THE basic economic literature tells us that the factors of the economy are capital, labour and land (infrastructure).
An update on this is the Solow Residual, another and most important factor that consists of the entrepreneurial effort, based on knowledge and its creation; hence new ideas and innovations, which all drive the development and growth of the economy.
However, those involved in examining the interaction of various economies tell us that an economy is a complex, non-linear adaptive system; complex, though it is indeed a system on its own, it interacts with other systems so affecting and being affected by these interactions.
In fact these interconnections are of fundamental importance to its operation and how it adapts to changes.
It is non-linear in the sense that a small event in its own or interacting economies can have an abnormally large impact on the economy.
It is adaptive in that it changes its activities in response to changes in the operating environment and even on its own ideas and innovations or those of its interconnected economies.
The concepts of complexity, non-linearity and adaptability and with the interactions among other economies- many driven by the thought processes of the various populations, businesses- make it difficult to properly define or predict the performance of the economy even by a set of dynamic mathematical equations over any medium- to long-term period so limiting the use of econometrics.
Hence, many of the models in use tend to be very limited and not totally realistic.
The importance of these definitions to the T&T economy is the inherent ability to adapt given internal or external stimuli as a member of a set of complex interacting economies.
This ability to adapt is fundamental to our economy when we talk about its diversification particularly given the dual impact of the depletion of the petroleum resource and the intent of the global community to cease the use of hydrocarbons and replace them by renewables.
In other words what we should be experiencing in our economy today is; the business community recognising that as a small open economy we need to continue to earn foreign exchange, which is now done mainly by the exploitation of the depleting petroleum resource.
Thus, the business sector should be moving its major activities of import, mark-up, sell, towards exporting into the global market.
Instead we hear daily the complaints of this private sector to the government of the shortage of forex as we run down our forex reserves and savings to keep the economy from collapsing; yet hoping that we can find new sources of natural gas.
The immediate question then is why did our economic ability as a complex non-linear adaptive system atrophy or did it ever exist as such?
A report by the IDB in 2017 sought to address this phenomenon of being un-adaptive by the firms onshore of our economy.
The report suggests that the major contributors to this phenomenon are the firm’s size, age, ownership and trading history (as importer or exporter).
According to the IDB, these are added to by the constraints on access to finance, crime, corruption, infrastructure, mismatch between education and the firm’s requirements.
The over-valuation of the TT$ is also tendered as a fundamental constraint on both exporters and firms that cater for the local market.
A fundamental point made by the IDB is that the trading history of the firm is a contributor to this un-adaptability. Indeed this characteristic is described by Prof John Foster of the University of Queensland, in his paper, “From Simplistic to Complex systems in Economics”, where he says:
“… an economic system is a complex adaptive system with the general properties, one of which is; such a system must exhibit some degree of structural irreversibility due to the inherent hierarchical and bonding natures of the interconnections among components that are formed as structural development proceeds (its history): It is this that results in the inflexibility and maladaptiveness that precipitates a structural discontinuity of some kind”.
What Prof Foster is telling us is that our economy, complex adaptive, will exhibit a degree of structural irreversibility due to its history, which inhibits its ability to adapt to the current discontinuity of having to become exporters given the depletion of the petroleum resource and the uncertain global environment.
This circumstance is not due to the components of the economy, but to the economy’s interconnections among the participants in contributing economies; the various business networks that overtime have built up the business culture of the onshore sector in our case.
It is well known that the entire history of our economy is that of a plantation with the petroleum resource today as the current export commodity and the rents so derived used by the local business community to import what is demanded by the local population.
Though Lloyd Best was correct when he postulated that the general choice of the onshore private sector of import/mark-up/sell businesses was the optimum option (low risk/high returns), given the availability of forex, he did not say what he thought of the adaptability of that sector if these rents were to cease.
However, this import activity is the history that created the current business culture, which as Prof Foster tells us is rigid and unable to adapt to some degree.
Still, the local commentators on how we should go about diversifying the economy talk about the need for institutional reform, financing to invest, improvement in our education system to produce the required human capital, build new industrial parks (the government is now engaged in creating special economic zones), increase the labour participation rate, improve the ease of doing business, discard any extractive institutions, reduce the present crime scourge etc.
Also we listen to the government that clearly thinks that it is the job of the private sector to diversify the economy and is encouraging SMEs to export by providing access to forex via the Exim Bank.
However, nothing is being done to address the root cause of the problem, the un-adaptiveness of the onshore private sector.
In numerous articles over the years I have recommended the creation of a national innovation system in the mode of a modified Triple Helix and driven by the government.
Indeed the classic example of government intervention is Singapore that under its government direction moved that country from being a swamp into today one of the richest countries in the world.
The basic strategy is an initiative by a government to identify an innovation via R&D and then create the companies to exploit this.
These companies are sold as they establish themselves to the private sector so engaging them in and teaching them the export trade.
Singapore did it (as discussed by Richard Baldwin in his book, “The Great Convergence”) by its government attracting high tech FDI, so providing the opportunity to acquire knowledge by its human capital via developing of its universities and their R&D.
However, our government at present is concerned with the short term and its focus is on acquiring new sources of natural gas.
Indeed it was just announced that besides retrieving gas from the Manatee field government is negotiating with Venezuela also to retrieve gas from the adjacent Loran field owned by Venezuela.
This approach may be justifiable, since diversification takes time and the shortage of gas is a disaster in the short term, but it should not be the complete response.
