Tomorrow is Budget Day 2014. Over the past few weeks, many stakeholders would have made their hopes regarding its content known. Most are not new. Perennial calls for the diversification of the economy away from its dependence on energy have come, yet again, from virtually every chamber and business association.
The deficit spending that has characterised the country's national budget for the past three years has also garnered attention. Finance Minister, Larry Howai, has given assurances that it will be treated with.
As the country waits to see what will be deemed priority areas and whether long-standing issues will be dealt with, or if the government–a year away from a general election–will choose to dispense "goodies", the two above-mentioned issues loom large in the background.Firstly, the issue of the deficit could potentially have effects on the ability to diversify the economy. Deficit spending–and the government borrowing necessary to finance it–can result in something known as the "crowding out" effect.
Where it is happening, where it is not
As the term implies, in crowding out, something occupies a space at the expense of everything else in the vicinity. In the T&T context therefore, this deficit, and the government borrowing it represents, could potentially be crowding out the very private sector needed for diversification of the economy, by competing with it for loans.Indera Sagewan-Alli, executive director of the Caribbean Centre for Competitiveness explained further.
"What it means is, if there is $2 billion of liquidity in the system, but government has an expenditure need, but doesn't have a revenue flow that will give it that income, what it will do is go on that market and borrow from banks. If government borrows this money to reconstruct roads or create short-term employment, you have no money available in the banking system for the private sector.
This tends to happen because the banks would find the government an easier client to lend to than they would find a private investor because of the risk factor."
However, Sagewan-Alli, an economist, does not think that crowding out, in this traditional sense, is happening in the economy; an opinion shared by fellow economist and PNM senator, Dr Lester Henry. Both believe the argument would be hard to sustain because of the excess liquidity in the financial system, which business owners are not taking up.
"The state that demand-for-investment financing in T&T has been for the last few years very, I don't want to use the word dormant, but it has been extremely slow, lethargic," said Sagewan-Alli.What they are both seeing, though, is a crowding out of the private sector in the labour market, particularly, the competition for lower income, low-skill workers.
This has its own negative effects on the ability to diversify the economy in that it robs business owners in various sectors of the very workers they need, by providing high wages in its "make work" programmes according to the economists.
Referring to a recent IDB report which chided the government for providing social programmes that were too generous and, which was also reported on in last week's Sunday BG, Henry said, "It is happening. Workers are being pulled away from the private sector. You can see the "Wanted" signs all over the place in many of the service sector areas, which is where lower wages tend to be."
Sagewan-Alli elaborated on the other industries which were affected by the competition for workers.
"Printing and packaging is one of those areas...agriculture is suffering, because farmers are saying that they cannot find labour. If you take cocoa as an example, the requirement for manual labour is quite high. Where you may have people interested in resuscitating the cocoa industry, their inability to find labour to work the estates is one of the reasons why they are not doing it. Even small farmers are complaining they cannot get labour when it is time to reap their crops."
She said that these were some of the very areas both the present and past governments have said they were going to invest in, with a view to diversification.Dr Roger Hosein, economics lecturer at the UWI, gave some scale to the problem.
Quoting from the community and social personal (CSP) segment of available labour market data, under which figures for make-work programmes are listed, he said, "The number of people employed in CSP increased from 154,400 in 2001 to 192,800 in 2012. Alongside increases in CSP, employment has been decreased in agriculture with 17,797 workers lost between 2001 and 2012 and the corresponding amount of workers lost in manufacturing during the same time period was 5,145."
Using a labour force figure of 600, 000, Sagewan-Alli estimated that around 100,000 were being absorbed, not only by programmes like URP, CEPEP and the like, but On the Job Training (OJT) and other professional programmes as well."I would have to say about 20 per cent of the employment in this country is generated by those programmes, between 16-20 per cent and I am sure that is an understatement."
The CEPEP-lisation of work ethic
The Caribbean Centre for Competitiveness head said this has ramifications for productivity and the country's work ethic, both vital in creating the kind of atmosphere in which diversification could thrive."Without the CEPEP-type programmes, you may find, naturally, people seeking out opportunities to improve their skill set and to improve themselves, in order to compete on an open job market. But with programmes like CEPEP and URP, what it is doing, it is preventing people from doing that."
She continued: "What has happened over time is that these programmes, because there has not been a demand for an increase in productivity, we have now fostered a work ethic in that area that is extremely inimical to efficiency."She also criticised the OJT and programmes for scholarship winners on the basis that while they augmented employment figures, what they, in fact, did was underemploy graduates.
"They are not really realising their economic potential, which now has implications for how they can spend in an economy. You need spending to stimulate demand and this constrains their spending capacity. It constrains how they can make investments, in a property or in a car and all of these things that need to be happening in an economy for stimulation of growth to take place."
Sagewan-Alli said, ultimately, this was an indictment on the country's development process."It means that your economy–your productive sectors–are not growing at a rate that is able to absorb this labour."
Using the budget to effect change
Henry suggested that, ultimately, the make-work programmes must be scaled back."It can't be a drastic fall in the make-work programmes overnight. You don't want to dislocate so many people all in one go. But there has to be an easing up on that and not a gradual expansion of it, which is what has happened over the past four years."
Meanwhile, Sagewan-Alli also said that government, needed "to be putting its focus on creating the enabling environment, where investors are incentivised and they are excited about borrowing the surplus liquidity in the financial system to be able to invest and grow the economy."
Using one example of a past budget incentive of reduced taxes over a three-year period, given to business people to increase property development, Sagewan-Alli said it made no sense to do so, when the bureaucracy involved in starting up projects took up much of those three years and wiped the benefit of the incentive away.She said funds should be going towards creating methods to streamline all of the development efforts that are taking place and even being duplicated across ministries.
"You should use your budget to support that kind of alignment. You are using the budget to say, specifically in this year, we are allocating resources to the whole diversification thrust, which is separated among a range of ministries and entities...that is a recipe for disaster in my view. What you need is one entity, or set up a ministry of economic diversification. You put the resources in there to do the kind of things that we are talking about. To develop the strategies, to focus on the research and the development, understanding the international market, because that is something that you have to do. We have to be continually scanning the market and seeing where it is going."
The Caribbean Competitiveness head also said an allocation of funds to hire the human resources needed to effect these changes could also be considered."If one private expert is going to take three years, then two will take one year and you reduce the time. If it is urgent enough that you want it done in a few months, you allocate the financial resources via the budget to make sure it gets done in the time you want it done."
She commended the International Financial Centre and continued efforts to strengthen it as one of the sectors where government was getting things right. However, she named tourism as another where the country was failing.Regarding the crowding out in the labour market, Sagewan-Alli said government had to rethink how it defined success in social interventions.
"It must not be a minister getting up and saying last year, 10,000 people were hired in CEPEP and this year 15,000. That is not success. In fact, that is an indication of your economy failing."