Roger Hosein Trade and Economic Development Unit Achieving Sustainable Development in Regions with Extractive Industries June 14 th 2013 Paria Suites

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1 Roger Hosein Trade and Economic Development Unit Achieving Sustainable Development in Regions with Extractive Industries June 14 th 2013 Paria Suites 1

2 Brief outline of Dutch Disease and resource curse Effect on labour flows deindustrialization, deagriculturalization, productivity issues, geographic unemployment. Effect on Revealed Comparative Advantage Mineral dependence syndrome Effect on education Effectongenuine savings needforhartwickrule Effect on government spending please spending, inefficient spending, high subsidies 2

3 The economy is divided into 2 sectors a Traded Sector and a Non Traded Sector. Thetraded(T)sector isfurtherdividedintoa Boomingtradable(BT)sectoranda Non-booming tradable(nbt) sub-sector. Algebraically : Y=T+NT wheret=b+nbt The model also assumes that the Traded Sector (BT and NBT) are price takersandthattheeconomyisatornearfullemployment. 3

4 Figure 1: The Impact of the Dutch Disease on Employment and Prices Wages L 0 NT L 1 NT S Effect R m Effect L 1 T L 0 T L 0 NBT W 2 W 1 W 0 Indirect Deindustrialization 0NT L 1 L 0 L L 0 L 2 1 L 2 0T Labor 4

5 Labor market changes associated with the Dutch Disease Table 1: Labor market changes associated with the Dutch Disease. L L R L S L DD -L Overall NBT BT NT NBT 0 NBT 1 NBT 2 NBT 2 -NBT 0 - BT 0 BT 1 BT 2 BT 2 -BT 0 + NT 0 NT 1 NT 2 NT 2 -NT 0 + Employment in the NT sector increases, Employment in the BT sector rises, Employment in the NBT sector falls. 5

6 Labor market changes associated with the Dutch Disease Table 2: Prospective redistribution of labour in the BT, NBT and NT sector Initial Employmen t by sector Dutch Disease Employmen t by sector Initial period sectoral share of employment Dutch Disease employme nt share Expected change in employme nt share Brief Notes NBT 0 NBT 2 Loses workers on account of a resource movement and spending effect NT 0 NT 2 Dominant spending effect that swamps a negative resource movement effect BT 0 BT 2 Positive resource movement effect that is only very marginal 6

7 GDP Figure 2: Resource Curse Effects of a Boom. Resource Poor Resource Rich B C D Resource Curse Effects A 0 T 0 T 1 T 2 7

8 Natural Resource-Led Development Trajectories Performance Figure 3: Resource Led Development Trajectories prosperity Low-level equilibrium 0 History/time Low-level equilibrium resource curse

9 Profits Figure 4: Corruption and Economic Growth. R 1 R 0 Rents B 2 B 1 B 0 P 1 P 0 0 entrepreneur rent seekers 0 P: profit, R: rent 9

10 Mass of Industries F(t) Boom F (t+1) NT NBT BT NT NBT BT RCA scores 10

11 Growth rate of GDP (Constant LCU) GDP (Constant LCU) Antigua and Barbuda St. Lucia Trinidad and Tobago Antigua and Barbuda St. Lucia Trinidad and Tobago Source: World Development Indicators (Various years).

12 Figure 6: Trends in the nominal price and production of crude oil, Production Prices $US Annual Production in 000 of barrels)

13 Figure 7: Trends in natural gas production and natural gas resource rents as a percentage of GDP, % of GDP Natural Resource rents as a % of GDP Production 13 Natural Gas Production

14 Structure of GDP, and other macroeconomic outcomes Effect on Genuine Savings DutchDisease andrca Labor market effects; spillover strikes, labor productivity, outcomes including an assessment of the factors influencing unemployment rates and unemployment, evidence from shift share analysis. Increased levels of pollution Mineral dependence syndrome Effect on education Effect on government spending please spending, inefficient spending, high subsidies. 14

15 Table 4: Oil generates significant revenues Production (000 barrels) Oil Rents (US$mns) Oil Windfall (US$mns) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , p , Source: Annual Economic Survey(various years) and own computations. 15

16 Table 5: Real value added 2000 base year, BT NBT NT Total , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Source: National Income Accounts Yearbook (various years)

17 Year Total reserves in months of imports Table 6: Some basic Macroeconomic indicators, Total reserves (includes gold, current US mn$) Current account balance (% of GDP) GDP per capita (constant 2000 US$) , , , , , , , Source: Annual Economic Survey of T&T(Various years). 17

18 Table 7: Full employment in a Recessionary environment, Real Economic growth Rate Unemployment Rate (%) Transfers and Subsidies (TT$mn) p Source: Annual Economic Survey (Various years); CSSP (Various years). 18

19 and indeed we have become very dependent on the petroleum sector Petroleum FDI Petroleum FDI as % of Total FDI Table 8: Indicators of Petroleum Dependence Petroleum GDP (US$ Petroleum GDP as % of Total GDP Petroleum exports (US$) SITC 3+5 exports as % of Total Exports Oil Revenues (US$) Oil revenues as a % of Total revenues , , , , , , , , , , , , , , , , , , , , , , , , , , , , p , , p n.a. n.a n.a. n.a. n.a Source: Central Bank of T&T Annual Economic Survey, (various years) *In 2008 the Total inflow of FDI was US2800.8mn an increase as compared to US$830 mnin the previous year. This was due to the purchase of the RBTT Ltd by the Bank of Canada. This accounts for the fall in the relative proportion attributed to Petroleum. 19

