DISCUSSION PAPER
DRD131
OIL WI!:-luFALLS I~ A SEALL PARLL.l..J.fDTTA...>tY D210CRACY:
THEIR ~ACT ON TRINIDAD .~~D TOBAGO
by
Richard Auty
[niversity of Lancaster
Alan Gelb
World Bank
Septe!Ilber 1985
,'.
De7e:opment Research Department
~conomics and Resea=ch Staff
World Bank
~.
The world Banl<:. does not accept responsibility for the views expressed herei:1
which are these of the author(s) ana should not be attributed to the World
3ank or to its affiliatad organizations. The findings, interpretatiQns, and
conclusions are the results of research supported by the Bank; they do not ,-
necessarily represent official policy of the Bank. The designaticns:employed,
the presentati.on of material, and any ::laps useJ in this document are....solely
for the convenience of the reader and d,J not i:nply the expression of-any
opinio?1 whatsoever!on the flart of the ~,orld Bank or its affiliates c~cer.ling
t~e legal status of any country, cerritory, city, area, or of its authorities,
or concerning the deli~i:ations of its ~ourrdaries, O~ national affiliation.
OIL WI~FALLS IN A SK-\LL PARLI.\.'1E~TARY DEHOCRACY:
THEIR UlPACT ON TRINIDAD AND TOBACO
Richard Auty Alan.. Gelb
Dept. of Geography, Development Reseli,r.:di�'�O~pt'~;
University of Lancaster. World dank.
September 1985 *
* The~old Bank does not accept responsibility for the views expressed
he~ein which are those of the authors and should not be attributed to the
World Bank or to its affiliated organizations. The findings,
interpretations, and conclusions are the result of research supported by
the Bank; they do not necessarily represent of:icial policy of the Bank.
The�designations employed, the ?resent~tion of r.laterial, and any oap:; used
in this docuoent are solely for the convenience of the reader and do not
� imply the expression of any opinion whatsoever on the part of the World
Sank or its affiliates concerning tile ~~al Status of any countr;,
territory, city, area, or of its authori~ies, or conce_'ning tiLe
delioitation of its boundaries, or national 2ffiliation
In cornon with other o i l e q o r t e r s Trinidad and Tobago reaped l a r g e w i a d f a l l
gains a f t e r 1973. Cheir use w a s heavily influenced by its d i s t i n c t i v e
p o l i t i c a l economy, and r e s u l t e d i n s u b s t a n t i a l weakening of its nonoil t r a a e d
sectors ( t h e "Dutch disease"). Attenpts t o d i v e r s i f y through gas-based
i n d u s t r i a l i s a t i o n a r e not l i k e l y t o replace shrinking o i l income. This paper
t r a c e s the r e l a t i o n s h i p from p o l i t i c a l objectives t o use of o i l windfalls and
t h e e f f e c t s on the nonoil economy.
I. INTRODUCTION
I n common w i t h o t h e r o i l exporting c o u n t r i e s Trinidad and Tobago
reaped unprecedented w i n d f a l l gains i n 1973-7L and a g a i n i n 1979-80. T h i s
paper a n a l y s e s t h e use made of its wi;idfalls, and che consequences f o r i t s
n ~ n o i leconony. How d i d t h e o b j e c t i v e s of its governnent i n f l u e n c e t h e
a l l o c a c i o n of o i l income? Has Trtnidad been a b l e t o avoid t h e "Dutch Disease"
(Corden and Neary, 1982) of increased o i l dependence and s h r i n k i n g nonoil
t r a d e a b l e s ? What has been t h e l o n g - t e n value of its vindf a l l gains?
R e l a t i v e t o o t h e r oil-exporting developing c o u n t r i e s used a s
comparators i n Gelb ( 1984)--.Ugeria, Ecuador, Indonesia, I r a n , Nigeria, and
Venezuela-Trinidad and Tobago has some d i s t i n c t i v e f e a t u r e s . It is s n a l l ,
w i t h a slow-growing population of only 1.1 ail:iua. i l t h o u g h its 1974
GXP/head was s l i g h t l y exceeded by Venezuela, its 1982 GNP/head, a t US$68h0,
placed i r a t t h e top of t h e n i d d l e income developing country range. P u b l i c
a d m i n i s t r a t i o n is s e n e r a l l y e f f e c t i v e . The p o l i t i c a l s y s t s n was democratic,
and u n l i k e Venezuela ( t h e only couparatur a l s o Lo have an e l e c t e d government
throughout t h e period) it was modelled on the Westminster parliamencary system
and thus vas l e s s prone t o experience d i v e r d l n g o b j e c c i v e s between rxecucive
and l e g i s l a t u r e . F i n a l l y , p r i o r t o t h e f i r s t u i n d f a l l the country had
undergone a ? e r i o d of austeritlg, due t o t h e g r a d u a l d e c l i n e i n o i l ouc2ut from
e s t a b l i s h e d f i e l d s . The new o f f s h o r e f i n d s developed a t the s c a r t of t h e
1970's v e r e a l s o l i m i t e d . This r a i s e d public awareness of t h e negd co proceed
r
- --
with c a u t i o n i n the use of income from the country's f i n i t e o i l r$sources.
