Caribbean Islands - Trinidad and Tobago Role of Government in the Economy

More about the Economy of Trinidad and Tobago.

Role of government

Government involvement in the economy increased rapidly with early self-government in 1950. Spurred by the economic decision making of Gomes, the young government embarked on an "industrialization by invitation" strategy in an attempt to emphasize manufacturing (see The Road to Independence, this ch.). The strategy was a natural outgrowth of the success of import substitution manufacturing that had occurred during World War II. The most significant pieces of legislation that changed the government's stance on the economy were the Aid to Pioneer Industries Ordinance and the Income Tax Reform Ordinance to Benefit Industry, both enacted in 1950. These measures provided wide- ranging fiscal concessions for infant industries. Similar measures were also developed for tourism. Fiscal incentives permitted new investment to benefit from accelerated depreciation allowances, duty-free importation of machinery and raw materials, and provisions for the repatriation of profits. These fiscal measures marked the first time Trinidad and Tobago sought foreign capital outside of Britain. In 1962 drastically increased tariffs complemented the fiscal incentives of encouraging manufacturing and protecting it from outside competition. Although tourism did not receive the attention of manufacturing, it did signify a renewed interest in Tobago, the island traditionally neglected by Port-of- Spain officials.

These policies, bolstered by an expanding world economy, proved a general success as the unprecedented growth of the 1950s included the establishment of over 100 pioneer industries by the mid-1960s. These comprised basic manufacturing, such as bricks, beer, textiles, glass, cement, paints, and chemicals. Although incentive legislation helped expand output in manufacturing, many expectations for the sector were not met. Although manufacturing's share of GDP did rise, the sector never obtained the dominance it held in Jamaica. Employment expectations were also not met as foreign investment brought industries that were more capital intensive than anticipated. In general, there were few economic linkages forged between the oil and manufacturing sectors in the 1960s. The employment absorption of new manufacturing generally went unseen as Trinidadian society experienced its fastest population growth rate ever, increasing over 50 percent from 1940 to 1960.

The government's industrial push in the postwar era also included heavy investments in the islands' physical, social, and organizational infrastructure. To meet growing commercial and residential demands, the country's water, electricity, communication, and transportation systems were expanded. Likewise, self-government emphasized the need for improved social services such as medical and educational facilities. Beginning in 1958, the government issued the first in a series of five-year plans. The last five-year plan (1974-78) was never completed, as expectations of continued oil wealth apparently precluded the need for further plans.

The role of the government in the economy increased drastically during the 1970s. The move toward increased government involvement in the economy was the direct result of the Black Power movement of 1970 and the long-term consequence of decades of trade union criticism of foreign ownership. Some foreign firms were nationalized with compensation; the government typically acquired only a 51-percent equity share of these companies. Other firms were simply localized in ownership via the purchase of a majority of shares by private Trinidadian citizens. In 1971 the government bought a 51-percent share of the Caroni Sugar Company, which controlled over 90 percent of sugar activity in the country. The banking industry underwent a nationalization and localization process in 1972. In that year the government purchased a 51-percent share of the Royal Bank of Canada, subsequently renamed the Royal Bank of Trinidad and Tobago. Meanwhile, Barclays Bank (renamed the Republic Bank), the Bank of Nova Scotia, and numerous insurance companies were localized in ownership. Although the government's prominent entrance into the economy predated the oil boom, increased government revenues from oil accelerated the process. Between 1968 and 1974, the government entered the oil industry in force, purchasing the oil holdings of the British Petroleum Company and Shell Corporation and integrating them into the newly established Trinidad and Tobago Oil Company (Trintoc). In the same year, Texaco's gas stations were localized islandwide. By the late 1970s, the government had become the largest employer in the country.

