GEISHA KOW­LESSAR ALON­ZO

T&T’s eco­nom­ic mod­el needs to change to cre­ate a so­ci­ety where hu­man wel­fare is max­imised.

This is the ad­vice from T&T born, re­gion­al econ­o­mist Dr Justin Ram, who put for­ward this ar­gu­ment in his lat­est pa­per ti­tled, “Com­par­a­tive ad­van­tage, cheap con­sump­tion, and poor de­vel­op­ment out­comes in the Caribbean,” which was re­leased last week.

In an in­ter­view with the Sun­day Busi­ness Guardian, Ram ex­plained that the pa­per fo­cussed on cheap con­sump­tion, which is the pri­ori­ti­sa­tion of the do­mes­tic mar­ket for cheap im­ports.

“And that means you have this over­sized fo­cus on for­eign ex­change re­serves to im­port those cheap im­ports. In ad­di­tion to that, you then have a back­ward link­age where­by gov­ern­ment must try to earn as much in­come as pos­si­ble to sub­sidise peo­ple be­cause they don’t have good jobs be­cause we have pri­ori­tised the econ­o­my for cheap im­ports.

“I am say­ing, now, that the eco­nom­ic mod­el has to change to fo­cus on the hu­man con­di­tion. which re­al­ly I’m mea­sur­ing as the val­ue of hu­man cap­i­tal, which is mea­sured as the max­imi­sa­tion of your in­come over your life­time. That means that hav­ing lo­cal pro­duc­tion is re­al­ly im­por­tant to give peo­ple good jobs, al­low them to earn as much as pos­si­ble,” Ram said.

That, in turn, he fur­ther ex­plained, means that a gov­ern­ment does not have to now con­stant­ly find mon­ey to sub­sidise con­sump­tions be­cause now, peo­ple would have good jobs.

Delv­ing in­to his pa­per, Ram de­tailed that while look­ing at the per­for­mance of the T&T econ­o­my and many economies across the Caribbean, most eco­nom­ic ob­servers us­ing their typ­i­cal macro­eco­nom­ic lens­es would say that these economies have per­formed rea­son­ably well from the time of In­de­pen­dence un­til about the first decade of the new mil­len­ni­um. The rel­a­tive­ly re­cent stag­na­tion of the reg­o­nal economies is thought to be due to a lack of com­pet­i­tive­ness, poor busi­ness en­vi­ron­ment, and bloat­ed state sec­tors.

He not­ed that in­ter­na­tion­al fi­nan­cial in­sti­tu­tions and in­ter­na­tion­al agen­cies that seek to as­sist these coun­tries fo­cus on re­forms that at­tempt to mit­i­gate these prob­lems. Ram point­ed out that the rents earned from ex­ploit­ing nat­ur­al re­sources, such as oil, gas baux­ite, co­coa, and even the sandy beach­es of the Caribbean, have masked the fun­da­men­tal prob­lem.

“I be­lieve that there is a more fun­da­men­tal prob­lem; the root cause of the prob­lem has not been iden­ti­fied, or econ­o­mists are un­will­ing to even con­sid­er it since the the­o­ry that un­der­pins much of the glob­al eco­nom­ic or­der and, in­deed, glob­al­i­sa­tion could be the prob­lem.

“Since the 1980s, the eco­nom­ic doc­trine has mea­sured eco­nom­ic progress by con­sump­tion ef­fi­cien­cy. How­ev­er, what we have fol­lowed is not eco­nom­i­cal­ly ef­fi­cient since this would im­ply that all oth­er fac­tors and the econ­o­my are op­er­at­ing ef­fi­cient­ly.

“We have, in­stead, fol­lowed the no­tion that the avail­abil­i­ty of cheap con­sump­tion mea­sures eco­nom­ic well-be­ing. This im­plies that coun­tries should seek to open their mar­kets so that res­i­dents can con­sume prod­ucts made the most ef­fi­cient­ly wher­ev­er they might be. Well-be­ing is, there­fore, mea­sured by how res­i­dents can spend their in­comes on the cheap­est goods avail­able glob­al­ly to help their in­comes stretch fur­ther. How much an in­di­vid­ual can con­sume with their earn­ings rather than what they can pro­duce is the pre­dom­i­nant mea­sure of de­vel­op­ment,” Ram ad­vised.

This is the the­o­ry of com­par­a­tive ad­van­tage, which un­der­pins the glob­al eco­nom­ic or­der.

Be­yond this, Ram sug­gest­ed, the the­o­ry of cheap con­sump­tion means that small states like T&T and the rest of the Caribbean should open their do­mes­tic mar­kets to all for­eign prod­ucts so that do­mes­tic con­sumers can ben­e­fit from goods and ser­vices that can be pro­duced more cheap­ly by much larg­er and more com­pet­i­tive economies who ben­e­fit from in­ter­nal economies of scale that small mar­kets like T&T’s could nev­er em­u­late.

Ram ad­vised this is par­tic­u­lar­ly true of ad­vanced man­u­fac­tured prod­ucts like ap­pli­ances, elec­tron­ics and mo­tor ve­hi­cles.

“In small places, like T&T and many Caribbean economies, the the­o­ry of com­par­a­tive ad­van­tage means that these economies are left to pro­duce low val­ue added goods and ser­vices or add min­i­mal val­ue to nat­ur­al re­sources like oil and gas, petro­chem­i­cals, and tourism. In ad­di­tion, man­u­fac­tured goods re­lat­ed to the val­ue-added of agri­cul­tur­al prod­ucts, such as agro-pro­cess­ing and food prod­ucts, oc­cur on­ly be­cause of the Cari­com Com­mon Ex­ter­nal Tar­iff (CET), of­ten with sig­nif­i­cant for­eign in­ter­me­di­aries. This means that 70 per cent of what is con­sumed in the do­mes­tic mar­ket is im­port­ed, with most labour di­rect­ed to dis­trib­ut­ing im­ports, in­stalling im­ports, pro­vid­ing ser­vice and main­te­nance for im­ports, and sell­ing and re­tail­ing im­ports.

