Diversification in TT: Will it ever happen?

In the play, two men, Vladimir and Estragon wait for Gordot, who never arrives.

Based on research, Jeetendra Khadan and Inder Jit Ruprah are putting forward the view that diversification may never come to Trinidad and Tobago, because the country’s currency is overvalued relative to the US dollar and that there has been no political will to change this situation because adjustments may lead to short term hardships for the country.

The paper suggests that adjustments to the currency’s value could “boost diversification of non-energy export products and their markets over the medium term” and spur economic growth and employment.”

According to Khadan and Ruprah, currently only the energy sector has shown the ability to diversify and has been doing so since the late ‘70s, however, “non-oil and non-petrochemical tradable diversification has remained low and almost constant but since the early 2000s has steadily decreased both in terms of commodities and markets.”

The authors said the reason this is happening is ‘Dutch Disease’, a situation that occurs when the country’s exchange rate is chronically overvalued because of energy production.

Khadan and Ruprah said:

“At the same time, producers for the domestic market face competition from cheap imports. Thus, in the presence of the Dutch Disease, even those goods that are produced at the frontier of technology are not economically viable in a competitive market. If a new business enterprise utilising modern technology is established in a country affected by this disease, with all the other competitiveness factors being equal, it will only be economically viable if its productivity is greater than the productivity achieved by business enterprises in rival countries to a higher or equal degree of the appreciation of the exchange rate caused by the Disease.”

According to Khadan and Ruprah, an adjustment in the exchange rate could have an important role in improving the situation. But they warn that as beneficial as a devaluation might be, it can have consequences that may be unpleasant for the public, including a short term increase in poverty, as the real spending power of average households is decreased and an increase in the cost of imported raw materials.

The authors said politicians’ continued acquiescence to the will of the public will cause them to miss an important opportunity to jumpstart the diversification process and they said the consequences can be dire.

“Just like Vladimir and Estragon, policymakers are waiting for Godot; in this case the recovery of oil and gas prices. Either way, the diversification agenda is subsumed to short-term concerns with the corollary of a lost opportunity as a diversification policy can take a couple of decades or so to show results; the same time horizon when oil and gas run out. Today, the warning by Ramsaran (1995), writing about the eighties, may be prescient: “In the early phase of the oil boom foreign earnings were hived off into ‘Special Funds’, reflecting a conscious decision to conserve this resource. Once oil prices began to fall, however, there was a reluctance to put the brake on spending, and these reserves were quickly used up.

With the buffer gone, and with the major foreign exchange sector in difficulty, the need for quick and strong corrective action became inevitable.” If so, perhaps Santayan’s caution that “those who cannot learn from history are doomed to repeat it” is also relevant today.”

The paper is available at the IDB’s Trinidad website.