To turn around the decline and grow Tobago’s economy it would take annual investment of approximately $600 million to generate annual output growth of one per cent.
To reset the foundations for annual growth of six to eight per cent Tobago therefore, must undertake annual development investment approximating $3.5 billion in the first five years from 2022 to 2026, recommends economist Dr Vanus James.
He said approximately $2 billion of this investment will have to be done by the ‘Tobago Government’, given the current weak financing (savings) capacity of the national private sector and the public character of some of the necessary investments.
And amidst calls for Tobago to get at least another billion dollars in the upcoming budget to be used as a stimulus, James advised that the island must use its advantageous tourism platform to make a proper foray into the capital services.
This, he emphasised, will grow the island’s national capacity to innovate and compete to solve selected problems in the local and global economy.
Deputy political leader of the island’s second major political party and the man vying to be its next Chief Secretary, Farley Augustine had said the call for an additional billion dollars was based on the upper limit of the recommendation of the dispute resolution commission that Tobago get between 4.03 per cent and 6.9 per cent of the national budget.
He said in the past, successive governments have kept to the lower limit of the recommendation and with the elections due shortly for a new Tobago House of Assembly, he expected the central government to give the island more funds.
But James explained that Tobago must invest to upgrade the scale and quality of its production, employment and export education especially tertiary skill-intensive schooling and training, healthcare, creative outputs such as music, video games and films based on the Carnival industries and the history of the Caribbean and even explore export opportunities in its housing services.
And for this to work, James suggested, it would be necessary to increase domestic development credit to the capital producers and adjust the laws and incentives to attract foreign capital into the industries.
“We know the strategy works. Economies in the Caribbean that adopt this strategy of capital production linked to an industrialised tourism outperform all others and solve their development problems,” James said, noting that Bermuda and Cayman Islands produce and export financial capital services and linked them to tourism.
Citing that Bermuda generates GDP per capita of US$117,000 and Cayman Islands GDP per capita of US$91,000, James added that both grow at an annual rate in excess of their cost of public debt (six per cent Cayman; two per cent Bermuda).
He also compared them with the sea-sun-sand tourism countries: Jamaica, GDP per capita of US$5,600; St Lucia, US$11,600; Tobago US$4,200.
All of these grow at an annual rate below their average cost of public debt, he added.
According to James, the strategy works for several reasons.
He posited that the production of capital increases the knowledge, skills and self-confidence of workers in the production process.
This, James added, then increases the capacity to innovate, average worker productivity and the flexibility to adjust price to support innovation and competition.
He explained that the overall result is a rising savings rate adjusted to meet environmental conservation requirements, emphasising that to be successful, the investments must be adequately scaled to meet national needs, considering several factors.
First, James noted that Tobago is beginning to borrow at a cost approximating four to five per cent and T&T is also borrowing at similar costs to finance its response to the pandemic.
Second, provided on a sufficient scale, development credit can cause damaging short-run inflation, James said.
Thus, he said, to ensure development with debt sustainability and inflation management, Tobago must seek to achieve annual output and productivity growth of at least six to eight per cent over the next 25 years.
And, thirdly, James noted, like all other Caribbean economies, T&T lies near the bottom of the Global Innovation Index and has been there for decades.
“We know from available evidence dating from 1970 that every one per cent growth of the capacity to innovate reduces imports by 0.31 per cent while growing exports by 0.25 per cent,” James noted.
Saying that the capacity to innovate is the only economic factor known to foster growth in T&T, James said through this pincer effect it makes growth self-sustaining by generating the import capacity needed to finance the import requirements of investment.
Further, he said when the impact of trade on growth in T&T is considered, available empirical estimates indicate that it takes a 52 per cent increase in the national capacity to innovate to increase the rate of economic growth by one.
This must be Tobago’s primary target, James stressed.
At the same time, he said, the Tobago economy has been stagnant or declining in the last nine years at least, even though Government has spent about $350 million annually on development programming.
“Corruption aside, some of the ineffectiveness of this development spending is likely the result of poor development approaches and policies,” James added.
According to James, one necessary public investment is addition of full-spectrum skill-intensive schooling and training to the current academic offerings, including substantial upgrade of the technical capacity and pay of teachers and support staff. Another is a establishment of a professionally-run national development bank to supply development credit to capital producers.
James said the right design would encompass a land and housing trust to support investment in exportable housing services linked to tourism.
To get public policy right, he suggested that Tobago will also need to invest in a system of representative government which provides for effective oversight of the executive, provides all stakeholders an opportunity to participate in decisions about what is being done, protects minority rights, and ensures predictable and fair national public sector budgeting.
James explained that the productivity growth generated by such a development programme would also yield a flow of taxes, fees and surpluses to validate the public investments over the long-term, and enable related indexing of social transfers to productivity.
Such a programme, he said, would allow Tobago to develop a viable economy with exports on which foreigners want to spend a growing share of their rising income, noting that this would bring an end to 137 years of dependence on the Trinidad economy while transforming the national economy and policy.
According to James, budgeting for growth in the midst of COVID-19, even for Trinidad, must be guided by innovation, diversification and growth, a domestic cluster of industries that produces tradeable/exportable capital.
With the fiscal package to be revealed within the coming weeks, James maintained that now, even given national supplies of cheap fossil fuels for energy, Tobago and also T&T cannot compete in the global production of manufactured capital goods.
He maintained that its supply of low-cost labour is simply too small, when compared to China, India and the likes.