Are we destined to an era of sluggish growth, decreasing levels of real (as opposed to government-subsidised) employment, increasing income and wealth inequality?
During the budget discussion, I suggested that T&T needs a minimum growth rate of 5.0 per cent per annum if we are to achieve our economic objectives.
We have not achieved this since 2007 and that achievement of 5.5 per cent came after a 13 to 15 per cent gross domestic product (GDP) performance in the prior year.
In other words, since 2006, our economy has fallen off a cliff.
Over the past three years, our gross domestic product has continued to be negative year-on-year, and despite suggestions to the contrary, I expect this trend to either continue or for any upturn to be anemic and overall be directly linked to the level of government spending.
T&T has an economy that is predominantly based on two main activities. First, there is the oil and gas economy, which over the last decade shifted to a predominantly gas economy. The slow down in the US, the support to that economy from entitlements and the reality that their turnaround will be a long, drawn out process.
US natural gas deposits can be a catalyst for economic growth in the US and T&T will have to deal with that changing dynamic. The bottom line is that our local energy sector will be challenged, and baring an escalation of the conflict in Israel and the Gaza Strip, which could be a precursor to a conflict with Iran, energy prices should remain moderate. At the end, we are unlikely to see double-digit growth from energy sector activity in the short to medium term.
The second main economic activity in T&T is in the retail sector. Money flows from the energy sector to the local economy, which facilitates the importation of goods from abroad. Merchants set themselves up to import and distribute these goods to consumers who are able to consume at an high level per capita because of the boon from the energy sector.
This boon comes either in the form of direct hand outs or through subsidies. Many have been unable to recognise or follow the trail and understand the implications of these handouts and subsidies. In addition, the retail sector is becoming increasingly challenged, so where is the impetus for our GDP growth to come from?
Misallocation
There is a debate about the GATE programme and a shift back to "dollar for dollar." The fundamental question is to determine who has benefited from the GATE programme in its present form and how has this contributed to economic development.
With GATE, students get a free pass for tertiary education. It means they are price-insensitive to what they studied and how they performed.
As with any subsidy, it resulted in a misallocation of resources as other areas in the education value chain maximised the student's price insensitivity to tuition fees.
Price insensitivity meant that schools could increase their profit margins without any impact on demand. Observe the growth in size of many private institutions over the past decade. In addition, students often need access to accommodation close to their place of study and being insensitive to tuition fees means they had more at their disposal to pay for better accommodations. Observe the accommodations around the university campuses today and reflect on how they were ten years ago.
How has the transfer of wealth from the State to the private sector through the GATE programme impacted the national economy, its development and the sustainability of that development? Do we know? Has anyone even asked the question?
The result is a GATE programme that did not after ten years give us the targeted skills in the areas required for national development, but instead facilitated a transfer of wealth from the State to the owners of a "buy, mark up, sell or rent" enterprise. The same is the case for the gas subsidy, Cepep, smart cards and all the similar programmes.
Retail challenge
Aspects of this model, ie the retail trade are also under threat. You will note a "sky box" service now at every street corner enabling citizens to purchase goods online and import what they would have previously purchased locally. This has an impact on local retail activity. Consumption is a significant activity that drives our private sector, and just as low oil and gas prices impair the energy sector, so to the ability to purchase online from abroad is impairing the local retail sector. Also impacted are the employment opportunities for persons, such as store attendants.
The threat from abroad, plus the high cost of labour resulting from the alternative of government make-work programmes, place the retail model under stress. With two of our main drivers of economic activity in difficulty, that really leaves a service sector and manufacturing as engines of growth, neither of which has been given the attention that they deserve.
We were once told we could not compete with China, so manufacturing is futile. As far as services goes, in the area of financial services, we are scrambling for an up-to-date Securities Industries bill, an updated insurance bill has seen more talk than action and we are still not clear on what our International Financial Centre is supposed to be and do.
Recognise the entire process is dysfunctional, and its current form, creates further dependency on the State.
Beyond that, it encourages a more rapid wealth transfer since there is less of an appreciation from the masses of what it takes to earn the right to spend those monies and, therefore, less sensitivity to quality and service.
Service culture
It is a well-established principle that the most discerning consumer is one who purchases items for his own use with his money. When you use someone else's money to acquire something for yourself, you tend not to care about price and, in fact, may reach out beyond what is financially feasible.
In an economy where people are spending on themselves and demand comes exclusively from productive activity, people will also demand a level of customer service and quality consistent with the effort it took to acquire the funds to purchase the item in the first place. This gives rise to a quality and service culture that positions the good or service provider to compete internationally.
We are now in a quandary, a negative feedback loop from which it is difficult to extricate ourselves. T&T needs to boost productivity and also be able to compete internationally to provide goods and services in sufficient quantities that can offset our dependence on the energy sector.
In order to do that, we need to become world class in our systems, processes and how we deliver to our customers. This requires a tension where our customers will demand from us world-class service, otherwise they will refuse to purchase. This local dynamic needs to play out in order for local companies to develop the competences to move outside of the Caribbean region and into bigger, more sophisticated markets.
Without the tension between a discerning consumer and an innovative producer, our goods and services will be challenged to rise to the top of the quality spectrum. Those that can afford will then seek to purchase from abroad.
In the process, the drive to buy local will fall on deaf ears as it has done for much of our history in an open market environment.
This cycle needs to be broken, but it cannot be broken by the imposition of quotas and restrictions on the purchase of foreign goods. We need to engineer the process of customers becoming more discerning.
Yet, they are unlikely to take this bold step so long as significant elements of what is consumed are afforded through subsidies. We also need to increase local aggregate demand, but that is a discussion for another day.
I have been on the theme of subsidies and transfers for the past few weeks from different angles.
Hopefully, we recognise the need for change towards a more market oriented approach and become committed to effecting those changes. If we don't, then we had better just sit back and wait for the next energy boom. If another boom does not come again, then "yes" will be the answer to the question posed at the start.
Ian Narine is a broker registered with the Securities and Exchange Commission.