The main revenue earner and driver of economic growth -the energy sector- has crashed. Trinidad and Tobago is increasingly looking towards other players in the economy -the private sector- to take on a greater role in stimulating an economic recovery by increasing investment and employment, and earning foreign exchange.
The question is whether the private sector in its current form and under present conditions can deliver for the economy. If not, what are the constraints and how to tackle them to ensure sustainable economic recovery and transformation?
The report Are Oil And Gas Smothering The Private Sector In Trinidad And Tobago? tackles these questions. It is the first comprehensive firm-level data-driven analysis of the private sector in Trinidad and Tobago with a comparison with firms in the Caribbean, and the rest of the small commodity-exporting economies in the world.
The favourable economic outcomes experienced in the last decade were largely influenced by the boon from the commodity supercycle. Government revenues increased substantially and so too its presence in various areas of the economy. This period was characterized by record low levels of unemployment, substantial investments in infrastructure, human capital, and a suite of generous social programs that benefitted the country’s citizenry. Though these initiatives were well intentioned, they were directly related to a temporary positive energy shock. That favourable shock is over! A new reality besieges Trinidad and Tobago -i.e. limited fiscal space for the government to manoeuvre and stimulate economic activity.
The economy is facing a number of macroeconomic constraints including widening fiscal deficits, rising debt and external imbalances. The role the state played in the labour market by creating job opportunities, providing subsidies and social programs targeted at various segments of the population, neglecting inefficient public enterprises, to name a few, can no longer continue. Reality is quickly setting in. It’s time for adjusting and recalibrating the economy towards more realistic macroeconomic fundamentals.
Easier said than done.
The challenge policymakers have to contend with in the short-to-medium term is the expected socioeconomic impact that such adjustments would bring. That too familiar call for economic diversification and an enhanced role of the private sector, which occurs more vociferously when the energy sector retreats, is here once again.
Hence, the key question is: Can Trinidad and Tobago’s private sector take on the challenge and become an innovative driver of growth and development, if not what can be done?
Currently, Trinidad and Tobago’s private sector underperforms relative to the Caribbean average. Firm-level performance indicators suggest that most firms in Trinidad and Tobago are either stagnant or declining if sales growth is used as the performance metric (Figure 1 in the infographic). Total factor productivity measured at the firm level is relatively lower when compared with other countries in the Caribbean, labour productivity has been declining since the great recession, and private investment is significantly lower than the average for the rest small commodity-exporting countries (ROSE-C).
This study examined factors relating to the profile of firms, macroeconomic conditions, business climate, and other microeconomic factors as possible constraints to performance. An unfavourable macroeconomic environment and business climate affect all firms in the private sector. With respect to the former, the main issue relates to an overvalued exchange rate—a negative externality of being hydrocarbon dependent. An unfavourable business climate reflects government policies, regulations, and public services that hinders rather than promotes a dynamic, export-oriented and innovative private sector. Microeconomic constraints include finance, labour, and crime and the profile of private sector firms—an important determinant of performance—is mostly unfavourable.
What do we do about it?
To define the way forward, three key questions need to be asked:
- What are the priority areas?
- What types of productive development policies should be adopted?
- What is the governance (public-private) framework and action plan required for policy intervention?
The macroeconomic and microeconomic constraints identified in the report suggest the need for policies that would improve the overall business environment and underlying macroeconomic conditions. Hence, interventions should focus largely on horizontal productive development policies – that is the horizontal quadrants of public inputs and market reforms (see Table 1 in the infographic).
Public Private dialogue.
It is time for a change. Setting up a governance framework that can facilitate a structured, participatory, and inclusive approach that speaks to the unique circumstances of Trinidad and Tobago is critical for effective policymaking and implementation. Hence, establishing working groups among various public-private actors to facilitate feedback and collaboration can help build legitimacy into the policy process when decisions are made on interventions to remedy market failures.
To have your voice heard and learn more about the study, register for our webinar tomorrow:
To download a copy of the study, please click here: https://publications.iadb.org/handle/11319/8104