.
Except f o r t h g q u e s t i o n of s i z e , i n r e l a t l o n co conparacor countrhes, these
D
f e a t u r e s favoured the a b i l i t : ~t o nake good use of :he w i n d f a l l s . Trinidad and
Tobago c h e r e f o r z began wich a number of advantages.
S e c t i o n 11 o u t l i n e s t h e " i n i t i a l conditions" of the p c l - i t i c a l system
and the economy before the f i r s e o i l shock. These were t o be of g r e a t
importance i n s e t t i n g p u b l i c p r i o r i t i e s and so d e t e m i n i c g t h e a l l o c a t i o n of
w i n d f a l l s a f t e r 1973. The main p r i o r i t i e s before the f i r s t boon were: ( i )
--
i n d u s t r i a l i z a t i o n and growth; ( i i ) extending n a t i o n a l c o n t r o l over production
and ( i i i ) a s s i s t i n g poorer s e c t i o n s of s o c i e t y . O i l income and gas
d i s c o v e r i e s were t o add; ( i v ) d i v e r s i f i c a t i o n i n t o gas-based i ~ d u s t r y .
S e c t i o n I11 d e s c r i b e s t h e response t o the f i r s t o i l boom, 1974-78.
Although i t was c a u t i o u s , p o l i c i ~ : i n i t i a t e d during t h i s period, notably (i)
the t r e n d towards s t a t e ownership, ( i i ) incrsasiag sr3.r,~$diest o conskmars and
t o f a i l i n g f i n s and ( i i i ) pronoting gas-L-aed i n d u s t r i a l development vere t o
c a r r y through i n t o the period of the second o i l boom when t h n i r i n p a c t became
major. The period of the second boom, 1979-81, is analysed i n Section IV.
T r i n i d a d ' s gas-based i n d u s t r i a l i s a t i o n s t r a t e g y is evaluated. i n
S e c t i o n V, because of its c r u c i a l importance i n preparing f o r t h e post-oil
era. Conclusions follow i n S e c t i o n V I .
11. TBINIDrU) .L':D TOBAGO BEFORE 31E FIXST SOOY
Za. P o l i t i c a l S t r u c t u r e 4
Trinidad and Tobago eclerged i n t o a parliamentary democracy a i t e r
--
*
World War LI. Its tvo-parcy structure reflected an underlying ec~lnic
'
i
-
cleavage. I n L970 3lacks c o n s t i t u t e d b3 percent of rhe population, and E a s ~
"?
Indians 60 percent. rOurteen percent were mixed. The i s l a n d ' s a o r e upwarB:
n o b i l e alack ? o p u l a t i o n was s t r o n g l y represented i n sovernoent s n a predoninai
i n industr:~. ,he Zast Indian population, descer.dancr; of Lndent.~redl a b o r e r s
was poorer and l a r g e l y r u r a l : Black e t . -&.. , 1976. The Peaple's :.ia:ional
Yovement (PNM) uhich has remained i n power s i n c e 1956 vas l e d by D r . E r i c
Villiarns u n t i l 1931; t h e r e a f t e r i t was l e d by Dr. George Chambers. Its
c o n s t i t n e n t s have been mainly black. The Democratic Labour P a r t y (gPL), t h e
l e a d i n g o p p o s i t i o n , drew most of its support from t h e poorer and more r a d i c a l
-1/
I n d i a n s
Inf luenced by t h e views of Lewis, 1950, i n 1956 t h e P?IM set its f i r s t
g o a l a s i n d u s t r i a l i s a t i o n , u i t h heavy i n i t i a l r e l i a n c e on. f o r e i g n c a p i t a l ,
technology, and mnagement. The stress Lewis, 1972, placed on c o n p e t i t i v e
l a b o r - i n t e n s i v e exports vss not ennhasised.'- The" Gi?L- ;ztc&ed t h e government
f o r a l l e g e d c o r r u p t i o n and f o r depending too much on " e x p l o i t a t i v e f o r e i g n
c a p i t a l " but because i t represented a n unwieldy c o a l i t i o n of r u r a l a s t
I n d i a n s , urban poor and a s m a l l European e l i t e , i: never coalesced. The DPL's
weakness allowed t h e PLJM t o energe a s a s t r o n g u n i t a r y government l a r g e l y f r e e
of c o o p e t i t i o n u i t h i n i t s ranks. T h i s was to be important i n keeping puollc
expenditures nore d i s c i p l i n e d than those of n o s t o t h e r o i l e x p o r t i n g
g o v e r m e n t s .
Early i n 1970 s t r e e t demonstra:ions and a m t i n y i n the a r n y gave
voice t o qidespread d i s s a t i s f a c t i o n with growing economic problens caused by
d e c l i n i n g o i l revenues. The PNH recognizeh t h a t d i s c o n t e n t was sufficient t o
nount a c r e d i b l e c h a l l e n g e t o its power. It reluctantly undertook a populist
-
c o u r s e focused around r h r e s ,xiin goals :
-
-1/ Xer.wich, 1983. Lowenthal, 1972, d e f i n e s the s o c i a l j t r u c t u r e a s " c u l ~ u r a l
?luralism"in vhich groups i n t e r a c t f o r economic ?ur?oses but achere to
r e l i g i o u s o r e t h n i c ~ r o u p i n g s i n s o c i a l 3 a t r e r s .
o t o excend p u b l i c ownership,
o t o r c d i s t r i b u t e income more e q u i t a b l y , and
0 t o a c c e l e r a t e i n d u s t r i a l d i v e r s i f i c a t i o n o u t of o i l .