20 Shale Gas 20

21 Resource Wealth and Genuine Savings Table 9: Trinidad and Tobago Genuine Savings Genuine Savings (% 0f GNI) (0.50) 1997 (3.82) (5.71) (4.11) 2003 (4.50) 2004 (7.11) 2005 (2.41) 2006 (3.92) 2007 (14.84) 2008 (24.60)

22 Table 10:Dutch Disease and Change in RCA values Master List change gain or loss State to state Loss b a Loss b b Loss d b Loss b a Loss c b Loss d b Loss d b Loss b a Loss b a Loss b a Loss d b Loss b a Loss d d Loss b a Gain b c Loss c b Loss d d Loss d d Gain d d Loss d c Loss d d Loss d d Loss c b Loss d c Loss b a Loss c b Loss c a Loss b a Loss d d Loss d b Loss b a Loss b a Loss b a Loss b a

23 Table 11: Transition probability matrix for movement amongst states, To a b c d a b c d From 23

24 Table 12: Procyclicality of Fiscal policy: Government expenditure and transfers and subsidies Year Total Expenditure (TT million) Transfers and Subsidies Source: Central Bank of Trinidad and Tobago (2012). 24

25 Figure 8: Cumulative distribution of major man days lost by major sector (BT, NBT and NT), cd BT major man days lost cd NBT major man days lost cd NBT major man days lost 25

26 Unemployment Transfers and subsidies

27 Table 13: Correlation scores between various indicators Unemployment rate Real GDP TTmn real transfers correlation UR and real GDP correlation UR and real transfers

28 Figure 10: Labor shares in manufacturing and the services sector, share manufacturing employment Share ofservices employment

29 Figure 11: Output per worker in the services and manufacturing sector, Output per worker in the manufacturing output per worker in the services sector manufacturing services 29

30 Table14: Summary in BT, NBT and NT segments of the economy Real Value added Employment BT NBT NT SUM BT NBT NT SUM employment shares change in employment shares BT NBT NT SUM BT NBT NT Labor productivity change in labor productivity BT NBT NT SUM BT NBT NT Sum

31 Table 15: Aggregate labour productivity and its shift share components, various time periods. Static Shift Share (LP S) Intra Industry Productivity (S LP) sse BT NBT NT Iip BT NBT NT Dynamic Shift Share ( LP S) aggregate labour productivity DSE BT NBT NT LP BT NBT NT

32 CO 2 emissions (kt) for Selected Caricom Economies Average Table 16: CO2Emissions for Selected CaricomEconomies Belize Guyana Jamaica Suriname Trinidad and Tobago Barbados TT/Jamaica 3.15 TT/Guyana TT/Barbados TT/Suriname TT/Belize

33 Table 17:Improper use of economic rents: Petroleum subsidy and government liability (TT$ Mn) Year Subsidy Claims Government Liability Source: Ministry of Energy and Energy Industries (2012) 33

34 Figure 12: Effect of Oil Windfall GATE on Income of Households Pursuing TLE Figure 12: Effect of Oil Windfall GATE on Income of Households Pursuing TLE Income of Households Y r G Y r B Y m A Y G d Y p Y 1 d 0 H r H m H p Financial Need 34

35 Income Group(TT$) Average Size of % Accessing GATE Percentage Number of Average Monthly Household by Funding by Income Distribution of Households by Savings per Income Group of Group of Head households by Household Income household by Head Household Income Group Household Income Group Group All Income Groups ,090 $ Less than 1, $ ,000-2, $ ,000-4, ,205 $ ,000-6, ,219 $ ,000-8, $ ,000-10, $ ,000-12, $ ,000-14, $ ,000-16, $ ,000-18, $ ,000-20, $ ,000-22, $ ,000-24, $ ,000 and Over $

36 Table 19: The Impact of Crime in Selected CaricomEconomies Sense of Security in the Caribbean Perceived Confidence in the Police Control Crime, Caribbean, Perceived Confidence in the Ability of the Police to Control Gang Violence Caribbean Some Amount of Confidence Great Amount of Confidence Antigua and Barbuda Barbados Guyana Jamaica St Lucia Suriname T&T

37 Table 20: English and Mathematics Pass/Fail Rates for Point Fortin East Secondary (PFES) and Point Fortin West Secondary (PFWS), English A (%) Mathematics (%) Pass Fail Pass Fail PFES( ) PFES ( ) PFES ( ) PFES ( ) PFES ( ) PFES ( ) PFES ( ) PFES ( ) PFES ( ) PFES ( Point Fortin West Secondary School PFWS ( ) PFWS ( ) PFWS ( ) PFWS ( ) PFWS ( ) Source: Compiled from information supplied by PFWS and PFES. 37

38 Addressing Economic Problems in Areas with Extractive Industries Reduce economic wastage(e.g. GATE) Strengthen the NBT Sector nationally via EODB and the GCR indices using CSR Too many workers employed in elementary occupations. Synthesis role of LED strategy Target the diaspora for development funds and the development of the SME sector E-Teck Park (Frederick Settlement Industrial Park, Endeavour Industrial Park, Factory Road Industrial Park, Preysal Industrial Park, Dow Village Industrial Park, Reform Village Industrial Park, Debe Industrial Park, Point Fortin Industrial Park) Microfinance is critical Look at the bptt example Explore intra Caricom market as they are our natural trading partner Reduce corruption Search for new markets 38