Ian Nar­ine

The head­line rep­re­sents a tan­ta­lis­ing head­line that can set the imag­i­na­tion rac­ing. What type of event can re­sult in com­bin­ing Sau­di Ara­bia with the Unit­ed States of Amer­i­ca?

The head­line is not mine but rather is tak­en from the Wall Street Jour­nal (WSJ) of No­vem­ber 12, 2012. The cat­a­lyst for the WSJ ar­ti­cle is a re­port from the In­ter­na­tion­al En­er­gy Agency's World En­er­gy Out­look 2012 that pre­dict­ed the Unit­ed States would be­come the lead­ing pro­duc­er of both oil and nat­ur­al gas by the end of this decade. In the process, they would over­take Sau­di Ara­bia in oil pro­duc­tion and Rus­sia in nat­ur­al gas pro­duc­tion.

This pre­dic­tion is now sup­port­ed by an­oth­er ar­ti­cle dat­ed Jan­u­ary 18, 2013, that sug­gests the US oil pro­duc­tion grew at a faster pace in 2012 than in any year in the his­to­ry of the US oil in­dus­try span­ning all of 153 years. There is the sug­ges­tion that 2013 is like­ly to sur­pass 2012.

The in­crease in dai­ly crude out­put is thought to be 779,000 bar­rels per day from 2011 to 2012 with an over­all 2012 av­er­age of 6.4 mil­lion bar­rels per day. In 2013 pro­duc­tion is ex­pect­ed to jump by 900,000 per day.

How did all of this come about?

It hap­pens when a coun­try es­tab­lish­es a vi­brant pri­vate sec­tor that can mo­bilise pri­vate cap­i­tal through a prop­er­ly reg­u­lat­ed and func­tion­al cap­i­tal mar­ket that en­cour­ages in­no­va­tion and ad­e­quate­ly re­wards tak­ing risk.

This is the en­vi­ron­ment that fos­ters in­no­va­tion and it is in­no­va­tion in the form of new drilling tech­niques for oil and gas that is at the core of the US en­er­gy re­nais­sance. It should be well not­ed that en­er­gy and cap­i­tal are the life blood of an econ­o­my. Fur­ther, eco­nom­ic growth, in and of it­self, im­plies the greater con­sump­tion of en­er­gy bar­ring fur­ther in­no­va­tion and tech­no­log­i­cal ad­vances in ef­fi­cien­cy and con­ser­va­tion.

An ex­pand­ing US en­er­gy sec­tor is an eco­nom­ic dri­ver on its own but, be­cause their eco­nom­ic mar­ket­place is aligned to fa­cil­i­tate the mo­bil­i­sa­tion of cap­i­tal, it is al­so giv­ing rise very qui­et­ly to a re­turn of man­u­fac­tur­ing to the US main­land.

The en­er­gy sup­plies plus the re­duc­tion in the mar­gin­al cost of labour be­tween the US and Chi­na points to the US be­ing po­si­tioned to re-es­tab­lish it­self as a man­u­fac­tur­er of val­ue added prod­ucts which has been a crit­i­cal com­po­nent of their econ­o­my pri­or to the out­sourc­ing trend of the 1990s and be­yond.

While there are still nu­mer­ous head­winds to the US econ­o­my as a whole, the above sce­nario does place a pos­i­tive light on as­pects of the US econ­o­my and it sup­ports the call for a pref­er­ence for US-cen­tric stocks as op­posed to the trend from the re­cent past of fo­cus­ing pre­dom­i­nant­ly on emerg­ing mar­ket op­por­tu­ni­ties.

Amer­i­ca T&T?

Now what about T&T?

If on­ly we had an eco­nom­ic frame­work that re­mote­ly re­sem­bled the for­mat of the US econ­o­my, we would be much far­ther ahead as a na­tion. We al­ready have the in­gre­di­ents of ac­ces­si­ble oil and gas re­sources yet we lack the nec­es­sary chan­nels to ef­fec­tive­ly mo­bilise cap­i­tal that can cre­ate the new growth and de­vel­op­ment op­por­tu­ni­ties that we so crave.

A few weeks ago, the BG View asked the ques­tion: why do we lack am­bi­tion to own? The an­swer is sim­ple as it is log­i­cal: our econ­o­my is struc­tured in such a man­ner that it is eas­i­er to rent.

As a coun­try we run a non-en­er­gy bud­get deficit fund­ed by rents from the en­er­gy sec­tor. These monies, un­der the guise of our "en­er­gy div­i­dend," are used to fund en­ti­tle­ment pro­grammes and sub­si­dies. That then al­lows for a lev­el of eco­nom­ic ac­tiv­i­ty where one sim­ply has to im­port goods from abroad and sell in­to the mon­ey that is float­ing around; a rel­a­tive­ly hand­some re­ward for a low lev­el of risk and it's not cap­i­tal in­ten­sive.

For those more ad­ven­tur­ous, con­tract­ing–sup­port­ed by state spon­sor­ship–is the or­der of the day. Recog­nise that this is a coun­try that spawned the idea that you de­vel­op en­tre­pre­neurs by giv­ing a Cepep con­tract; an idea that is now en­trenched in­to our eco­nom­ic fab­ric hav­ing been around for more than 10 years, span­ning dif­fer­ent ad­min­is­tra­tions.

We cre­at­ed ar­ti­fi­cial lev­els of de­mand through an in­creased non-en­er­gy deficit, of­fered no pro­duc­tive out­comes and pau­perised large sec­tions of the pop­u­la­tion through ris­ing in­fla­tion. We ac­cent­ed this ap­proach by sug­gest­ing that in­creas­ing sup­ply to match the ar­ti­fi­cial de­mand can solve the prob­lem.

