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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 1 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 3 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 5 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 7 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 8 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.) 9 Is it Low Social Returns? 1. Human Capital 2. Infrastructure 3. Global Competitiveness 4. Quality of Governance GDM Trinidad and Tobago 10 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 11 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 12 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 13 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 14 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 15 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. GDM Trinidad and Tobago 17 6 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 18 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 19 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 20