KING: DUTCH DISEASE IN TT

“As the disease continues, the economy moves from production of tradable goods to consumption and inflationary pressures and high demands for foreign exchange and high demand for other resources and items which we are not producing” she said on Tuesday making a presentation on the motion brought by Government to increase the borrowing capacity of the Finance Ministry to $20 billion, to facilitate the Central Bank to conduct open market operations.

(The Dutch Disease refers to the deindustrialisation of a nation’s economy that occurs when the discovery of natural resources raises the value of that nation’s currency, making manufactured goods less competitive with other nation’s, increasing imports and decreasing exports.)

King said, “There is a fundamental relationship between the money available in the economy and the amount of goods and services which is produced by that economy particularly in tradable goods when this relationship goes awry we find ourselves in the position we are in today engulfed in increasing inflation particularly in the prices of goods and services which the demand is inelastic.”

King said the price of food is one commodity in which demand is inelastic and the cost of real estate is also increasing. She said the rate at which food was rising was an indication that the economy had gone awry. She said liquidity can drive inflation if there isn’t an accompanying increase in labour, capital and production of tradable goods and services.

At the end of 2005, TT’s GDP was $74.5 billion, with the petroleum sector generating $30 billion of this and agriculture, food and beverage accounting for three billion and manufacturing sector $2.5 billion. King said agriculture and manufacturing were decreasing in their contribution to GDP and these “are our tradable goods and services which can earn us our foreign exchange.”

She said the non-tradable sector including construction services had risen to $39 billion — the largest of any sector of the economy and growing. King said left alone this set the stage for the Dutch Disease.