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GDM Trinidad and Tobago 1
Competitiviness and Growth in Competitiviness and Growth in Trinidad and TobagoTrinidad and Tobago
D. Artana, S. Auguste, R. Moya, S. Sookram and P. Watson
Washington DC, September 20 th 2007
GDM Trinidad and Tobago 2
Real GDP Growth RatesReal GDP Growth Rates
0%
5%
10%
15%
20%
25%
30%
35%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Energy
Non-Energy
Non-energy Tradable
11.8% Energy6.5% Non-Energy4.4% Non-Energy Tradables
GDM Trinidad and Tobago 3
Evolution of the Capital Stock Evolution of the Capital Stock 2000 TT$2000 TT$, 1990-2003, 1990-2003
-
10,000
20,000
30,000
40,000
50,000
60,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Mil
lion
s of
200
0 T
T$
Energy Sector
Non Energy Sector
Non Energy Tradable
Energy 13.2%Non-Energy 1.9%Non-Energy Tradables 4.8%Non-Energy Tradables (exc. CH y Ass) 1.7%
Annualized Growth Rate
GDM Trinidad and Tobago 4
Capital Compensation at sector level
0%
10%
20%
30%
40%
50%
60%
1991 1993 1995 1997 1999 2001 2003
Petroleum Industries
Non-Petroleum Tradable Industries
GDM Trinidad and Tobago 5
• Capital compensation for non-petroleum tradable industries in T&T is similar to capital compensation for developed countries (Poterba) but volatility is higher.
• It seems risk adjusted returnsrisk adjusted returns for these industries are lowerlower in T&T
GDM Trinidad and Tobago 6
GDM Decision TreeGDM Decision Tree
* A g g re g a te F in a n c ia lC o n s tra in ts* P o o r D e b tM a n a g e m e n t
C o s tly In te rn a tio n a lF in a n c e
* F in a n c ia l c o n s tra in ts* W e a k R e g u la tio n* B a n k in g sy s te m
a n d re g u la tio n s
C o s tly L o c a lF in a n c e
B a rrie rs to in v e s tm e n t
* E x te rn a litie s* S p illo v e rs
* C o o rd in a tio n fa ilu re* C rim e
* C o rru p tio n* 'F o re x ' R isk s* T a x p re ssu re
* T a x re g u la tio n
L o wA p p ro p ria b ility
L o w C o m p e titiv in e ssL o w S u p p ly o f C o m p l.In p u ts (H K a n d In fr .)
* T o o -little se lfd isc o v e ry
* H ig h C o s t( in fr . c o s ts )
L o wS o c ia l R e tu rn s
L a c k o f O p p o rtu n itie s
H is to ric a lly lo w g ro w th a n d lo w in v e s tm e n t in th e n o n -e n e rg y ( tra d a b le se c to r)E c o n o m ic g ro w th v e ry c o rre la te d w ith e n e rg y p ric e s . E n e rg y d e p e n d a n c e
GDM Trinidad and Tobago 7
Most Binding Constraints in the Most Binding Constraints in the GDM Decision TreeGDM Decision Tree
from the Managers Point of Viewfrom the Managers Point of View
C o stlyF in a n c e17 .6%
B a rrie rs to in v e s tm e n t
L o wA p p ro p ria b ility
29 .1%
L o wS o c ia l R e tu rn s
53 .3%
L a c k o f O p p o rtu n itie s
N o n -E n e rg y S e c to rL o w I
R e la tiv e ly lo w g
GDM Trinidad and Tobago 8
• National saving rate above the average for LAC with S>>IS>>I
• Large Capital Inflows (FDI/GDP highest in LAC)
• Sovereign debt investment grade since July 2005
• Financial system is sound (No crisis)
• International Benchmarking: low costlow cost group group• Real Interest Rate: 6.3%• Savings/GDP: 23.8%• Spreads: 7.7%
• Survey Evidence: Not so costly to financeNot 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?Is it Costly Finance?
GDM Trinidad and Tobago 9
GDM Decision TreeGDM Decision Tree
* A g g re g a te F in a n c ia lC o n s tra in ts* P o o r D e b tM a n a g e m e n t
C o s tly In te rn a tio n a lF in a n c e
* F in a n c ia l c o n s tra in ts* W e a k R e g u la tio n* B a n k in g sy s te m
a n d re g u la tio n s
C o s tly L o c a lF in a n c e
B a rrie rs to in v e s tm e n t
* E x te rn a litie s* S p illo v e rs
* C o o rd in a tio n fa ilu re* C rim e
* C o rru p tio n* 'F o re x ' R isk s* T a x p re ssu re
* T a x re g u la tio n
L o wA p p ro p ria b ility
L o w C o m p e titiv in e ssL o w S u p p ly o f C o m p l.In p u ts (H K a n d In fr .)
