Adaptive control of our stable economy

This suggests that the economy was unstable and that his actions, taxes, sale of assets, loans etc were meant to stabilise the economy.

Instability in (even an economy) any system means that it will undergo violent and increasing fluctuations when subject to any disturbance that moves it from its current state of equilibrium (low inflation and constant growth). Is our economy one of such systems? In our small open economy, the major characteristic is that we cannot produce locally much of what we consume and even use in our capital infrastructure.

Hence the population depends for its very economic life on the foreign exchange earned to fund the required imports.

In TT there is one major set of exports; those from the energy sector, at prices which are set by the global market.

The volatility of these prices coupled with the production levels could place the economy in a kind of boom-bust-boom situation as it adjusts to the changing input of foreign exchange income.

The history of our plantation economy demonstrates that its performance, growth/decay, moves in tandem with the quantity of foreign exchange earned from exports.

To be more specific, the growth and the longer-term development of the economy depend on the positive difference of the foreign exchange earned, rents, over that needed for imports to maintain consumption of the current lifestyle.

The onshore economic activity adjusts to the earned foreign exchange released into the market, ie, if the foreign exchange drops the imports will have to decrease; the onshore contracts, unless savings and reserves, but for a time, can maintain import levels as being experienced now in this recession.

The rigidity and the isolation of the onshore economy from the energy sector make it virtually impossible to create new exports or replace imports by local onshore production in the short to medium term.

A simple model of the economy would show that the positive difference of the foreign exchange income, rents from the energy sector, over that for imports can either be saved or used to expand economic activity onshore in the short to medium term and is also vital to the long-term restructuring of the economy.

A negative difference causes onshore economic contraction unless for a time reserves, savings are used to prop up the economy. Further, given the short-term characteristics of the onshore, in general any economic growth, increased economic activity will demand increased imports.

These two properties define a simple negative feedback model for the onshore economy. In the forward path the difference between the foreign exchange earned and that demanded for imports drives economic change (growth or decay) and in the long term, if positive, can provide real economic development.

In the negative feedback path accumulated growth affects demands for imports, demand for foreign exchange.

This system is highly stable and any disturbance in foreign exchange income, an exogenous input in the main to the onshore economy, simply forces a change in economic activity without any violent fluctuations.

Hence the Minister has no reason to stabilise the economy since it is inherently stable.

What he may try to do given a drop in rents from the energy sector is what the systems people call “model adaptive control” in which he tries to make the adjustment conform to certain specifications, eg control the rate at which the onshore economy contracts by using subsidiary inputs like injecting into the economy savings and reserves or borrowed US dollars to acquire a soft landing, or increasing taxes and interest rates, reducing government spending, even devaluing the currency to curb demand for imports.

The model tells us immediately that continued real growth/ development in the onshore economy depends on continued real growth in foreign exchange income, now primarily from the resource depleting energy sector.

Hence growth in our small open economy is export-led with this growth in general increasing the demand for foreign exchange.

Hence it is clear that continued onshore economic development depends on continuing investment of foreign exchange surpluses into the production of foreign exchange earning assets (infrastructure and human).

Our diversification of the economy has to be about earning foreign e x c h a n g e and the optimum use of imports.