2b. Economic S t r u c t u r e
-o i l Sector. O i l was discovered i n 1857 and i n 1913 S h e l l becoue
T r i n i d a d ' s f i r s t producer. By t h e 1950's Br-itish Petroleum, Royal Dutch
S h e l l and T e ~ s c oo p e r a t e d o i l r e f i n e r i e s , augmenting domestic crude v i t h
i n p o r t s from Venezuela. By t h e e a r l y 5970s petroleum extracting and r e f i n i n g
accounted f o r almost t h r e e q u a r t e r s of exporrs, nrre , f i f t h of government
revenue and 20 percent of GDP.
Fron t h e l a t e 1960s o i l production and r e f i n e d e x p o r t s had begun t o
drop. P u b l i c spending was c u t from 23 t o 20 percent of GI?? and a modest
budget d e f i c i t of 4-7 percent of GDP financed half through overseas borrowing
and half from doneskic sources. Between 1970 and 1973, GDP growth slowed t o
3.6 percent (4.5 p e r c e n t f o r non-mining GDP) from a l a o s t 5.5 percent over tne
precedizg 15 years w h i l e i n f l a t i o n r o s e i r o n an average of 2.5 percent Ln ttie
1960s t o over 10 p e r c e n t i n t h e e a r l y 1970s.
Even h e f o r e t h e d i s t u r b a n c e s of 1970 t h e governuent had taken a small
s t e p towards n a t i o n a l i s i n g t h e o i l i n d u s t r y , buying 3 r i t i s h P e t r o l e e u ' s
r e f i n e r y and f i e l d f a c i l i t i e s : Sandoval 1983. 2-larine e x p l o r a t i o n c u r i n g 1969
and 1971 revealed s u b s r a n t i a l new e s t i m a t e s of recoverable o i l and gas. Oil.
production rose from a low of 129,000 b z r r e l s per _day (bpd) i n 1971 co 151,600
bpd i n 1973, 5:~ceedLng t h e previous peak i n 1969. ? ~ l t h o u ~ohi l r e s e r v e s s e r e
e s t i m a t e d a t only about 10 years o u t p u t , t h e s e f i n d s reduced t h e i m e d i a t e
p r e s s u r e f o r ? o l i t i c a l l y d i f f i c u l t s t r u c t u r a l change.
x o n o i l S e c t o r s . A t t h e s t a r t of t h e 1970's n a n u l a c t u r i n g , though
h e a v i l y p r o t e c t e d by a "negative list" of p r o h i b i t e d imports and o t h e r
measures (which i n s n y cases doubled p r i c e s r e l a t i v e t o imports) accounted
f o r only 22.0 percznt of non-mining GDP. A g r i c u l t u r e , dominated by s u g a r ,
-
.
accounted f o r only another 5.8 percent. There w a s l i t t l e t o u r i s t t r a d e . The
economy was t h e r e f o r e h e a v i l y oil-dependent-nonoil t r a d e a b l e s , a g r i c u l t u r e
and m n u f a c t u r i n g , accounted f o r only 27.8 percent of n o m i n i n g GDP a s a g a i n s t
a Chenery-Sryquin "norn" of 42 percent f o r c o u n t r i e s a t comparable l e v e l s of
income per head. L/
A n uneven incone d i st r i b u r i o - n r e l l e ct e d pronounced dualism o r che
economy between high-technology o i l and nanufacturing s e c r o r s and Lou-skill
a g r i c u l t u r e . I n 1973 a g r i c u l t u r e g e n e r a t e d one s i x t e e n t h o f t h e v a l u e addea
per worker i n o i l r e f i n i n g and one f i f t h of t h a t i n c h e n i c a l s . h g r i c u l c u r e
too was d u a l i s t i c ; v a l u e added per worker i n sugar was almost f o u r c i c e s t h a t
i n the r e s t of t h e s e c t o r . R e f l e c t i n g the=e d i s p a r i t i e s , the e l i t e segment of
o i l workers, less than f o u r percent of t h e councry's l a b o r f o r c e . earned
USS5,000 a year conpared with USS750 f o r a l l o r h e r workers and US$325 f o r
a g r i c u l t u r a l workers: Black et. a l . 1976.
-- Uneven incone d i s t r i b u c i o n was
accentuated by high and r i s i n g unenployaent which topped 14 percent i n the
e a r l y 1970s. 4n the economy a s a whole, sevency 2ercrnt qr cke llaoor forct:
was unionised.
-1/ Xorn e s t i n a t e s a r e based on Chenery ar.d Syrquin ( i 9 7 5 ) , caking nonnlning
GDP/head a s t h e indicator of incone/head.
