Beyond the Resource Curse

3. Is There a Policy Learning Curve? Trinidad and Tobago and the 2004–8 Hydrocarbon Boom

3 Is There a Policy Learning Curve? Trinidad and Tobago and the 2004–8 Hydrocarbon Boom Richard M. Auty Since gaining independence in 1962, Trinidad and Tobago has experienced three hydrocarbon booms (1974–78, 1979–81, and 2004–8). The first two booms each conferred an additional 35 to 39 percent of non-energy GDP in revenue annually, and the most recent windfall conferred an average extra 59 percent of non-energy GDP annually. The over-rapid domestic absorption of the first two booms through increased consumer subsidies and stateled resource-based industrialization triggered a protracted growth collapse through 1982–93 that cut incomes by one-third and destabilized politics. Some lessons have been learned from the 1974–81 booms, and the deployment of Trinidad and Tobago’s 2004–8 hydrocarbon windfall revenue was more cautious. Two-thirds of the 2004–8 windfall was saved by both the private sector and the public sector. Even so, the third of the windfall that was absorbed domestically expanded the non-energy public sector deficit to three times the IMF estimate of a sustainable deficit level. The scale of absorption also intensified “Dutch disease” effects (that is, the relative contraction of nonhydrocarbon tradable activity, notably agriculture and manufacturing , relative to service activity) and sustained rent-seeking interests. Consequently , despite the welcome gain in policy-making caution, Trinidad and Tobago has yet to nurture an effective pro-reform political coalition that can neutralize rent-seeking interests and promote competitive diversification of the economy. Is There a Policy Learning Curve? 85 Fashionable statist policies encouraged government intervention in many developing countries through the 1960s and 1970s, and these policies cumulatively distorted these countries’ economies and triggered growth collapses during the 1974–85 period of commodity price vulnerability. This was notable among the resource-rich countries. The growth collapses proved protracted because the interventionist policies established powerful rent-seeking constituencies that resist International Financial Institutions (IFI) efforts at economic reform. Nevertheless, evidence of a policy learning curve emerged among the rent-distorted developing economies through the late 1990s and early 2000s. However, high-rent, hydrocarbon-driven economies have struggled through the 2004–8 commodity boom. Three hydrocarbon-dependent economies in South America (Bolivia, Ecuador, and Venezuela) appear to have learned little, but this chapter finds patchy evidence of policy learning in Trinidad and Tobago. The chapter is structured as follows: The first section briefly summarizes the literature pertaining to the political economy of rent deployment in Trinidad and Tobago and identifies five features of the country’s political economy that create the risk of maladroit rent deployment. It also compares the scale of the hydrocarbon windfall rents of 1974–78 and 1979–81 with those of the 2004–8 windfall and establishes the legacy of the 1974–81 deployment. The next section analyzes the political economy of the 2004–8 rent deployment in Trinidad and Tobago. Briefly, the chapter finds that although recent rent deployment has improved compared with 1974–81, the rent-seeking interests established during the earlier booms persist and channel revenue in ways that retard the long-term competitive diversification of the economy. The Legacy of Past Hydrocarbon Rent Deployment Implications of the Rent Cycling Literature for Trinidad and Tobago The emerging theory of rent cycling suggests that the scale of rent relative to GDP impacts both elite incentives and the development trajectory. Whereas low rent incentivizes elites to grow the economy (because that increases the level of taxation, which is the principal source of discretionary expenditure and one that the elite frequently benefit from disproportionately), high rent encourages rent distribution at the expense of investment efficiency and sustained long-term growth. 86 Richard M. Auty More specifically, low rent motivates governments to provide public goods and efficiency incentives that align the economy with its comparative advantage , which in low-rent economies for the most part initially lies in early competitive labor-intensive manufactured exports. The low-rent development trajectory rapidly absorbs surplus rural labor so that rising wages automatically drive diversification into productivity-boosting, skill-intensive, and capital-intensive sectors. In addition, early industrialization drives early urbanization that accelerates the demographic cycle to reduce the dependent/ worker ratio, which raises the share of investment in GDP and accelerates per capita GDP growth. Finally, the rapid structural change engendered by competitive industrialization drives a virtuous sociopolitical circle as it proliferates social groups that restrict policy capture by one group and also...