“This means the econ­o­my nev­er be­comes tru­ly in­no­v­a­tive, or there is no need for deep tech­no­log­i­cal know-how or in­no­va­tion, when all glob­al in­no­va­tion is on­ly one ship­ping con­tain­er or a click away,” Ram fur­ther ex­plained in the pa­per.

Ex­ploit­ing and sell­ing raw nat­ur­al re­sources

Look­ing at the log­ic be­hind the cur­rent eco­nom­ic mod­el this coun­try has fol­lowed, Ram said the re­cent pol­i­cy di­rec­tion of the Gov­ern­ment has been to ex­ploit its rel­a­tive­ly abun­dant nat­ur­al gas re­serves, which, up un­til 1999 and the then util­i­sa­tion ra­tio, had gas re­serves that would have last­ed un­til about 2070. How­ev­er, he not­ed, the de­ci­sion was made to mon­e­tise a size­able pro­por­tion of the nat­ur­al gas re­serves as liq­ue­fied nat­ur­al gas (LNG) or raw gas and sell it to for­eign mar­kets to earn for­eign ex­change (FX).

“The FX is re­quired to fi­nance the con­sump­tion of cheap goods and ser­vices from abroad be­cause the do­mes­tic mar­ket is pri­ori­tised for this cheap glob­al con­sump­tion. The FX is al­so need­ed to sub­sidise the con­sump­tion of these goods and ser­vices via gov­ern­ment trans­fers since lo­cal work­ers do not earn enough to fa­cil­i­tate the in­de­pen­dent con­sump­tion of their house­holds,” Ram said.

He said this de­ci­sion means that in the 2020s, T&T ex­pe­ri­enced a nat­ur­al gas short­age and now needs to find new gas re­serves to fi­nance the con­sump­tion of im­ports and sub­sidise house­holds’ con­sump­tion.

It is a pol­i­cy, Ram sug­gest­ed, that leads to an eco­nom­ic tread­mill, with the con­stant need to fi­nance a high pro­por­tion of con­sump­tion that is made up of im­ports (70 per cent) and gov­ern­ment ex­pen­di­ture to sup­port house­hold con­sump­tion.

Min­i­mum wage, labour laws and com­par­a­tive ad­van­tage

As a re­sult of fol­low­ing the cur­rent eco­nom­ic mod­el, this econ­o­my has low labour force par­tic­i­pa­tion rates, Ram stat­ed.

“It on­ly has space in the labour mar­ket for a rel­a­tive­ly small per­cent­age of skilled peo­ple who earn a de­cent wage. Most peo­ple have jobs that do not pay well, and many peo­ple could be clas­si­fied as work­ing poor, ex­cept for the large trans­fers and sub­si­dies paid out by gov­ern­ments to house­holds in one form or an­oth­er, such as fu­el and wa­ter sub­si­dies with ad­di­tion­al neg­a­tive feed­back loops.

“We can­not have fair glob­al free trade with­out the free move­ment of peo­ple and sim­i­lar labour stan­dards across the board. Free move­ment of labour and iden­ti­cal labour stan­dards across the globe are not on the hori­zon; there­fore, it is cru­cial that we pri­ori­tise our do­mes­tic mar­ket for do­mes­tic pro­duc­tion to give our labour force, which al­ready has a min­i­mum wage and bet­ter labour stan­dards in place, a fair shot at a bet­ter labour force par­tic­i­pa­tion rate,” the pa­per by Ram ex­plained.

Bank­ing, cred­it, and com­par­a­tive ad­van­tage in T&T and the Caribbean

Ram said the eco­nom­ic mod­el al­so in­cen­tivis­es cred­it and fi­nance for the con­sump­tion of fi­nal im­ports. Ex­clud­ing re­al es­tate-as­so­ci­at­ed cred­it, about 25 per cent of loans are for mo­tor ve­hi­cles, 17 per cent are for cred­it card debt, and 36 per cent are for re­fi­nanc­ing and debt con­sol­i­da­tion.

Giv­en the over­all com­po­si­tion of con­sump­tion, it is safe to say that most con­sumer cred­it is for pur­chas­ing im­ports, he said.

“If we look at cred­it ex­tend­ed to busi­ness­es, 12 per cent went to man­u­fac­tur­ing, five per cent to con­struc­tion, and six per cent to agri­cul­ture, petrol, and leas­ing. So, a min­i­mal amount of busi­ness cred­it is go­ing to­wards pro­duc­tion,” Ram added.

SIDE­BAR

Com­par­a­tive ad­van­tage is a the­o­ry de­vel­oped by David Ri­car­do, a British econ­o­mist who died in 1823, still has a sig­nif­i­cant hold on eco­nom­ic doc­trine be­cause hu­man well be­ing is mea­sured by con­sump­tion ef­fi­cien­cy or, as Ram prefers to call it, cheap con­sump­tion.

Ram not­ed that glob­al­i­sa­tion is ground­ed in this the­o­ry, and pro­po­nents of glob­al­i­sa­tion quote sta­tis­tics that say that it has raised nu­mer­ous peo­ple out of pover­ty, mea­sured by those liv­ing on less than US$2 per day as if this da­ta is some­thing to shout about.