What, in fact, hap­pened is that pri­vate cap­i­tal would not ven­ture in­to an en­vi­ron­ment where de­mand was ar­ti­fi­cial and so the on­ly game left in town was an ex­pand­ed role for the State in the on­shore econ­o­my.

We are fer­vent­ly try­ing to ex­tri­cate our­selves but, once again, the pol­i­cy pre­scrip­tion is flawed. We are hop­ing that through an in­creased fo­cus on ed­u­ca­tion, the de­vel­op­ment of hu­man cap­i­tal and im­prov­ing pro­duc­tiv­i­ty and in­no­va­tion, we can in­crease the sup­ply side which then match­es bet­ter with the de­mand side of the equa­tion lead­ing to eco­nom­ic growth.

May I sug­gest that while this may sound work­able on pa­per, it will not amount to any­thing un­less a fun­da­men­tal is­sue is ad­dressed. The is­sue: the abil­i­ty of our econ­o­my to con­sis­tent­ly mo­bilise and ef­fi­cient­ly al­lo­cate cap­i­tal in or­der to re­ward risk tak­ing.

Spin­ning in mud

In T&T, there is a sur­plus of liq­uid­i­ty that re­mains pri­mar­i­ly in the bank­ing sec­tor. Un­less we can mo­bilise this liq­uid­i­ty to­wards risk tak­ing and en­sure that the re­wards from tak­ing risk are su­pe­ri­or to any oth­er type of re­turn (read: crime, cor­rup­tion and nepo­tism) we are ef­fec­tive­ly spin­ning top in mud. This is the price of in­ef­fec­tive gov­er­nance.

De­mand, in part, comes from con­sump­tion, pub­lic ex­pen­di­ture and in­vest­ments. The non-en­er­gy deficit, borne out of sub­si­dies and trans­fers, points to pub­lic ex­pen­di­ture and fis­cal im­bal­ance. Con­sump­tion re­duces sav­ings and, while it may dri­ve ac­tiv­i­ty in the short term, over the long term we see that ex­ces­sive con­sump­tion is of­ten fu­elled by debt which then leads to cri­sis.

In­vest­ment is the key and this will on­ly come about when cap­i­tal is mo­bilised ef­fec­tive­ly and ef­fi­cient­ly. Ed­u­ca­tion with­out in­vest­ment sim­ply re­sults in a brain drain. En­tre­pre­neur­ship and in­no­va­tion with­out the right cap­i­tal in sup­port ei­ther will not hap­pen at all or will fail.

Many speak about cap­i­tal mar­ket de­vel­op­ment but the truth is we will con­tin­ue at a snail pace un­less we de­vel­op the po­lit­i­cal will to close the many loop­holes that di­verts cap­i­tal away from the cap­i­tal mar­ket.

With­out ad­e­quate pro­cure­ment rules and trans­paren­cy in gov­ern­ment that en­sures that there are full dis­clo­sures around those who have re­ceived state con­tracts, what those con­tracts are for and the re­sults or ben­e­fits de­rived from these con­tracts, then we will con­tin­ue to have an aver­sion to risk tak­ing and an affin­i­ty for back room deals.

With­out ad­e­quate tax com­pli­ance it will al­ways prove to be more ben­e­fi­cial to en­gage in tax eva­sion than face the trans­paren­cy of the cap­i­tal mar­ket. We have gone from the Rev­enue Au­thor­i­ty to a Tax Amnesty but, still lost in the equa­tion, is the fact that if every­one prop­er­ly paid their tax­es we would not have had bud­get deficits for the past five years.

With­out a reg­u­lat­ed, risk-based ap­proach to lend­ing by banks–that in­cludes a fo­cus on op­er­a­tional risks of the bor­row­er–there will be lit­tle im­pe­tus to im­prove cor­po­rate gov­er­nance by pri­vate sec­tor com­pa­nies.

The com­bi­na­tion of the lack of tax com­pli­ance and in­ad­e­quate cor­po­rate gov­er­nance means that it will most like­ly be too big a hur­dle to move from a pri­vate com­pa­ny to a pub­licly list­ed com­pa­ny.

This is why our stock mar­ket has stag­nat­ed. With­out an ac­tive stock mar­ket there is very lit­tle ex­it op­por­tu­ni­ty for ven­ture cap­i­tal and with­out an ac­tive ven­ture cap­i­tal frame­work the seed cap­i­tal to fund en­tre­pre­neur­ship and in­no­va­tion will find an­oth­er home. The ed­u­cat­ed then mi­grate for op­por­tu­ni­ties.

At the end, it should be clear that cap­i­tal mar­ket de­vel­op­ment–the en­gine up­on which an econ­o­my moves from third world to de­vel­oped–is more a ques­tion of po­lit­i­cal will than in­fra­struc­ture.

We start­ed our jour­ney around the same time as Sin­ga­pore. If we com­pare the two coun­tries our lack of will should be ob­vi­ous.

Is there any hope of lo­cal­ly owned com­pa­nies rais­ing cap­i­tal in T&T to tap in­to the mil­lions of bar­rels of oil and tril­lions of cu­bic feet of gas with­in our space?

Not on our present tra­jec­to­ry. In­stead of Amer­i­ca T&T, we have to sit back and watch Sau­di Amer­i­ca.

Ian Nar­ine is a bro­ker­reg­is­tered with the SEC.