Climate
• T&T ranks fairly well in the Investment Climate
survey
• Survey results. 60% of the establishments
mentioned that corruption was a factor hindering
the establishments and their business
opportunities, with 23% of them finding it a major
and severe problem
– Security costs represent on average 3.7% of
sales, very high for international standards
GDM Trinidad and Tobago
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Macro Risks: Fiscal Sustainability and the
Stabilization Fund
• According to IMF (2007) sustainable non-energy deficit in T&T should be
between 4.4 and 10.8% of GDP, but it is around 15.5% (fiscal year
2005/06)
• Firms identify Macro Risk as the most binding constraint at the individual
factor level
230
210
190
170
150
130
110
90
70
50
Primary Government Expenditure at constant prices
2002 = 100
Chile
Venezuela
Trinidad & Tobago
2002
and Tobago
2003GDM Trinidad 2004
2005
16
2006F
Open Forest Analysis
•
T&T exports are not very diversified and it does not have
many open opportunities
Exports concentrate on oil and gas products (historically
between 60 and 70%).
Firms identify lack of access to foreign market as a
binding constraint
•
•
TRINIDAD AND TOBAGO: 2003
OPEN FOREST FOR LATIN AMERICAN COUNTRIES
2.5
3,000,000
2,500,000
Petroleum
Raw Material
Forest Products
Tropical Ag.
Animal Product
Cereals
L intensive
K intensive
Machinery
Chemical
ln(PRODY) - ln(EXPY)
1.5
2,000,000
1,500,000
0.5
-0.5
1,000,000
-1.5
500,000
-2.5
0
BRA
SLV
ARG
GTM
CHL
COL
GUY
NIC
PAN
ECU
JAM (*)
1
TTO
2
3
4
5
Density (Inverse)
SOURCE: Hausmann and Klinger (2006). (*) Jamaica, year
2002.
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Conclusions about innovation
• Lack of innovation and new discoveries outside the
energy sector
• Lack of entrepreneur activities, which can be
related to:
– Poor human capital
– Path dependence
– Relatively high government intervention
• most of infrastructure services, even telecommunications and
internet are public, what might prevent the development of local
business groups, with externalities to other activities
• Also high intervention in housing and tourism
GDM Trinidad and Tobago
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Conclusions
• In spite of several reforms in the last 25 years T&T has not boosted
vigorous economic growth in the non-energy tradable sector yet
– It is not a problem of costly financing but of lack of opportunities
• Low sophistication in exports. T&T has poor “open forest”
• T&T growth might be path dependent. The high specialization in
energy may limit growth in other tradable sectors due to:
– High macro risk (historical correlation between the international oil
price and real GDP growth is close to 80%)
– Credibility about new fiscal rules (SF)
– Lack of externalities in production, lack of forward and backward
linkages, lack of previous learning and lack of local entrepreneurs
• Inside of the lack of opportunity branch of the tree, several issues:
– Some problems of appropriability (high macro risks & crime)
– Some problems of lack of complementary inputs (underperforms
in most of the indicators analyzed compared to same income level
countries)
GDM Trinidad and Tobago
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Ranking Binding Constraints
• T&T improved many policy instruments. From now on it is
more about fine tuning on the micro front
• On the macro front: Fiscal management of the natural
resource revenues continues being highly critical
– It exacerbates volatility and aggravates the underdevelopment of the
non-energy sector.
– The complementary inputs the Government provides (particularly
non-tradable ones) might not be enough to overcome the lack of
competitiveness, making the effort meaningless
– Having first a prudent fiscal management the country has room to
improve several complementary inputs
GDM Trinidad and Tobago
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