III. TlIE FIKST OIL SHOCK, 1974 - 1978
3a. The S i z e of t h e !Jindfa11
h shown in Figure 1 Trinidad and Tobago experienced an unusually
l a r g e w i n d f a l l o v e r 1974-78 r e l a t i v e t o o t h e r c a p i t a l - i n p o r t i n g exporters-39
p e r c e n t of non-mining GDP--because new o i l f i e l d s began t o come on strean i n
s u b s t a n t i a l q u a n t i t i e s j u s t a s t h e enbargo of 1973 caused the worldwide p r i c e
of o i l t o g u a d r u p l e L i Corporate and o t h e r t a x e s ( T r i n i d a d does not follow
t h e common OPEC system) were r a p i d l y a d j u s t e d to. syphon off f i v e s i x t h s of
i n c r e a s e d revenues. O i l t a x e s jumped from one f i f t h of government revenues
before t h e boom t o 60 percent i n 1974-78: s e e Figura 2 , .
3b. Uses of t h e Windfall
F i s c a l p o l i c y w a s i n i t i a l l y very c a u t i o u s r e l a t i v e t o t h a t of o t n e r
o i l e x p o r t e r s . The country had j u s t emerged from a period o f L ' ~ u s t e r ~ t y ;
u n l i k e Ecuador and Venezuela ( K a r l , 1982; ,%rsnall-Silva, 1934), s t r o n g ,
u n i f i e d government reduced intra-public-sector competition f o r r e v e n w s ;
u n l i k e Nigeria (Bienen, 1984) t h e r e were no s t r o n g r e g i o n a l i n t e r e s t droups.
To l i m i t dependence on o i l revenues, t h e p r o g r e s s i v e nonoil t a x system w a s
k e p t i n place though t a x b r a c k e t s were i n f l a t i o n - a d j u s t e d . O i l revenue
. 1
exceeded r e c u r r e n t spending by 40 percent; s e e FLgure 2. E x i s t i n g p u b l i c
'9
-
11 The ~ i n d f a l land its uses a r e estimated r e l a t i v e t o a hypothetical
*- -
P
p r o j e c t i o n involving ( a ) r e l a t i v e p r i c e d e f l a t o r s c o n s t a n t a t t h e i r
- average 1970-72 l e v e l , ( b ) a c o n s t a n t r a t i o of r e a l a i n i n g o u t p u t t o t
nonnining GDP, 'c) a constant r a t i o of t o t a l a b s o p r t i o n t o output and ( d ,
c o n s u p t i o n and i n v e s t a e n t changing t h e i r s h a r e oi a b s o r p t i o n i n line u l c h
the Chenery-Syrqain, 1975 norns. For nore d e t a i l see G e l b , 1984.
Figure 1
The Oil Windfall and its Use: 1973-81
Trinidad and Tobago :
Fiscal Evolution
O i l Revenue
subsidies
(Oil Revence-Recurrent E? .)
programs were not s c a l e d up a s i n c e r t a i n o t h e r e x p o r t i n g coitntries. :Tor d i d
t h e government r e d r a f t its new f o u r t h five-year plan f o r 1974-78, nou
o b s o l t t e . A nation-wide debatc on how '0 deploy t h e nev wealth l a s t e d i n c o
1976, so t h a t i n 1974-78 a l r o s t half t h e w i n d f a l l w a s i n v e s t e d abrcad i n
S p e c i a l Funds f o r Long-Tern Development.
R e l a t i v e t o non-mining GDP, t o c a l a b s o r p t i o n had been high i n 1970-72
because foreign-financed investment t o t a p t h e new o f f s h o r e f i n d s ha?,
permitted a c u r r e n t d e f i c i t averaging 14.5 percent of nonminkng GDP.
Xbsorpt ion rose f u r t h e r af ter !975 a s spending from t h e w i n d f a l l a c c e l e r a t e d ,
a s shown i:: Figure 1. Over 1974-78 e x t r a revenues were used a s follows:
( 1 ) 70 percent was saved abroad, transforming c u r r e n t d e f i c i t s i n t o
u
s u r p l u s e s which averaged 10 percent of 1976 nonuining GlIR eve-r. 1974-
78.
( 2 ) 12 percent w a s i n v e s t e d dome.stically
*.. (3) 18 percent was consumed.
A s shown i n Fignre 1 , r e l a t i v e t o o t h e r e x p o r t e r s savings doroad was e x t r e n a l y
l a r g e , and domestic i n v e s t n e n t was i n i t i a l l y modest. Consumption out of
w i n d f a l l gains was f a i r l y high a f t e r 1975.
( 1 ) Savings abroad. By 1978 i n t e r n a t i o n a l r e s e r v e s reached USSL .8
b i l l i o n , up from USS47 n i l l i o n i n 1973. Reserves were used t o e s t a b l i s h a
&
high i n t e r n a r i o n a l c r c 6 i t r a t i n g ; l o a n s of US3157 3 i l l i o n and USS112 n i l l i o n
were negotiated i n 1977 and 1978. S t r i c t c a p i t a l co.ltrols l i m i t e d o u t l l o r ; ~ ;
a e d i u n and long t e r n debt w a s US$417 n i l l i o n a t t h e end of 1978.
