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Thursday, October 24, 2002

I am posting a lot about the Trinidad and Tobago budget, I realise. I am not terribly impressed by it, but it does not matter that much in the global scheme of things. In a class today I learned about how people make non-rational decisions, such as the work done by this year's Nobel Prize Winner Daniel Kahneman and his partner Amos Tversky. This is part of the real reason I'm currently studying economics. It fascinates me, and it has even motivated me to learn calculus at my not-so-advanced age. (I could not differentiate a year ago. I'm not all that great at calculus now, but I am progressing.)

Sacha Volokh had a good comment a the end of a post last week about Kahneman, saying that "economics is nothing but applied psychology". Putting dollars and cents aside, economics is fundamentally an analysis of how people make choices under constraints, resource-based or otherwise. In the past century or so economic science has come far, but it's still nowhere near any kind of universal theory on decisionmaking, and there is no reason to suggest that it ever will be. The "dismal science", to use Thomas Carlyle's moniker, can illuminate so many issues, though, that it is worth considering its analysis in most situations. I am not an expert, merely a student (literally); nevertheless I will try to provide as concise and cogent an analysis as I can.

Feel free to comment, though keep it clean. I'd love to hear from you.

I read in yesterday's Trinidad Express about Manning's proposed University of Trinidad and Tobago. The UTT is part of a plan to achieve 20 percent of the population go through higher education by the year 2020 (the vision thing strikes again) up from the present 7 percent. I know am beginning to sound like a bit of a crank, but hasn't anyone read Alison Wolf's Does Education Matter? Or the numerous studies on how education has no strong relation to economic growth?

Cart before the horse again. Trinidad got mass secondary education in the 1970s, during the great oil boom, before there was a popular demand for it; now the promised (but still unrealised) natural-gas boom is to deliver mass (relatively speaking) university education as well. Education is a good thing--no nation of illiterates ever thrives--but given that education expenditure is increasingly regressive at each educational level, the government would be better to ensuring that everyone left primary school literate, and working its way up. The propensity of some parents to treat schools as a nine-month national babysitting programme has to change too.

Given the carping of so many University of the West Indies students and graduates about the shortcomings of the institution, one would also think that the resources would be better spent there. Today there was a student protest on security at the St. Augustine campus. Five years ago I witnessed a three-day campus shutdown triggered off by a murder. Security is one of may worries. A shortage of library books (a complaint of universities the world over, I know, but no less true for that), a haphazardly-put together campus, a dearth of research are all problems the UWI faces. Manning stresses his commitment to the UWI, though I have no idea waht that means.

The University is regional largely in name only. Save for engineering, law and agriculture, the campuses essentially serve as non-residential "finishing schools" for the local middle class. (The talented and the rich go abroad, of course.) I am generally against token initiatives, but one measure that would be interesting is enabling UWI students to spend at least part of their matriculation in another island. I suggest this less for regional understanding than as a means for inividual development. Unlike the middle classes of other places (mostly wealthier than the Caribbean, I admit, but digress) the West Indian middle class is largely stationary--the expense of inter-island travel makes for limited rite-of-passage wanderlust. I wish that UWI students were curious and interested enough to do this all on their own--consumer demand is a powerful thing. Sometimes, though, we could all use an incentive.

Wednesday, October 23, 2002

My friend Nicholas Laughlin has a post on the situation at Trinidad's Caroni (1975) Limited. While I concur with his analysis of the Trinidad sugar industry, I disagree with his recommneded solution. As I wrote immediately below, in the absence of restrictions land generally goes towards it most highly valued use; in a densely-populated island, with over half of the land being state property, the notion that this is agiculture is questionable. Certainly there are viable crops that can be produced on part of the land in Trinidad and Tobago, and some of it needs to be set aside as watershed, forest and nature reserve. The suggestion, though, that Caroni's resources be redirected towards other crops is dubious; it's tantamount to industrial policy--the same thing that caused Caroni Ltd. to be set up to begin with.

Caroni is a failed enterprise; it has never made a profit, and exists solely as a palliative to sugar workers and cane farmers. There is not evident that a food security porgramme (where Trinidad became self-sufficent in food) is a wiser strategy. Trinidad does not have a comparative advantage in food production, for domestic or overseas consumption it's workers get paid too much for non-agricultural work, and the island's farmers have been slow in the adoption of modern technology. other than niche crops, the main base stapes of the local diet (wheat flour, rice, potatoes) are produced much cheaper. Consumers would be better off being able to buy rice and flour form any source other than National Flour Mills, with local agriculture shifting to higher-value crops, if viable. This should be a course decided on by individual farmers, though; the Government, looking at Caroni's dim situation, should stop throwing good money after bad and shut down the operation, sell off its assets, and ease the transition for the workers to other activities. (This won't happen for political reasons; no Afro-Trinidadian government would "needlessly" risk antagonising the Indo-Trinidadian opposition, and no Indo-Trinidadian government would needlessly upset much of its political base.)

