GDM Trinidad and Tobago1 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 Tobago2 Real GDP Growth Rates

GDM Trinidad and Tobago3 Evolution of the Capital Stock 2000 TT$,

GDM Trinidad and Tobago4 Capital Compensation at sector level

GDM Trinidad and Tobago5 Capital compensation for non-petroleum tradable industries in T&T is similar to capital compensation for developed countries (Poterba) but volatility is higher. risk adjusted returns lowerIt seems risk adjusted returns for these industries are lower in T&T

GDM Trinidad and Tobago6 GDM Decision Tree

GDM Trinidad and Tobago7 Most Binding Constraints in the GDM Decision Tree from the Managers Point of View

GDM Trinidad and Tobago8 S>>INational 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) low cost groupInternational Benchmarking: low cost group Real Interest Rate: 6.3% Savings/GDP: 23.8% Spreads: 7.7% Not so costly to financeSurvey 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 Is it Costly Finance?

GDM Trinidad and Tobago9 GDM Decision Tree

GDM Trinidad and Tobago10 Is it Low Social Returns? 1. Human Capital 2. Infrastructure 3. Global Competitiveness 4. Quality of Governance

GDM Trinidad and Tobago11 Human Capital Schooling indicators are relatively poorSchooling 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 returns to schooling are not extremely highBut returns to schooling are not extremely high except for tertiary education Quality is an issueQuality is an issue highest emigrationDefoort (2006): T&T has one of the highest emigration rates for skilled workers in the world Less educated workers are harder to findBut 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 Tobago12 Conclusions about Human Capital Puzzle? Brain drain, high return to university level, very low enrolment. high wage differential low barriers to migrate –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 Tobago13 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 Tobago14 Its ranking in GCI is not in line with its income level Least Favorable aspects: Institutions, Infrastructure, Market Efficiency and Innovation

GDM Trinidad and Tobago15 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 –Security costs represent on average 3.7% of sales, very high for international standards

GDM Trinidad and Tobago16 Macro Risks: Fiscal Sustainability and the Stabilization Fund sustainable non-energy deficit in T&T should be between 4.4 and 10.8% of GDP15.5%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 Tobago17 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 Tobago18 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 Tobago19 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 T&T has poor “open forest”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 –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: appropriability (high macro risks & crime) –Some problems of appropriability (high macro risks & crime) lack of complementary inputs –Some problems of lack of complementary inputs (underperforms in most of the indicators analyzed compared to same income level countries)

GDM Trinidad and Tobago20 Ranking Binding Constraints fine tuning on the micro frontT&T improved many policy instruments. From now on it is more about fine tuning on the micro front Fiscal management of the natural resource revenues continues being highly criticalOn 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