* T o o -little se lfd isc o v e ry
* H ig h C o s t( in fr . c o s ts )
L o wS o c ia l R e tu rn s
L a c k o f O p p o rtu n itie s
H is to ric a lly lo w g ro w th a n d lo w in v e s tm e n t in th e n o n -e n e rg y ( tra d a b le se c to r)E c o n o m ic g ro w th v e ry c o rre la te d w ith e n e rg y p ric e s . E n e rg y d e p e n d a n c e
GDM Trinidad and Tobago 10
Is it Low Social Returns?Is it Low Social Returns?
1. Human Capital
2. Infrastructure
3. Global Competitiveness
4. Quality of Governance
GDM Trinidad and Tobago 11
Human CapitalHuman 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
• But returns to schooling are not extremely highreturns to schooling are not extremely high except for tertiary education
• Quality is an issueQuality is an issue
• Defoort (2006): T&T has one of the highest emigrationhighest emigration rates for skilled workers in the world
• But Survey Results: Less educated workers are harder to findLess 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 Tobago 12
Conclusions about Human Conclusions about Human CapitalCapital
• Puzzle? Brain drain, high return to university level, very low enrolment.
– High return to complete tertiary education in T&T, but still high wage differentialhigh wage differential with developed countries, for people with low barriers low barriers to migrateto 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 Tobago 13
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 Tobago 14
Its ranking in GCI is not in line with its income level
-140.0
-120.0
-100.0
-80.0
-60.0
-40.0
-20.0
0.0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
GDP per capita, PPP
GC
I R
anki
ng
ARG
CHI
BR
GTM
CR
ELSL
T&T
MAL
MAU
Least Favorable aspects: Institutions, Infrastructure, Market Efficiency and Innovation
GDM Trinidad and Tobago 15
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% Security costs represent on average 3.7%
of salesof sales, very high for international standards
GDM Trinidad and Tobago 16
Macro Risks: Fiscal Sustainability and the Stabilization Fund
• According to IMF (2007) sustainable non-energy deficit in T&T sustainable non-energy deficit in T&T should be between 4.4 and 10.8% of GDPshould be between 4.4 and 10.8% of GDP, but it is around 15.5%15.5% (fiscal year 2005/06)
• Firms identify Macro Risk as the most binding constraint at the individual factor level
Primary Government Expenditure at constant prices 2002 = 100
50
70
90
110
130
150
170
190
210
230
2002 2003 2004 2005 2006F
ChileVenezuelaTrinidad & Tobago
GDM Trinidad and Tobago 17
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 constraintOPEN FOREST FOR LATIN AMERICAN COUNTRIES
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
BRA SLV ARG GTM CHL COL GUY NIC PAN ECU JAM (*) TTO
SOURCE: Hausmann and Klinger (2006). (*) Jamaica, year 2002.
TRINIDAD AND TOBAGO: 2003
-2.5
-1.5
-0.5
0.5
1.5
2.5
0 1 2 3 4 5 6
Density (Inverse)
ln(P
RO
DY
) -
ln(E
XP
Y)
Petroleum Raw Material Forest Products Tropical Ag. Animal Product
Cereals L intensive K intensive Machinery Chemical
GDM Trinidad and Tobago 18
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 interventionRelatively 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 Tobago 19
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 opportunitiesIt is not a problem of costly financing but of lack of opportunities
• Low sophistication in exports. T&T has poor “open forest” 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 riskHigh 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:– Some problems of appropriability (high macro risks & crime)appropriability (high macro risks & crime)– Some problems of lack of complementary inputslack of complementary inputs (underperforms
in most of the indicators analyzed compared to same income level countries)
GDM Trinidad and Tobago 20
Ranking Binding Constraints
• T&T improved many policy instruments. From now on it is more about fine tuning on the micro frontfine tuning on the micro front
• On the macro front: Fiscal management of the Fiscal management of the natural resource revenues continues being highly natural resource revenues continues being highly criticalcritical– 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