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Why we need Economic Diversification in Trinidad and Tobago

Economic diversification in Trinidad and Tobago is imperative, although diversification away from the energy sector has largely failed. A country with a perfectly diversified export portfolio will have an index close to 0 (most diversified), whereas a country that exports only one product or to one country will have a value of 1 (least diversified). In Trinidad and Tobago, there is diversification only in the energy sector in products and export markets. Tradable diversification has remained low and almost constant but since the early 2000s has steadily decreased in products and markets. However, the economy is less diversified than desired.

Past policies have failed because of Dutch disease in Trinidad and Tobago, whose chronic exchange rate overvaluation has been caused by the exploitation of oil and gas. Countries that have a lower GDP per capita adjusted purchasing power parity than their nominal GDP per capita are considered as having an overvalued exchange rate. In calculating the real exchange rate, it is clear that the Trinidad and Tobago dollar has been consistently and substantially overvalued.

Given that oil and gas will eventually run out by the year 2030 at the current rate of depletion, the country needs a major change of the exchange rate. Doing so would reduce the size of the fiscal adjustment in the short term and result in diversification of nonenergy export products and their markets over the medium term, hence spur economic growth and employment.

The downside is that a diversification policy can take decades to fully manifest, at which time oil and gas will have run out.

The policy brief, Diversification in Trinidad and Tobago: Waiting for Godot discusses the potential role that the exchange rate plays in diversification, fiscal adjustment, and economic growth.

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3 Comments

  • avatar image
    Valerie Mercer-Blackman
    November 3, 2016 Reply

    Thanks for this great and timely article, which argues for the need for an exchange rate adjustment for Trinidad and Tobago as it deals with a Dutch Disease. However, we have to add the difficulty of diversifying an economy of 1.2 million people in terms of economic activity. In this sense, the comparison with Malaysia and Indonesia fails: both are highly populous countries with a very large agricultural base and at some point a large supply of low-skilled labor that could provide an initial comparative advantage in manufacturing. They also happen to be located in the middle of the fastest-growing region in the world in the last 20 years. While things are not perfect in T&T--particularly continued subsidies for fuel consumption--the diversification of their production base has some merits, as within the oil and gas sector there is a large and fairly talented oil and gas services sector as well as manufacturing of petrochemicals. So indeed, the conundrum of an over-valued exchange rate is a major problem for those countries suffering from Dutch Disease. PS: please add Kazakhstan to your graph, where I now am and am having trouble counting the number of zeros in the Tenge bils :)

  • avatar image
    Valerie Mercer-Blackman
    November 3, 2016 Reply

    Thanks for this great and timely article, which argues for the need for an exchange rate adjustment for Trinidad and Tobago as it deals with a Dutch Disease. However, we have to add the difficulty of diversifying an economy of 1.2 million people in terms of economic activity. In this sense, the comparison with Malaysia (pop. 30 million +) and Indonesia (almost 250 million +) fails: both are highly populous countries with a very large agricultural base and at some point a large supply of low-skilled labor that could provide an initial comparative advantage in manufacturing. They also happen to be located in the middle of the fastest-growing region in the world in the last 20 years. While things are not perfect in T&T--particularly continued subsidies for fuel consumption--the diversification of their production base has some merits, as within the oil and gas sector there is a large and fairly talented oil and gas services sector as well as manufacturing of petrochemicals. So indeed, the conundrum of an over-valued exchange rate is a major problem for those countries suffering from Dutch Disease. PS: please add Kazakhstan to your graph, where I now am and am having trouble counting the number of zeros in the Tenge bils :)

  • avatar image
    sally radford
    November 4, 2016 Reply

    Agriculture in Trinidad was rescued in 1845 by indentured labour from india. they revived sugar plantations and diversified food production into cocoa, coffee, coconut and other commodities. .racial discrimination since independence continues apace and government persecutes investors in rural .communities with vat on food, levies and other disincentives. graduates in world-class faculties of agriculture and engineering migrate. it is difficult to find fine cocoa as chocolate in drinks or ice cream in airlines and hotels and superfruits soursop, guava and mango in juice and yogurt. india offered expertise in coconut production. markets are not refrigerated so fruits, vegetables, meat and fish rot in the heat, now rising to record highs as rats, cockroaches, flies and ants flourish. government pursues vendettas against the last regime and granted $270 million to carnival and $10 billion to security while reducing funds to education, health and other services as the murder toll exceeds that of the usa. the caribbean academy of sciences has a cubpoard for an office in a university where the computer is not functional. imports from prc include fakes, dried food, shoddy goods and plastic trash and ornaments. Plains ideal for sugar cane, corn and rice are covered in concrete to house caricom squatters as floods bring deadly african mosquitoes, rubbish chokes rivers and drains are clogged. tourists are regularly killed in carnival and in tobago. government supporters spend fortunes on bling, tattoos and fetes and include single parents with offspring from different fathers who expect handouts.

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