Petrodollar revenues expanded the state's range of activities in the economy from nationalization and localization to the introduction of widespread subsidies and large-scale public works programs, the creation of numerous state-owned enterprises, and the implementation of huge industrial projects. Like other oil economies, Trinidad and Tobago suffered from the "Dutch disease," the process by which oil-wealthy nations tend to subsidize non-oil sectors of the economy. During the 1970s, subsidies and transfers represented the greatest share of current government costs, moving from 25 percent of government expenditure in 1977 to 36 percent by 1980. Subsidies alone more than tripled during this period. For example, subsidies on gasoline allowed prices to remain the same throughout the decade, when market prices more than quadrupled. Although subsidies were primarily redistributive in their intent, they also handsomely benefited the private sector, whose inputs such as water and electricity were also supported. Ambitious public works programs, developed to alleviate unemployment, employed some 50,000 citizens but were largely inefficient and unclear in their objectives.

The multibillion-dollar industrial park at Point Lisas, more than any other single activity, symbolized the thorough role of government involvement. The park was constructed, in part, with revenues from the so-called Special Funds for Long-Term Development, consisting of over forty different funds. Cost overruns were so prevalent during the construction of the park that no final cost was ever obtained. The park sought to use the country's oil and natural gas reserves for a well-integrated petrochemical industry, alongside heavy industries like steel. Most of the site's plants came on-stream in the early to mid-1980s, including steel, urea, ammonia, cement, and methanol plants and an oil refinery. Although these plants were still young in the 1980s, concerns existed that some of these projects could turn into white elephants. Also considered, but not constructed as of the late 1980s, were an alumina (see Glossary) smelter (Trinidad is a bauxite [see Glossary] transshipment site) and a plant to process liquefied natural gas.

The government's attitudes toward its role in the economy remained unchanged in the 1980s. Despite minor policy differences, both Prime Minister Chambers (1981-86) and subsequently Prime Minister Robinson (1986- ) continued to perceive an extensive role for the state in the country's mixed economy. One significant change enacted by the Chambers government was to reduce the number of bids offered to foreign contractors for large industrial projects. After a Ministry of External Affairs report concluded that these foreign firms had financially exploited the arrangements and hurt local competitors, the process was changed to favor locals.

Chambers, however, confronted much more devastating economic difficulties as a result of the deep recession brought on by the sharp fall in oil prices in 1982. Decreased oil production lowered government revenues, a sizable portion of which were derived from the petroleum industry. Growing fiscal deficits prompted the Chambers government to pursue unpopular domestic policies, such as decreased subsidies, increased utility rates, an increased tax base, and, most important, deep reductions in capital expenditures, thereby eliminating most funds for economic development. To stabilize the country's deteriorating balance of payments position, the government opted for equally unpopular trade policies. These measures included a new import licensing system and a dual exchange rate, both of which drew the ire of other Caricom nations. To help smooth the adjustment period, the Chambers government invited William Demas, a well-known Trinidadian economist and president of the Caribbean Development Bank, to write a broad "Imperatives of Adjustment Plan" to help stabilize the country's accounts and work toward a recovery.

A recovery, however, never materialized under Chambers, and the Robinson government was faced with the same task of reversing the recession, reducing budget deficits, and stabilizing the balance of payments, but with fewer resources. In 1987 the Robinson government proposed few policies that diverged widely from those of Chambers. A major goal of the Robinson government, however, was to improve relations with Caricom trading partners, which had soured because of Trinidad and Tobago's protectionist policies in the early to mid-1980s. The unification of the country's exchange rate in January 1987, followed by the removal of a 12-percent import duty for most Caricom countries in July, did help to revive regional integration. On the budgetary side, Robinson continued to reduce capital expenditures; unlike Chambers, however, he attempted deep cuts in current expenditures, most notably the cost of living allowances of civil servants. That proposal was withdrawn, however, after a storm of protest. Nonetheless, the issue was important in that it symbolized the difficulty the Robinson government might face in seeking economic concessions after a decade of great wealth. In his 1987 budget speech, Robinson warned of the possible divestment of some state-run enterprises, thus earning his government an early reputation as pro-business. In the late 1980s, the NAR government's main economic objectives remained economic recovery and diversification; nonetheless, the new government cautioned that its economic program would require ten years to be completely effective.

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