Opinion
- Editorial- Commentary
Mary King
:
Economics of the local market
The global recession, unlike the last Asian crisis, is affecting every economy. It was possible for the Asian countries to emerge rather quickly from that crisis since in the rest of the world it was business as usual. The Asians were able to export and so rebuild their economies once the financial measures were undertaken. Today the downturn has severely reduced the capacity of the major markets to import, particularly the US (now reducing its trade deficit) and as a result the major exporting economies are also in a collapsed mode.
The model being used for economic rejuvenation includes governments' support for the financial institutions so as to improve confidence of, and in, the financial system and fostering the manufacturing/service sector with the aim of supplying local markets with local goods and services. As President Obama says, "It is American production for American consumers." Countries that depend on exporting for their economic survival, particularly small economies with small internal markets, are at a severe disadvantage in the face of this kind of economic reconstruction, WTO notwithstanding.
The growth in the petroleum-based plantation economy of T&T depends on its ability to export high-priced oil, gas and petrochemicals. With the collapse of these prices and demand, and the intention of the US and the energy importing world to include alternate energy sources in their fuel mix, both prices and demand appear to be stuck in the cellar for the foreseeable future.
The impact on the T&T on-shore sector (including the Government) that employs some 95 per cent of the population and generates less than five per cent of the foreign exchange earnings will be unemployment. Since the major on-shore activity is the production of non-tradable goods and services, the reduction in the energy earnings, and as a result Government spending, spells GDP contraction. It appears, then, that we cannot export our way out of this downturn-even tourism is down.
Is it possible to maintain some reasonable economic activity by stimulating the production of goods and services for the local market? This column has discussed the configuration of the on-shore sector via the economic pyramid and has shown that its commercial and business activities depend, both for imports and manufacturing exports, on the foreign exchange earned primarily by energy. Hence these activities will be constrained given the reduction of foreign exchange. The rejuvenation of our economy in the short-term, then, may turn on our ability to produce more goods/services/infrastructure for the local market.
Agriculture springs to mind and there is some scope there. But we must recall that Sir Arthur Lewis' (unsuccessful) thesis on the industrialisation of the British West Indies was about moving people off the land to make agriculture more competitive.
To maintain the on-shore as is, the demand for US dollars will exceed the supply. This is already putting pressure on the exchange rate (local market is short of US dollars). We can sustain our on-shore activity (in the short-term?) by using our foreign reserves and/or borrowing, cheerfully recommended by the Central Bank Governor. However, alarm bells would be clanging for a housewife if she had to dip into her savings or borrow over an indeterminate period for current expenses-not so for our Governor.
We can let the TT dollar depreciate but the population has never been allowed to appreciate the relief valve that a floating currency brings. However, Prof Wint of UWI claims that it is important for macroeconomic stability of small countries that the exchange rate is kept constant. For our plantation economy the State argues that in the good times the T&T dollar should not be allowed to appreciate nor in the bad times depreciate, ignoring that at one time the "fixed" TT dollar and the pound sterling were 14:1 and now 9:1.
If we cannot supply the foreign exchange demanded by the economy and refuse to allow the TT dollar to depreciate then other economic control variables will have to take up the slack. In this case, short of rationing, further liquidity reduction and an increase in interest rates will be necessary, in stark contrast to the almost zero interest rates in the developed world.
In the context of emerging market protection by the US we have to use the opportunity of the Summit of the Americas to gain regional trade concessions in energy. We also have to start the reconstruction of the infrastructure required to provide the missing knowledge based layers of our economic pyramid. This includes the physical, intellectual, financial and institutions required, together with improvements in our utilities and health services, with priority given to those that employ local people and resources and need a minimum of foreign exchange.
Mary King is a columnist of the Trinidad Express (maryking@tstt.net.tt). Petroleumworld does not necessarily share these views.
This
commentary was originally published by Trinidad Express,
Monday, March 16th 2009
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