The pandemic and associated political developments have made the world a more dangerous and complicated place, especially for smaller countries. As the paradigm shifts from a multipolar world based on free trade and more open markets, to one based on political alignments reinforced by sanctions, economic management will become more difficult, increasing the need for management information systems which track trade flows on a real-time basis.
The current improvement in GDP, trade and foreign exchange flows is derived from one performance variable: increased energy sector prices. But dependence on the energy sector also poses significant risks to future growth. The six years of depression experienced from 2015 thru 2021 have amply demonstrated the folly of depending on a single sector. The key challenge is how to use the energy windfall to develop other growth areas whilst energy prices remain buoyant.
Buoyant energy prices generate a positive economic impact. But there are caveats. Since T&T imports refined fuel products at world market prices, it is also affected by the underlying supply-side pressures which increase transportation costs and drive inflation. This is an international trend as inflation in G7 countries remains strong. Marla Dukharan in her economic outlook published this week argues that higher energy prices will not save T&T as actual energy production continues to decline.
She notes that LNG production in 2022 has averaged 2003 levels, natural gas output is comparable to 2004 levels, and crude oil stands at only half of 2000 levels. Further, the non-energy sector weakness also persists. The finance minister recently noted that T&T would continue to depend on the energy sector, although there would be continued efforts to diversify. What will drive the non-energy sector? How can the two views be reconciled? And in what time frame?
Changes in economic policy do not immediately influence business decision-making. Policy announcements take time to be implemented into law and administrative practice. Investment decisions are undertaken only after the policy decisions have taken effect, with careful analysis and evaluation. This amounts to a lag effect of years between policy announcement and eventual investment decision. The Loran Manatee field, for example, will not be in production before 2025 at best. This is not compatible with managing an economy on a five-year election cycle and demonstrates the need for consistent policy frameworks regardless of which political administration is in office.
Economic growth is driven by many factors which include, population growth, improvements in the labour participation rate, productivity enhancement, technological improvements, new factor discoveries and of course increased investment expenditure, be it local or foreign. These factors work in combination and should support each other in a virtuous cycle.
Natural population growth is closely related to economic growth. If the population is growing, one can expect the economy to approximate a similar growth rate. Improvements in technology and productivity also add to economic growth. Similarly, the labour participation rate (the number of people in the labour force as a percentage of the working-age population) can affect growth. If the labour force participation rate increases, it will help boost the growth rate. Additional energy finds, and associated development expenditures, new non-energy sector projects will also push the growth needle upwards. For simplicity, I have ignored the impact of the monetary sector.
The evidence is that these variables are either in decline or about to decline. This data can be accessed on the CSO website and is conveniently summarised in The 10th Actuarial Report to National Insurance Board.
The population growth has collapsed below the rate required to maintain the population base. The population will grow very slowly to 1.4 million people in 2030 as it ages and then begins to decline and age more rapidly. The labour force participation rate is also declining from 61.2 per cent in 2000 to 59.3 per cent in 2018. This compares to the World bank's estimate of an average of 60.1 per cent for 181 countries in 2021. Whilst the difference in percentage terms appears small, it has a significant cumulative effect. As the population declines it will age meaning that there will be fewer people available to work. Furthermore, older populations tend to be more conservative, more concerned with preservation than with expansion and therefore a loss of dynamism.
Despite the avowed concern with diversification, the incentives are few and are too small to drive incremental production in the non-energy sector. The biggest incentives have gone to the construction sector, an area in which several cabinet members are interested but which does not improve the long-term non-energy sector export potential.
By contrast, production levels in the energy sector have been in continuous decline. Up to 2012 finance ministers listed projects to demonstrate growth potential. The projects enumerated by the minister in the 2023 budget speech are designed to stem the decline in energy output, not increase energy output. And the deep water bid rounds have failed. Coming immediately after the depression, the increased energy prices give only the illusion of growth.
The finance minister is not a magician. He must explain the source of sustainable economic growth. Further, how long will higher prices fund increased consumption expenditure?