( 2 ) Domestic i n v e s t a e n t . The l a ~ ~ e sa lcl o c a t i o n s were f o r : ( a )
E
economic and s o c i a l i n f r a s t r ~ c t u r e ,(5) gas-based i n d u s t r i d l i z a t i o n , and (c)
n a t i o n a l i z i n g and "saving" e x i s t i n g i n d u s t r i e s . Only i ~ a l fof the TTS4 t i l l i o n
catmarked "Funds f o r Long-Term Development" had been spent by the c l o s e or
1978. Of the funds a c t u a l l y used, approximately half vent i n t o econonic
i n f r a s t r u c t u r e - t r a n s p o r t a t i o n , ?ewer, and wate. and. one f i f t h went to s o c i a l
inf r a s t sture-education and housing. I n �r a s t r u c t u r a l i n v e s t a e n t w a s seen a s
labor using and ained t o e l i n i n a t e a n i n f r a s t r u c t u r a l backlog a c c u ~ u l a t e di n
the l a t e 1966s.
I n s t e a d of accepcing iUIOCO's proposal to export l i q u i i l e a n a t u r a l gas
(LNG) t o t h e United S t a t e s , i n 1975 the government created a task f o r c e co
plan gas-based i n d u s t r i a l i z a t i o n . It experisented with different r o n s of
ownership, refusing j o i n t ownership proposed by the m u l t i n a t i o n a l s when i t
bought out t h e i r o i l r e f i n e r i e s but accepting t h i s i n two fertilizer piants,
taking a 51 percent equity stake. Foreign p a r t r ~ e r swere responsible f o r
technology, managenent, and marketing. Attempts t o n e g o t i a r e o t h e r j o i n t
ventures collapseci because the d e s i r e t o spend o i l revenues led the gove,, ~ nnt e
t o downplay r i s k a o r e than p r i v a t e partners. Tn 1976 it planned a j o i c t s t e e l
venture where the s t a t e uould own 67 percent and Hoesch-Zstel, Kawasaki and
' l i t s u i the balance. Later i n 1976 governnenc cancelled the agreenenc on the
grounds t h a t (i) t e r n s offered by the p r i v a t e i n v e s t o r s were poor, ( i i ) t h e i r
denanas f o r f i s c a l i n c e n t i v e s vere unreasonable and ( i i l ) :heir s a l e s s t r a t e g y
excluded North Xnerican markets.. the s t a t e went ahead on its own, relying on
four i n t e r n a t i o n a l companies to develop tile plant on c o n t r a c t d e s p l t a ~ a r n i n g s
-
of market access p r o b l e m and of a low race of return. dy the end of 1378
1
-
TTS240 A l l i o n had been spenc on the project.
- Impatient w i ~ hslow ?regress,
i n 1977 the gover$ent a l s o abandoned plans t o build a gas-based aluninuz
smelt e r with Guyana and Janaica. .*other p a r t n e r , .;ational Suuthrcire,
comnitted co only 10 ?ercenc of the equicy and began f e a s i b i l i t : ~s c u d i e s .
However, the goal of c r e a t i n g new i n d u s t r i e s was l a r g e l y s i d e t r a c k e d
i n t o taking over d e c l i n i a - i n d u s t r i e s t o m a i n t a i n jobs. I n 1974--78 TTS1.67
b i l l i o n (one year's o i l revenues) was s p e n t i n a c q u i r i n g 40 companies
i n c l u d i n g t h e purchase of remaining c o n t r o l i n the l a r g e Caroni sugar r e f i n e r y
(government had acquired a s j o r i t y s h a i e i n 1969), and a TTS93.6 n i l l i o n buy-
out of Royal Ducch S h e l l ' s r e f i n e r y (renamed t h e T r i c t o c r e f i n e r y ) , the z e c c n ~
l a r g e s t i n t h e country. This clove was popular, especially wich the a i l i t a n t
o i l workers' union which saw it a s a s t e p towards n a t i o n a l i z i n g the l a r g e r
Texaco r e f i n e r j .
( 3 ) Domestic Consumption. R i s i z g subsLdies f o r food, 5 l e l and
u t i l i t i e s a b s o r j e d TT$760 n i l l i o n i n L974--78. O i l p r i c e s v e r e held to nalf
i n t e r n a t i o n a l l e v e l s ; u c i l i t y companies began t o . r u n l d r g e o p e r a t i n g u e r i c i t s
having been unable t o r a i s e r a t e s s i n c e t h e end of che 19611s and i n one c a s e
1937. Consumer j r i c e s t h e r e f o r e rose l e s s r a p i d l y than o t h e r p r i c e s ; s e e
Figure 3, and d e f l a t e d consunption ( a s neasured i n n a t i o n a l accounts) r o s e
s h a r p l y r e l a t i v e t o nominal consunpcicn, a s shown i n Figure 1. By 1978
s u b s i d i e s were estimated t o account f o r more than 7 percent or G3P and
recorded f i s c a l s u b s i d i e s accounted f o r 22 percent of o i l revenues: s e e
Figure 2.