If agriculture, as it currently exists in the country, is non-viable, then that challenge needs to be faced, less as a matter of policy than as a matter of social and economic change. Part of the reason why there are still international arguments over bananas is that the governments of the Leeward and Windward Islands, despite receiving over 25 years of protection under the European Lomé Conventions, never told banana growers that their lives would have to change, and that they probabaly could not grow bananas anymore, at least not at a competitive price. This is a failure of stasis--a desire of policy makers and others to keep things as they are, to live "in the old time days", to not face up to the present. Challenging this is not so much a matter of deep-thinking vision á-la-Manning as a willingness to see and adapt to change. Protesting cane farmers want to continue to live in the past, and no one is willing to step up and tell them they can't.

Tuesday, October 22, 2002

As I referred to in my last post, not much changes in Trinidad and Tobago. A classic example of this is the annual budget statement. I once railed against the annual performance of "budget theatre", considering most post-1995 statements to be superfluous and of little effect. Budgets are, in essence, two things. Firstly, they are an exercise in fiscal policy, as the goverment uses taxation and public spending to stabilise the macroeconomy. Secondly, they tell you how the the government plans to financially intervene in the economy to raise revenue and pursue its policy goals. Except during the depressing years of structural adjustment, Trinidad's budgets are all the second, with little of the first.

Of course, the information's all there, if you want to find it, especially in the accompanying Medium Term Macro Policy Framework. (no link yet available, I'm afraid.) One could also do worse than read the IMF's annual Article IV consultation report on the country. But, no, that's not what budget speeches are about. Rather the people had to endure over an hour of Patrick Manning's alternating high-and-low intonation to get a gist of what he was going to give them, 10 weeks before Christmas. Like the Santa Claus that most West Indian politicians pretend to be, Manning did not dissappoint.

Summarising what Manning announced today would take too long. Given the lack of a Throne of Queen's Speech in Trinidad and Tobago, the budget also serves as a huge government policy statement. So, more of the dysfuntional usual spending measures--new and refurbished police stations, new and refurbished schools, new and refurbished health facilities, increased old age pensions, etc., etc. If I sound dismissive, it is because every government announces them, to little discernable effect on the problems they're meant to be addressing--education, health care, crime, living on a fixed income. These are the great intractables, and it will take more than throwing money at the problem to make, say, Trinidad's education system work tolerably well.

I confine my comments to the thing the budget does directly--the actual taxation measures. To summarise, these are:

▪ a cut in Corporation Tax from 35 to 30 percent, with more cuts promised in future;
▪ a cut in the top Income tax rates from 35 to 30 and from 28 to 25 percent;
▪ a TT$10,000 annual credit union investment tax deduction;
▪ a TT$10,000 decuction per year (for the first five years) for first-time home buyers;
▪ the removal of duty and VAT on medication;

I have little to quibble about concerning the first two--lower taxes are, in general, a good thing, though they are not a supply-side panacea they are often made out to be. (The Laffer Curve is a bit disingenuous, especially with tax rates already so low; given the dominace of Trinidad's oil revenues, it probably would not apply anyway.) Is Manning's stated goal of lowering corporation tax to make "Trinidad and Tobago the most attractive location for investment in the Western Hemisphere" a sound one? There is only a limited correlation between tax rates and investment levels--most of Trinidad's current investment is in the energy sector, which still "suffers" under a 50 percent corportation tax rate. It takes a lot more than mere tax rates to create an attractive investment environment.

The deductions, on the other hand, I have a major problem with. Post-adjustment, Trinidad and Tobago had one of the simplest income tax regimes in the world, with only a few deductions, and a rate structure that was simple to calculate (The tax declaration, on the other hand, remained a semi-labyrintine bureaucratic construct--the form could easily have been one side of one page.) This just goes an reverses that who process. Worse than that, it create a distortion--a bias towards a particular kind of investment. Credit unions provide low returns to their members--lower, certainly, than mutual funds like the Unit Trust. Now, after some lobbying by the credit union "movement" (it almost makes these financial intermediaries sound progressive) the imbalance is going to be at least partly redressed. Are people not smart enough to make investment decisions on their own merits?

