How urgent is the need to reduce the economy’s dependence on hydrocarbons?
FARRELL: In 15-20 years the global energy sector – certainly crude oil – is going to be in decline, partly driven by the Paris agreement to reduce greenhouse gas emissions, coupled with the shift from fossil fuels to renewable sources. Trinidad and Tobago doesn’t have a lot of crude oil, but we have significant natural gas deposits. Fortunately, gas has a longer lifespan and can likely take us to 2050 before we enter a decline.
However, the reality is that irrespective of what happens to prices, the energy sector here is of limited duration. On that basis, we need to chart a way forward while still keeping the economy open to the global marketplace. This will require a shift from hydrocarbons-based exports to other goods and services, which need to account for a significant share of export earnings by 2030, ideally around 40%. That is a tall order, but one to which the country must aspire.
How should the conversation regarding diversification be approached?
FARRELL: It’s constructive to look at diversification efforts in terms of increasing export earnings and our ability to earn foreign exchange. We also have an interest in improving infrastructure as this leads to higher productivity. We are advocating that the government should focus on these two areas.
The key to successful diversification is engagement with the private sector. While this initially is a more difficult process for a government than earmarking specific industries for diversification and public investment, the latter is likely to run into serious roadblocks and eventually fail. We need to take the more difficult path of engaging the private sector, stimulating their ingenuity and providing government support in various ways.
One of the critical components of this activity is information. If the government can help by providing this for the private sector’s decision-making and entrepreneurial process, then we’re likely to be more successful. It’s also crucial that we build on existing, successful industries for quick wins. There are certain industries that lack such a foundation and, for these, consultation with the private sector needs to take place. We are progressing, with the assistance of the Inter-American Development Bank, to identify the areas in which the country can invest in research and development, out of which commercial possibilities may arise.
What policies are needed to drive greater investment in export-oriented industries?
FARRELL: The government’s whole incentive structure encourages private businesses to position themselves to benefit from the rents flowing from the energy sector. We therefore have to change the incentive structure as it is responsible for persuading the private sector to orient itself towards the domestic market. The structure has also propped up certain patterns of consumption and consumer preference that exist in our society. There isn’t a problem with having foreign goods or services in our country, but perhaps we have oriented businesses too much in this direction.
The government has stated that the current mode of development cannot continue, and that change needs to be driven by the private sector. However, this alone will not work, because the incentives we’ve created over the past several decades are very entrenched. For example, since 1974 the government has subsidised all fuels to ensure that the public can afford to travel. As a result of this policy, commercial transportation is subsidised and distribution businesses are running their fleets on subsidised diesel. This constitutes a hidden subsidy, of which there are many examples.
Furthermore, in an economic climate where the exchange rate is overvalued, we benefit in cost terms by continuing to import. To correct this imbalance, we need a preferential policy for export-oriented industries with the potential for earning foreign exchange.
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