Non-energy manufacturing has been identified by successive governments as key to the formation of a T&T economy that is less dependent on the energy sector.
But 40 years after the late Prime Minister George Chambers embarked on an effort to make this country a major manufacturing centre and 50 years after Sir Arthur Lewis seminal work, manufacturing in T&T faces major headwinds.
From the issue of economies of scale, to a reliable supply of foreign exchange (forex) to the ease of doing business, manufacturers have continued to persevere with some degree of success but with real challenges in moving forward.
Former Trade Minister Vasant Bharath says the biggest problem facing T&T’s manufacturing sector is its continued reliance on import raw materials, turning this into a finished product and then trying to export those products.
“And of course we don’t have the economies of scale to be able to do that. So we are not going to be competitive on international markets,” Bharath added.
Further, he said manufacturers must have the necessary incentives “not just on the books” but in reality to make their operations effective and efficient, reiterating that the ease of doing business has to be number one on Government’s priority list.
T&T is ranked 105 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings.
Consistent availability of forex was identified by Bharath as another hindrance to the expansion of the sector.
To the former Trade Minister there are significant other disincentives like delays in the refund of value added tax, forcing manufacturers to sometimes wait as long as two and three years to get their refunds to help maintain their cash flow.
Further, Bharath said, there’s no point for the country to compete in areas in which countries like China, India and the US are dominant because T&T will be “blown out of the water” due to economies of scale.
But economist Dr Justin Ram believes there is a place for manufacturers in T&T and what is crucial is a strategic approach to market penetration and competitiveness.
He noted that manufacturing in T&T is quite varied, ranging from PVC pipes to food products. And while this sector is key, the country must ensure that the competitiveness of the economy is conducive to all types of activities to achieve holistic transformation.
“That is an important distinction because depending on where the opportunities lie you really then want entrepreneurs to come in and fill those gaps.
“We have to look at the global value chains for example, and this is not necessarily for the Government to do, but for the private sector to see where they can fill those gaps in that global value chain with their manufacturing outputs,” Ram explained.
Dr Vanus James
Government, however, must ensure it is doing every thing to facilitate local manufacturing becoming part of these value chains explained Ram.
“This could mean the food value chain, the water value chain, for example with what Rotoplastics does with their water tanks, but it could equally mean much higher types of manufacturing which we are not doing for example, green economies with respect to building solar panels.
“This is an area T&T can get into because it already has cheap energy and some of the components of a green economy moving forward,” Ram noted.
But he argued that the country’s policy and structural transformation environment have not really been facilitating to diversification.
The markets, he said, simply do not work in T&T.
“And that means that entrepreneurial activity becomes very difficult. The labour markets do not work because there’s a lot of intervention by the Government either through things like CEPEP or URP or even with excessive government hiring in Central Government and even through State-owned enterprises. So there are a lot of distortions there,” Ram explained.
Additionally, he said, the country’s foreign exchange market “does not work at all.”
According to Ram demand and supply are not “allowed” to come to some sort of equilibrium.
“We have an over-valued exchange rate which ultimately is a disadvantage for any manufacturing sector. You can’t compete if you have an over-valued exchange rate and you have a labour market that is not working well.
“What tends to happen is that you have to pay people high wages but you cannot off-set that because the foreign exchange market doesn’t work,” Ram explained.
He reiterated that the “only thing going” in T&T is the low cost of energy, but this costs the State a considerable amount.
Look beyond manufacturing
From the perspective of serving as an engine of revitalisation, it’s perhaps true to say that the manufacturing sector provides Government with limited policy options, even though it makes sense for the country to do the best that it can with its economic potential, says Economist Dr Vanus James.
He explained that the sector cannot competitively produce capital goods, so little long-term gain in capital deepening can be expected from providing it credit designed to boost capital production.
“This is not China,” James explained adding, “For the same reason, it cannot be expected to serve as an engine of transformational growth by stimulating productivity growth in other sectors of the economy.”
He said Government could cut the sector’s profits tax rate and lower regulations, but with no significant expected gains in terms of competitive extra-regional exports of new innovative food and beverages under arrangements such as the EU’s economic partnership arrangements, its prospects of recouping those tax expenditures are modest at best.
In this regard, James added, without the capacity to contribute to domestic capital production, small manufacturers bring no special advantages of nimbleness and creativity compared to large ones that would justify special supporting Government policies.
James said, so far, with the twin advantages of low-cost intermediates and electricity, manufacturing downstream of the energy sector has been economically competitive farther afield than Caricom.
But apart from emerging challenges with the supply of gas, the sub-sector faces significant headwinds in the future because of the global need to shift away from industries based on hydrocarbons to preserve the environment.
Further, James noted, that even without those conservation headwinds, other large-scale competitors are building up their gas-production capacities.
“And the country’s historical record is replete with evidence that, in that environment, the global market for LNG is highly vulnerable to massive negative price shocks that put the sector and the economy at risk of repeated and substantial collapses of net cash flow.
“It should not be forgotten that these negative shocks are the main reason for repeated calls to diversify the economy away from the energy sector as a whole, including energy-based manufacturing,” James said.
Vasant Bharath
Hence, he explained, T&T must look beyond manufacturing for post-COVID economic diversification, productivity growth, export growth and import restraint.
In particular, the country must look to sectors that can grow capacity to produce capital as the basis for competing successfully in the markets for the broad classes of goods and services it imports.
James said because of the critical role played by creative thinking, the candidate sectors are those that can produce and export the industrialised capital services: education, healthcare and the creative industries such as music and fashion design.
He advised that while taking available advantage of its natural resource base, such as energy or sea, sun and sand, T&T must collaborate with the world to build suitable capacity to develop winning solutions to the following local and global problems.
These include affordable growth of the average level of knowledge, skills, and self-confidence of the workforce to match the changing requirements of market competition; growth of access to affordable advanced and reliable healthcare services by the workforce engaged in the process of competition; growth of readily accessible and attractive music and entertainment, film, fashion design, and other creative services to meet the changing demands of an increasingly knowledgeable, skilful, and self-confident workforce.
“Since the country imports solutions in all of these areas, success will amount to development of intra-industry trade in the industrialised tourism services,” James said.
For example, he added that as illustrated by soca, T&T must redouble its efforts to make music and export it to the world, while importing music at the same time.
“Of course, this is where the economic potential of Tobago fits into the favourable national options for the future. With suitable capital investments, international collaboration, and appropriate institutional development, it offers the country rich potential for exporting the industrial capital services on a very attractive tourism platform.
“Moreover, at this time, this window of opportunity is wide open, since (other than Cuba) Caribbean countries have not yet moved decisively to exploit it,” James said.