Labor :as a l s o s u b s i d i s e d d i r e c t l y . The s c a t e P u b l i c -darks progran
(DESID) provided 10,000 jobs, esploying 2.5 percent of the t o t a l workforce a t
wages f a r above those p r e v a i l i n g i n a g r i c u l ~ u r e . O v e r a l l p u b l i c s e c t o r
employment ex?anded from 86,000 t o 158,gOU--from l e s s than a q u a r t e r t o n o r e
than a t h i r d of t h e n a t i o n a l coral. E.
--
Trinidad and Tobago:
Relative Prices and Wages
Relative Prices
Trade weighted
Real Exchange
140
120
100'-!//-
a
umer prices/ -
80
* Xonmining output
Def lacor
Xeal Wage Trends
- - Sugar
..
- /F'urniture and
Wood products
*
-
-
S t r u c t u r a l Change i n Trinidad's Economy:
"The Dutch Disease"
A g r i c u l t u r a l out
Output \
Nonnining Tradeab l e s /
Sonmining GDP
II I I \
: \ '
1
Citrus Output \
(1910-72 100)
u'
3c. R e s u l t s Over 1974-78
Secause of t h e c a u t i o u s response t h e main cnnsequences of the
p o l i c i e s i n i t i a t e d during t h e f i r s t shock were not t o appear u n t i l l a t e r .
.Uthough a l a r g e r e s e r v e cushion had been b u i l t up, and i n t e r e s t payments on
f o r e i g n a s s e t s were t o mount t o $100million i n 1978, r e c u r r e n t expenditures
had begun t o r i s e ( t h e r e were stla11 f i s c a l and c u r r e n t balance d e f i c i t s i n
1979). Investment i n d e c l i n i n g i n d u s t r i e s d i v e r t e d revenues i n t o s u b s i d i z i n g
l o s s e s ; i n t h e case of t h e sugar i n d u s t r y , governnent had t o cover o p e r a t i n g
l o s s e s of lTS247 n i l l i o n i n 1977-78.
~ a n a ~ e n e nd ti f f i c u l t i e s compounded t h e p o l i t i c a l l y expeaient use of
nuch of t h e w i n d f a l l t o make it impossible t o r e v e r s e a g r o u l n g ' s t r u c f u r a ~
s h i f t i n f a v o r of nontradeables shown a s t h e " ~ u t c hDisease" i ~ d i c a d o-zi.,n,,,
Figure 4. Programs t o expand domestic food production were poorly
conceived. Despite a p l e c t i f u l supply of l a n d , i n a p p r o p r i a t e s i t e s ana
farmers were chosen f o r new r u r a l p r o j e c t s ( P o l l a r d , 1981). Unly a q u a r t e r of
t h e o u t l a y s f o r food s u b s i d i e s went t o producer i n c e n t i v e s . P r i c e c o n t r o l s
squeezed p r o f i t s a r g i n s and food i n p o r t s r o s e s h a r p l y f r o n TT$161 u i l l i o n i n
L973 t o ;TSb58 much i n 1978. The d e c l i n e of t h e export s e c t o r , notably s u g a r ,
is d e a l t with i n Section IV.
Xanuf a c t u r i n g continued t o be o r i e n t e d t o t h e domes t i c narket , whose
5. I
s n a l l s i z e i n h i b i t e d economies of s c a l e , c o n p e t i t i o r ~and v e r t i c a l linkages:
T.JO t h i r d s c o n s i s t e d of f i n a l s s s e n b l y of i a p o r t e d products, notably c a r k i t s
-
and food processing, with low added value. I a p o r r c o n t r o l s r e d u ~ d
i
c o n p e t i t i v e p r e s s u r e t o produce q u a l i t y products (Sandoval 1983, + r i g h t
B b
1981). l i e f i l w r j a c t i v i t y f e l l by $0 percent. Venezuela, which had suppLiea
txo t h i r d s of Trinidad ar.d Tobago's crude, c u t .back outpuc and i n t e r n a l i z e a
i t s refining while l e g i s l a t i o n i n the United S t a t e s increasingly favored
domestic r e f i n e r i e s . I n c o n s t a n t 1970 d o l l a r s t h e a i n i n g s e c t o r ' s s h a r e i n
t o t a l GDP d e c l i n e d t o only 7.0 percent; r r i n i d a d was s t e a d i l y i n c r e a s i n g r t s
dependence on an o i l s e c t o r contracEing i n r e l a t i v e t e r n s .
I n f l a t i o n was q u i t e moderate due t o p r i c e c o n t r o l s and tne openness
of t h e economy: the boom caused a jump t o 22 per c e n t i n 1974 which f e l l t o 17
percent then t o around 10 per cent. T r i n i d a d and Tobago had devalued by 22
percent a g a i n s t t h e weak US Dollar i n 1975-77. T h e r e a f t e r , it maintained a
fi:<ed p a r i t y of TTS2.4G = USS1.00. The trade-weighted r e a l e f f e c t i v e exchange
r a t e a p p r e c i a t e d only 5 p e r c e n t by 1978 r e l a t i v e t o its 1970-72 l e v e l a s shown
Between 1975 and 1978 employment Increased by 4.7 p e r c e n t , and
unenploynent decreased from 15.2 percent a t the s t a r t of t h e boom t o j u s t over
12 percent. But t h i s w a s due t o t h e government-subsidized work p r o g r a m and '
public s e c t o r e m p l o y n c ~ tmentioned above; p r i v a t e s e c t o r empiopnent was
a c t u a l l y dropping.
