Competitiviness and Growth in Trinidad and Tobago

1. Competitiviness and Growth in Trinidad and Tobago D. Artana, S. Auguste, R. Moya, S. Sookram and P. Watson Washington DC, September 20 th 2007 GDM Trinidad and Tobago

2. Real GDP Growth Rates GDM Trinidad and Tobago

3. Evolution of the Capital Stock 2000 TT$, 1990-2003 GDM Trinidad and Tobago

4. Capital Compensation at sector level GDM Trinidad and Tobago

5. Capital compensation for non-petroleum tradable industries in T&T is similar to capital compensation for developed countries (Poterba) but volatility is higher. • It seems risk adjusted returns for these industries are lowerin T&T GDM Trinidad and Tobago

6. GDM Decision Tree GDM Trinidad and Tobago

7. Most Binding Constraints in the GDM Decision Treefrom the Managers Point of View GDM Trinidad and Tobago

8. Is it Costly Finance? • National saving rate above the average for LAC with S>>I • Large Capital Inflows (FDI/GDP highest in LAC) • Sovereign debt investment grade since July 2005 • Financial system is sound (No crisis) • International Benchmarking: low cost group • Real Interest Rate: 6.3% • Savings/GDP: 23.8% • Spreads: 7.7% • Survey Evidence: Not so costly to finance • Bank Financing of new investment=52% (LATAM 30%, East Asia 36%) • Average interest rate 12.5% (37-month loan) • Average loan duration above ICS world average • Collateral requiered (as % of investment) almost half of ICS world average GDM Trinidad and Tobago

9. GDM Decision Tree GDM Trinidad and Tobago

10. Is it Low Social Returns? 1. Human Capital 2. Infrastructure 3. Global Competitiveness 4. Quality of Governance GDM Trinidad and Tobago

11. Human Capital • Schooling indicators are relatively poor • Low school life expectancy • Below regional average in enrollment rates in both primary and secondary education • Very low enrollment ratio in tertiary education • But returns to schooling are not extremely high except for tertiary education • Quality is an issue • Defoort (2006): T&T has one of the highest emigration rates for skilled workers in the world • But Survey Results: Less educated workers are harder to find than skilled ones and Poor primary school quality is more important than poor tertiary level quality • Limitation of the survey: look at the business needs given the actual economic structure. It does not capture externalities and social rate of returns GDM Trinidad and Tobago

12. Conclusions about Human Capital • Puzzle? Brain drain, high return to university level, very low enrolment. • High return to complete tertiary education in T&T, but still high wage differential with developed countries, for people with low barriers to migrate • Hendrik (2002) Compared to other countries, Human Capital explains large part of the differences between T&T and the U.S. wages (both stock and quality) GDM Trinidad and Tobago

13. Conclusions about Infrastructure • Infrastructure somewhat expensive with some problems related to quality • Infrastructure quantity and quality not in line (below) similar income level countries • But according to managers ranking, there are other “low return” factors more important than infrastructure (e.g. human capital, lack of access to foreign markets and poor management) GDM Trinidad and Tobago

14. Its ranking in GCI is not in line with its income level Least Favorable aspects: Institutions, Infrastructure, Market Efficiency and Innovation GDM Trinidad and Tobago

15. Investment Climate • T&T ranks fairly well in the Investment Climate survey • Survey results. 60% of the establishments mentioned that corruption was a factor hindering the establishments and their business opportunities, with 23% of them finding it a major and severe problem • Security costs represent on average 3.7% of sales, very high for international standards GDM Trinidad and Tobago

16. Macro Risks: Fiscal Sustainability and the Stabilization Fund • According to IMF (2007) sustainable non-energy deficit in T&T should be between 4.4 and 10.8% of GDP, but it is around 15.5% (fiscal year 2005/06) • Firms identify Macro Risk as the most binding constraint at the individual factor level GDM Trinidad and Tobago

17. Open Forest Analysis • T&T exports are not very diversified and it does not have many open opportunities • Exports concentrate on oil and gas products (historically between 60 and 70%). • Firms identify lack of access to foreign market as a binding constraint GDM Trinidad and Tobago

18. Conclusions about innovation • Lack of innovation and new discoveries outside the energy sector • Lack of entrepreneur activities, which can be related to: • Poor human capital • Path dependence • Relatively high government intervention • most of infrastructure services, even telecommunications and internet are public, what might prevent the development of local business groups, with externalities to other activities • Also high intervention in housing and tourism GDM Trinidad and Tobago

19. Conclusions • In spite of several reforms in the last 25 years T&T has not boosted vigorous economic growth in the non-energy tradable sector yet • It is not a problem of costly financing but of lack of opportunities • Low sophistication in exports. T&T has poor “open forest” • T&T growth might be path dependent. The high specialization in energy may limit growth in other tradable sectors due to: • High macro risk (historical correlation between the international oil price and real GDP growth is close to 80%) • Credibility about new fiscal rules (SF) • Lack of externalities in production, lack of forward and backward linkages, lack of previous learning and lack of local entrepreneurs • Inside of the lack of opportunity branch of the tree, several issues: • Some problems of appropriability (high macro risks & crime) • Some problems of lack of complementary inputs (underperforms in most of the indicators analyzed compared to same income level countries) GDM Trinidad and Tobago

20. Ranking Binding Constraints • T&T improved many policy instruments. From now on it is more about fine tuning on the micro front • On the macro front: Fiscal management of the natural resource revenues continues being highly critical • It exacerbates volatility and aggravates the underdevelopment of the non-energy sector. • The complementary inputs the Government provides (particularly non-tradable ones) might not be enough to overcome the lack of competitiveness, making the effort meaningless • Having first a prudent fiscal management the country has room to improve several complementary inputs GDM Trinidad and Tobago