The cost of downgrades

Why have these financial assaults been unleashed upon us? Anyone who is anyone knows the kind of economy we have historically operated; one that our current onshore private sector is very comfortable with.

The energy sector, driven by foreign investment, earns the foreign exchange, the lifeblood of small open economies, and the private sector onshore in general uses this foreign exchange, the retained rents, to import the necessities and luxuries of life — it is easier, maybe more lucrative, to import than produce locally.

Government also spends, subsidises, to maintain onshore economic activity; employment, poverty levels etc.

When the rents dry up the onshore economy will collapse unless some foreign exchange can be poured into the economy and government maintains its spending to sustain some economic activity.

As long as the foreign exchange rents do not recover, the onshore economy will either close down abruptly or, by virtue of government interventions via local and foreign loans, sale of assets, rundown of savings and reserves, make the descent of the economy tolerable/ less harsh.

The position of the “over value” of the TT$ is supported by some, in particular the IMF, which calls for flexible currencies for the region, even though some of the staff of the IMF have admitted after criticism by our own Dr DeLisle Worrell that devaluations in small, open economies are detrimental to the long-term stability of such economies.

Our Government’s choice is to close down the economy slowly for which it is being penalised by the downgrades; these downgrades make it more difficult and expensive to continue borrowing.

However, the gradual closedown of the economy by whatever means is not a solution to the recession; it is a reaction to the drop in foreign exchange rents and the economy could reach its steady state, bottom out, when the imports’ demand can be maintained simply by the reduced foreign exchange earned.

The repayment of the foreign loans will put even additional demands on the rents in the medium term which the rating agencies would have made more expensive. The solution to the recession is not fiscal, is not in the hands of the rating agencies, not even in the hands of the IMF. The solution is short to medium-term where with astute government intervention we can exploit our comparative advantages and unique product opportunities, can teach our private sector to export new products/services and/or upgrade its limited export performance.

In the long term we should respond to the emerging demands of the global economy to generate new, innovative and globally competitive products/ services. Hence the creation of a national innovation system is required if we are to respond also in the long term.

Many say that diversification is a task for the private sector not government, though the latter can be a facilitator. But a private sector that has lost its ability to adapt has to either be taught how to create export industries as was done in Chile by the government and a private sector combination to construct the salmon farms, or regenerated by new industrial creations.

Still, some are hoping, praying, that the energy sector rebounds, as it has done in the past, and the rents will begin to flow again — the good times would have returned.