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Development, Political, and Economic Difficulties in the Caribbean pp 117–148Cite as

Palgrave Macmillan

The Economic and Political Costs of Diversification as a Way Out of a Recession: The Case of Trinidad and Tobago

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Abstract

After Trinidad and Tobago having experienced a lost decade and facing another lost decade, the question of diversification as a way out of the recession is once again at the forefront of policy discussions following the recent oil price decline. In this chapter, we review the policies and their costs of the period 1986–1991, when Trinidad and Tobago last faced a recession derived from an oil price drop and simulate the economic costs of similar policies, particularly of an exchange rate devaluation, today. We argue that diversification should not be the policy objective but an exchange rate adjustment and institutional strengthening to reduce the oil curse. The chapter uses the framework of a hydrocarbon-dependent and ethnically diverse country, as is Trinidad and Tobago, on the above discussions and explains why there is currently policy inertia, as political rationality dominates economic rationality.

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Notes

  1. 1.

    International oil prices fell from US$115 per barrel in June 2015 to US$35 per barrel in January 2016.

  2. 2.

    Hailu, Degol, and Chinpihoi Kipgen. (2017). The Extractives Dependence Index (EDI), Resources Policy, Elsevier, 51, issue C, pp. 251–264.

  3. 3.

    Auty, Richard M. (2001). Resource abundance and economic development (p. 360). Oxford University Press.

  4. 4.

    Rickne, J. (2009). “Oil Prices and Real Exchange Rate Movements in Oil Exporting Countries: The Role of Institutions,” Research Institute of Industrial Economics Working Paper Series, no: 810.

  5. 5.

    Beckmann, Joscha, Robert Czudaj, and Vipin Arora. (2017). The Relationship between Oil Prices and Exchange Rates: Theory and Evidence. EIA Working Paper. See also Buetzer, S., M. M. Habib, and L. Stracca. (2016). Global exchange rate configurations: Do oil shocks matter? IMF Economic Review, 64, pp. 443–470.

  6. 6.

    Benassy-Quere, Agnès, Maylis Coupet, and Thierry Mayer. (2007). Institutional Determinants of Foreign Direct Investment, The World Economy, 30, issue 5, pp. 764–782.

  7. 7.

    Krugman, P. (1983). Oil and the dollar. In B. Jagdeeps, & P. Bulfordh (Eds.), Economic interdependence and flexible exchange rates. Cambridge, MA: MIT Press.

  8. 8.

    Lane, Philip, and Aaron Tornell. (1999). The Voracity Effect, American Economic Review, 89, issue 1, pp. 22–46.

  9. 9.

    Mehlum, H., K. Moene, and R. Torvik. (2006b). Institutions and the resource curse. Economic Journal, 116, issue 508, pp. 1–20.

  10. 10.

    Robinson, James, Ragnar Torvik, and Thierry Verdier. (2006). Political foundations of the resource curse, Journal of Development Economics, 79, issue 2, pp. 447–468.

  11. 11.

    Abidin, Mahani Zainal. (2001). Competitive industrialization with natural resource abundance: Malaysia. In Richard M. Auty (Ed.), Resource Abundance and Economic Development. Oxford: Oxford University Press.

  12. 12.

    Rauch, James, and Peter B. Evans. (2000). Bureaucratic structure and bureaucratic performance in less developed countries, Journal of Public Economics, 75, issue 1, pp. 49–71.

  13. 13.

    Knack, Steven, and Philip Keefer. (1995). Institutions and Economic Performance: Cross-Country Tests using Alternative Measures, Economics and Politics, 7, pp. 207–227.

  14. 14.

    Auty, Richard M. (1999). The transition from rent-driven growth to skill-driven growth: recent experience of five mineral economies. In Jorg Maier, Brian Chambers, Ayisha Farooq (Eds.), Development Policies in Natural Resource Economies. Cheltenham: Edward Elgar.

  15. 15.

    Gelb, Alan. (1988). Oil Windfalls: Blessing or Curse? New York: Oxford University Press.

  16. 16.

    Horowitz, D. (1985). Ethnic groups in conflict. Berkeley: University of California Press.

  17. 17.

    Montalvo, José G., and Marta Reynal-Querol. (2005). Ethnic Polarization, Potential Conflict, and Civil Wars, American Economic Review, 95, issue 3, pp. 796–816.

  18. 18.

    Easterly, William, and Ross Levine. (1997, November 1). Africa’s Growth Tragedy: Policies and Ethnic Divisions, Quarterly Journal of Economics, 112, issue 4, pp. 1203–1250.

  19. 19.

    Chandra, K. (2007a). Counting heads: A theory of voter and elite behavior in patronage democracies. In H. Kitschelt and S. I. Wilkinson (Eds.), Patrons, Clients, and Policies: Patterns of Democratic Accountability and Political Competition. Cambridge, UK: Cambridge University Press, pp. 84–109. See also Chandra, K. (2007b). Why Ethnic Parties Succeed: Patronage and Ethnic Head Counts in India. Cambridge, UK: Cambridge University Press.

  20. 20.

    Ahmadov, Anar. (2012). “Political Determinants of Economic Diversification in Natural Resource Rich Developing Countries,” Paper presented at Oxford Princeton Global Leaders Fellowship Program’s 4th Annual Colloquium, Princeton University. See also Baggio, J. and E. Papyrakis. (2010). Ethnic diversity, property rights, and natural resources, Developing Economies, 48, pp. 473–495.

