Growth through diversification

WHAT MANY will be looking for come budget day next month is continued commitment to the idea of diversification but with more aggressive incentives for boosting local production, reducing imports, and lighting a fire on renewable energy.

Once again, the foreign exchange tug-of-war between demand and supply has been one of the major challenges of the fiscal year. We share the view of UWI economist Dr Vaalmiki Arjoon that there is no magic bullet for this problem. What is required, however, is a clear overriding principle rationalising a robust range of interventions. The problem has to be attacked from multiple sides.

While diversification has been a talking point for years, energy production and downstream industrial use continue to dominate the economy. Oil and gas typically account for about 40 per cent of GDP and 80 per cent of exports but less than five per cent of employment. Our stable, democratic government, our well-educated, English-speaking workforce, our status as a regional financial centre with a relatively well-regulated and stable financial system provide the perfect conditions for the stimulation of non-energy areas.

We continue to have high levels of imports relating to mineral fuels, lubricants, machinery, transportation equipment, manufactured goods, food, chemicals, and live animals. Our most important import partners are typically the US (23.8 per cent), Russia (15.3 per cent), Colombia (11.1 per cent), Gabon (10.5 per cent), and China (7.3 per cent) – as at 2017. There is much room for the stimulation of local business.

First, the government must focus on the things that make doing business easier. This includes the tax regime, infrastructure, and measures enhancing competitiveness such as the reduction of state-sanctioned monopolies and better rules of fair trade.

At the same time, strategies must be adopted to address the major hindrances to diversification such as low labour productivity, inefficient government bureaucracy, and corruption. Viewed from this perspective, the upcoming political campaign finance reform is most welcomed.

Reducing the food import bill is something that must also be achieved, cognisant of the need to protect the environment. A shift to renewable energy, which is gentler on the ecosystem and therefore more sustainable, is essential. This is especially so given the fact that energy-based recovery continued into the third quarter of 2018, but at a slower pace than the first half of the year. The economy should receive a boost soon from the Angelin gas platform and other energy projects in the pipeline but we can only rely on fossil fuels for so long.

The need to become a self-sustaining society is also driven by key risk factors on the horizon, including developments in nearby Venezuela, tensions among major trading nations, volatility in energy prices, Brexit, and swings in financial market earnings. Our domestic macroeconomic management must, therefore, be closely coordinated and alert in dealing with a rapidly evolving external landscape with a view to buffering the economy.

The need to diversify is already upon us. Let’s not waste any more time.