Opinion
- Editorial- Commentary
Mary King:
Economic catch-22
Last week's article ended with, "high liquidity in the economy, ie high savings, high lending interest rates but no demand for credit, no investment and increasing unemployment with high inflation. Why?" The answer is two-fold, encompassing the characteristics of the economy of T&T and its fiscal management in the recent global environment of high commodity prices.
The fundamental problem in T&T is its plantation economy in which the Government's spending policy has been pro-cyclical, i.e. spend as much as possible when you have the money. The earnings of the Government from the energy sector (50 per cent of its income) are in US dollars, the spending of which increases the liquidity via what is termed the non-energy deficit. We have seen how this cumulative liquidity drives inflation and the Central Bank's attempts to reduce it via freezing of money and the sale of foreign exchange.
We have also seen that the Government's yearly spending increases GDP (doubled over the last five years) and which is not cumulative in that when spending drops growth drops, and, the economy goes into stagnation or depression.
In recent times this drop in spending came about with the fall in the Government's income as energy prices coupled with petroleum-based exports fell, the result -reduced or no GDP growth. However the high liquidity remains, still driving inflation, a situation which Yacoub Taleb refers to in the press as "demand-shock" stagflation due to the above factors and linked impact of pro-cyclical fiscal spending by the Government in a plantation economy.
The catch-22 situation that the State has found itself in is that liquidity and its result, inflation, are driven by the Government's spending, as is GDP growth. But on reduction in spending because of falling energy prices growth stagnates but with high liquidity inflation keeps roaring on.
The dilemma we have found ourselves in is that the Central Bank has become impotent to fix either inflation or economic depression.
If the Central Bank reduced interest rates to encourage the on-shore sector to invest and help in economic recovery (not that this would actually come about without the support of Government spending) this would also drive the already high inflation rate.
Instead the Government's interim solution seems to be to continue its spending in the short term by borrowing in the local market (now at some TT$3 billion in Budget support for 2008-9 and rising) which will correspondingly require a drawdown of our foreign reserves, the input to which is now severely reduced because of the reduction of foreign exchange earnings by the energy sector. The hope is that the energy prices will soon return to "normal".
Mr Taleb's contribution to this debate recognised the correlation between the Government's spending and the demand for cement and the construction sector, on the country and suggests that the economy beset by stagflation, can be boosted, not by monetary methods, but by Government spending on construction.
But if this is in the style of the past, spending on non-productive assets, it may cause an unsustainable rise in GDP.
The real solution is to level with the public, admit that as a resource-based economy this resource is expected to be exhausted within the lifetime of half of the present population, life is going to be difficult and we have to restructure the economy to one that is sustainable.
Another problem that can befall us is that were energy prices to again increase we could hit, not a geological peak in oil supply, but a geopolitical peak that can again spell recession. Hence the Government's management of the investment of our savings represented by high liquidity in the country, held by a risk-averse public, into high risk capital (as the Government did in the creation of Point Lisas) can build a sustainable economy via the construction of a national innovation system.
This column has already described how gas-rich Qatar is spending huge sums of money in building its knowledge city that will provide in the future-even before its gas is gone-a private sector-driven sustainable economy.
Part of our economic recovery may indeed see the increased sales of cement but the construction that may ensue will be towards creating a sustainable economy.
Surely the construction of smelters forms no part of T&T's sustainable economy (See my article; "Whither Alutrint". If the downstream aluminium industry is to form part of our economy, then like Japan, there is absolutely no need to have aluminium smelters with the accompanying health risks and the difficulties of managing spent pot liners. We can import the raw materials.
Global advantage today is not based on cheap factors of production but on our brains, on innovation, something the present Government is yet to fully appreciate.
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, June 22nd 2009 . Petroleumworld reprint this article in the interest of ou
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