The high growth r a t e of non-mining output -- 7.0 percent during 1974-
78-was t h e r e f o r e based on a c t i v i t i e s t h a t d i d not need co compete w i t h
e f f i c i e n t world producers. .As m y be i n f e r r e d from Figure 4, by 1978
c o n s t r u c t i o n and s e r v i c e s ,accounted f o r 79 percent ofq non-nining GUP. For a
country a t Trinidad and Tobago's Incorne/head t h e s e s e c t o r s would n o r n a l l y
account far 40 percent of nonnining GDP. Xonoil e x p o r t s c o n t r a c t e d by 30
r
percent in'dollar t e r n s d u r i n g 1974-78. I n tems of both s e c t o r a l output and
-
t r a d e ~ r i r & d a d and Tobago was s t e a d i l y i n c r e a s i n g its dependence on 2 i l .
3y 1978 concern gas r i s i n g t h a t t h e o i l s e c t o r .light not be a b l e t o
!
s u s t a i n c u r r e n t l e v e l s of Fnvestnent and consunption. A t c u r r e n t production
r a t e s t h e r e n a i n i n g o i l r e s e r v e s of 700 m i l l i o n b a r r e l s would be suf f i c i r n t
f o r only n i n e years. Production was expected t o f a l l by one q u a r t e r , t o
157,000 bpd by 1983, i n p l y i n g a revenue drop of TTS0.5 b i l l i o n a year. The
Bobb Comnittee on p u b l i c e x p e n d i t u r e f o r e c a s t nominal revenue growth of no
more than six t o seven p e r c e n t a y e a r through 1983, compared v i c h 54 p e r c e n t a
year d u r i n g t h e booln (Zobb, 1978). It projected that welfare program alone
would absorb a q u a r t e r of c u r r e n t revenues o r 12 percent of non-mining GUP.
Thus, by 1978 government was aware of its looming economic problems, and
u n l i k e some o t h e r o i l - e x p o r t i n g n a t i o n s i t planned t o meet tnem. but new
n a t u r a l gas f i n d s i n 1978 - an.eselmated 7.31.:cl!.1.4,0nT c u b i c f e e t i n proven
r e s e r v e s and 17 t r i l l i o n c u b i c f e e t in r e c o v e r a b l r . r e s e r v e s -- v e r 2 c o n s i a e r e a
s u f f i c i e n t t o permit both LXG and i n d u s t r i a l uses: N i e r l i n g , 1981. They
reduced t h e urgency of p o l i t i c a l l y d i f f i c u l t change and. promised t o o f f s e t t h e
? t oj e c t e d d e c l i n e i n o i l revenues.
I . THE SECOND OIL SIIOCK: 1979-1981
&a. The Second V i n d f a l l and its Use.
The second windfall--34.7 p e r c e n t of n o m i n i n g GDP over 1979-81--was
more abrupt than the f i r s t and was' t o be halved over 1982-84.' Absorption
p a t t e r n s f r o n t h e f i r s t o i l boom a c c e l e r a t e d t h e i r nomentun. Xp$roxinateljr
-
-
one q u a r t e r of the.gecond w i n d f a l l went t o d o n e s t i c investment and one q u a r t e r
-
t o consunpc .on; slitghtly less than one half was saved abroad; see Fi,ure 1.
h
T h i s inprf. led t h e resource balance from base period l e v e l s , r e s u l t i n g i n a
c u r r e n t account s u r p l u s which averaged 5.0 p e r c e n t of 1980 nonninlng GDP. Jy
the end of !381 r e s e r v e s were CSS3.3 b i l l i o n and n e d i u and l o n g - c e m debt vas
US$670 m i l l i o n . However, a f t e r 1982 u n s u s t a i n a b l e demnds f o r revenues t o
f i n a n c e investment, p u b l i c consumption, s u b s i d i e s and t r a n s f e r s threatened t o
e l i n i n a t e t h e l a r g e i n t e r n a t i o n a l s u r p l u s accumulated s i n c e 1973. I n 1982-83
f i s c a l d e f i c i t s equalled 67 p e r c e n t of o i l revenues, c u r r e n t d e f i c i t s t o t a l l e d
USS1.9 bill-Lon and r e s e r v o s f e l l t o USS2.1 b i l l i o n .
Three chrontc problems-(i) i n v e s t n e n t q u a l i t y , ( i i ) consumption
l e v e l s , and ( i i i ) non-mining economic structure--emerged d u r i n g t h e second o i l
shock. Each r e s u l t e d i n g r e a t e r dependence on the shrinking o i l s e c t o r (Dutch
ise ease) and made the gas-based i n d u s t r i e s d e s c r i b e d i n nore d e t a i l i n S e c t i o n
V more s t r a t e g i c .