  21. 21.

    Gill, Indermit S., Ivailo Izvorski, Willem van Eeghen, and Donato De Rosa. (2014). Diversified Development: Making the Most of Natural Resources in Eurasia. Europe and Central Asia Studies. Washington, DC: World Bank.

  22. 22.

    Toney, H. (1995). A Critical Review of the Manufacturing Sector in Trinidad and Tobago. ECLAC, CONS/95/3.

  23. 23.

    BP Statistical Review 2013 data workbook, Energy Information Administration.

  24. 24.

    Sachs, J., and A. Warner. (1995). “Natural Resource Abundance and Economic Growth.” NBER Working Paper No. 5398.

  25. 25.

    Hilaire, A. (1995). “Commercial Policy in Trinidad and Tobago.” in Insights into an Emerging Financial Structure: The Experience of Trinidad and Tobago, ed. R. Ramsaran.

  26. 26.

    2015 adjusted prices.

  27. 27.

    Cherif, R., and F. Hasanov. (2016). “Soaring of the Gulf Falcons: Diversification in the GCC Oil Exporters in Seven Propositions” in Cherif, R., F. Hasanov, and M. Zhu (2016).

  28. 28.

    See Chap. 1 of this book for further details.

  29. 29.

    Oomes, Nienke, and Kalcheva, Katerina, Diagnosing Dutch Disease: Does Russia Have the Symptoms? (April 4, 2007). BOFIT Discussion Paper No. 7/2007. Available at SSRN: https://ssrn.com/abstract=1001659 or https://doi.org/10.2139/ssrn.1001659.

  30. 30.

    Rodrick, D. (2005). The real exchange rate and economic growth: Theory and evidence, John F. Kennedy School of Government, Harvard University.

  31. 31.

    Fournier, Jean-Marc, and Åsa Johansson. (2016). “The Effect of the Size and the Mix of Public Spending on Growth and Inequality,” OECD Economics Department Working Papers 1344, OECD Publishing.

  32. 32.

    Papyrakis, E., and R. Gerlagh. (2007). Resource-Abundance and Economic Growth in the U.S., European Economic Review, 51, pp. 1011–1039.

  33. 33.

    Acemoglu, D., and T. Verdier. (1998). Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach. Economic Journal, 108, pp. 1381–1403.

  34. 34.

    Kaufmann, D. Aart Kraay, and Massimo Mastruzzi. (2005). “Governance Matters IV: Governance Indicators for 1996–2004. The World Bank.

  35. 35.

    Hilaire, A. (2000). Caribbean Approaches to Economic Stabilization, Working Paper 00/73. Washington, DC, International Monetary Fund.

  36. 36.

    Baum, Donald N., and Shuanglin Lin. (1993). The Differential Effects on Economic Growth of Government Expenditure on Education, Welfare and Defense, Journal of Economic Development, 18, issue 1; Devarajan, S., V. Swaroop, and Z. Heng-fu. (1996). The Composition of Public Expenditure and Economic Growth, Journal of Monetary Economics, 31, 33, 37, 44, pp. 112–122; Belgrave, A., and R. Craigwell. (1995). The Impact of Government Expenditure on Economic Growth in a Small Caribbean Economy: A Disaggregated Approach. Central Bank of Barbados Working Papers 1995.

  37. 37.

    Inter-American Development Bank (IDB). (2014). “Special Country Reports: Labor and Social Programs – Caribbean Region Quarterly Bulletin, 3, issue 3,” July 2014, Washington, DC: Inter-American Development Bank.

  38. 38.

    Khadan, J. (2017). An Econometric Analysis of Energy Revenue and Government Expenditure Shocks on Economic Growth in Trinidad and Tobago, Journal of Developing Areas, 51, issue 2, pp. 183–203.

  39. 39.

    International Monetary Fund (IMF). (2015). The Commodities Roller Coaster: A Fiscal Framework for Uncertain Times. Washington, DC: International Monetary Fund, Fiscal Monitor.

  40. 40.

    Moody’s. (2015). Moody’s downgrades Trinidad and Tobago’s government bond rating and issuer rating to Baa2 from Baa1 and changes the outlook to negative. New York: Moody’s Investor Service.

  41. 41.

    Sahadeo, C. (2012). “The Case for a Revenue Authority in Trinidad and Tobago.” Unpublished.

  42. 42.

    Dincer, Nazire Nergiz, and Barry Eichengreen. (2014). Central Bank Transparency and Independence: Updates and New Measures, International Journal of Central Banking, 10, issue 1, pp. 189–259.

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Author information

Authors and Affiliations

  1. Inter-American Development Bank, Washington, DC, USA

    Jeetendra Khadan

  2. Independent Economics Consultant, Washington, DC, USA

    Inder J. Ruprah

Authors
  1. Jeetendra Khadan
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Correspondence to Jeetendra Khadan .

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Editors and Affiliations

  1. Faculty of Social Sciences, The University of the West Indies, St. Augustine, Trinidad and Tobago

    Ann Marie Bissessar

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Khadan, J., Ruprah, I.J. (2019). The Economic and Political Costs of Diversification as a Way Out of a Recession: The Case of Trinidad and Tobago. In: Bissessar, A. (eds) Development, Political, and Economic Difficulties in the Caribbean. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-02994-4_7

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