The home ownership deduction is worse. Like the UK (where I am currently based) Trinidadians have a bias against rented accomodation; the deduction reinforces the motion that renting does not pay. (Note to young people; renting is simply paying for having a roof over your head. Home ownership is the same, with a bit of speculative debt/home equity value thrown in.) Some could rant about the despoilation of good agricultural land for housing, but that's unfair; unless arbitrarily restricted, land generally goes towards it's most highly valued use, and in Trinidad that's no longer agriculture. The real problem is the notion that property prices will always rise. Trinidad and Tobago are small islands, and some people in parts of the twin-island republic may be able to quote rents in hard currency, but the notion that land and housing scarcity will mean ever-rising prices will be tested sooner or later. The pundits fear rising inflation with an increase in hydrocarbon-fuelled spending; I fear, after this deduction, for the formation of a asset-price bubble.

VAT on medication; not much to say on this except that it's inefficient. For a VAT to work properly (at least accordig to theory) it has to be levied on everything. It would have made more sense to have a ubiquitous VAT and drop the overall rate to, say, 7.5 percent. It would not have made the VAT any less regressive (all indirect taxes are, by nature) but it would have been far less distortionary, and been a benefit to far more people.

In his brief exposition of fiscal policy, Manning announced some sensible things, like

(i) trying to organise and structure government borrowing plans across a range of maturities in order to establish a yield curve;
(ii) expand the list of primary dealers and facilitate the development of a liquid secondary market in government debt;
(iii) assure transparency in government bond markets.

I fear that these plans may be slow in coming. Trinidad and Tobago is not exactly a home of democractic capitalism. The number of people who trade on the Stock Exchange is painfully small, as is the number of securities available for trading. Unless local financial markets develop, with improved liquidity and real alternative means for companies to obtain capital other than bank loans, then a deep and effective local government securities market will not develop either.

As for Manning, I have a problem with paragraphs like this:

"The current expenditure estimates include a one-time payment of $600 million to cover salary arrears. In fact, it is this one-time payment that leads to the overall deficit of $623 million. Excluding this payment, the budget would show a deficit of a mere $23 million."

Manning just condescended to the nation, by assuming that the public can't subtract. Not only that--he's wrong. The $600 million could be any sample $600 million of government spending; he singled out the public servants to make a point about the good he was doing for them.

Manning's issue is not hubris. I think he probably means well, not for the sake of being altruistic, but rather for aspiring to deliver national greatness--he want's to be the one who finished what Eric started. The aim is not original: Malaysia's Mahathir Mohamad, one of the world's last decolonisation-era leaders, first mentioned a Vision 2020 back in the late 1990s. (The Asian economic crisis slowed things down a bit, though.) Manning wants to be known as the man who took Trinidad beyond another great threshold. That' why he went to Hong Kong six years ago, and that's his election-winning mantra now.

The real problem with what Manning's announced is that he sounds as if he really expects his measures to amount to something. Individually, they're all piecemeal; I am not sure what they all sum to. There is no major reorganisation, no terminating of programmes, no holding people to account. There is mainly the announcement of spending plans--so many, it turns out, that the failure of a few would not be seen to detract from the whole programme. This is not leadership, it's appeasement--a desire not to rock the boat too much. Many institutions require root-and-branch reform (the health and education sectors); others need to to stopped and restarted from scratch (the police) and still others are merely hopeless, and need to be put to sleep (the Unemployment Relief Programme and PTSC). There is no sign of any of this in this policy-statement-disguised-as-budget. The same people remain in place, carrying out a never-ending series of incremental measures and reforms. Trinidad and Tobago goes on, continuing on the same course, the autopilot firmly switched on.

Wednesday, October 16, 2002

I have just deleted a number of test postings, used to help my "coding". It's nice to see the blog slowly coming together. Next to rearrange links and the archives

My friend Nicholas Laughlin has just started his own blog, where he posts his own opinions and musings. He has a good post on Trinidad and Tobago's general election last week, and the polity that brough about the result. I, personally, don't think much is going to change. Not much does in T&T.

Nick's doing better than me, as usual. I am not posting any content just yet, partly because of time (I work full time, and I am also a part time postgraduate economics student) and partly because I have not finished the "look" of the site yet, at least not to my satisfaction. Hopefully that will change soon, when I settle down and get a real life.