4b. Investnent: The Over-extension cf S t a t e Ownership
P u b l i c i n v e s t n e n t accelerated s h a r p l y during 1979-81 p u t t i n g T r i n i d a a
and Tobago more i n l i n e w i t h t h e p u b l i c investment i n t e n s i t y of o t h e r c a p i t a l -
s c a r c e , oil-exporting c o u n t r i e s . As shown i n Figure 1, nomlnal dones t i c
investment r o s e r e l a t i v e t o nonmining output by 9.3 percentage p o i n t s r e l a t i v e
t o its base period value. Forty-three percent of governnent expenditures
during t h e second boom went t o c a p i t a l o u t l a y s (up from 43 percent i n t h e
f i r s t ) . Few p r o j e c t s were r i g o r o u s l y a p p r a i s e d o r comparatively evaluated and
&
i n t e r a c t i o n s were not adequately addressed. For exanple, the l a r g e volume of
p u b l i c c o n s t r u c t i o n boosted u n i t c o s t s of s o c i a l i n f r a s t r u c t u r e and caused
delays t h a t c r t t i c a l l y a f f e c t e d t h e v i a b i l i t y of the s t e e l and f e r t i l i z e r
p r o j e c t s .
Conpared t o t h e f i r s t boon, theye w a s a change i n t h e proportion of
funds a l l o c a t e d t o ( 1 ) a c q u i r i n g e x i s t i n g f i r n s , ( 2 ) new c o n s t r u c t i o n and ( 3 )
naking loans and advznces t o ? x i s t i n g f i n s . Outlays f o r d c q u i s i t i o n s shrank
t o a small f r a c t i o n of t o t a l p u b l i c investment a s loans and advances grew from
approximately one q u a r t e r t o one h a l f of t o t a l o u t l a y s . This was p a r t l y t o
meet the start-up requirements of t h e l a r g e s t c a p i t a l p r o j e c t s and p a r t l y t o
cope w i t h i n c r e a s i n g cash-flow problems of state-owned e n t e r p r i s e s .
Severe d i f f i c u l t i e s developed i n t h e s t a t e a i r l i n e (BWIA) arid t h r e e
l a r g e a c q u l s i c i o n s from t h e f i r s t boom, sugar (Caroni), cenent (Trinidad
Cement) and o i l r e f i n i n g ( T r i n t o c ) . BWIA r e q u i r e d TT$30 m i l l i o n i n governnenc
loans from 1979 t o 1981 t o cover l o s s e s . Sugar production dropped from
143,000 t o n s i n 1979 t o 93,000 i n 1981; i n 1979-81 production averagea h a l i
Caroni's i n s t a l l e d c a p a c i t y and l o s s e s t o f a l i e d TT$650 niiL2~~~:'f r i n i d a d
Cement's o u t p u t dropped t o less t h a n :ral!T" =p@a,city by 1981 an3 4;c32Cj ~ k e t only
one t h i r d of d o n e s t i c demand. The 22-yezr-old p l a n t used twice the energy of
a n e f f i c i e n t dry-process p l a n t and had one q u a r t e r t h e l a b o r p r o d u c t i v i t y .
Its average production costs were almost twice those of a typical Uortn
Xfrican gas-based cement p l a n t and 50 percenL of a t y p i c a l European p l a n t
d e s p i t e f a r lower energy charges. The cement subsidy rose s t e a d i l y t o TT$5_I
m i l l i o n by 1981. The government r e j e c t e d t h e previous owners' proposal t o
c l o s e t h e f a c i l i t y and r e p l a c e it with a new one, planning i n s t e a d t o
r e f u r b i s h t h e p l a n t and c o n s t r u c t a second one. .4s demand weakened t h e
4 L
I
T r i n t o c r e f i n e r y had a small l o s s i r ~1980 and a TTS114 m i l l i o n l o s s i n 1981.
The government faced t h e d i l e m a of l o s i n g lOOC jobs by c l o s i n g lt o r
-
-
investLng nore than USS400 n i l l i o n i n upg'fading LC t o produce l i g h t e r
products. It would then be a rival t o therlarger, * f a i l i n g , Texaco r e f i n e r y
which enplcyed 4000, and i n c r e a s e pressure- f o r n a t i o n a l i s a t i o u . These l o s s e s
over 1979-81 r e p r e s e n t e d t h e e q u i v a l e n t of 30 percent of 1979 o i l revenues.
The new gas-based i n d u s t r i e s discussed a t g r e a t e r length below
required g r e a t e r c a p i t a l i n f u s i o n s than had been expected. The ISCOTT
DRIfsteel p l a n t and t h e F e r t r i n anmonia p l a n t experienced s i g n i f i c a n t
c o n s t r u c t i o n delays and s t a r t - u p d i f f i c u l t i e s . Xeanwhile, cons t m c t i o n of a
u r e a f a c t o r y and a methanol f a c i l i t y began i n 1981; by then r h e i r n a r k e t s v e r e
turning down i n t h e f a c e of i n t e r n a t i o n a l recession.
4c. Subsidised Consumption: .h Unsustainable %mentun
D e f l a t e d consunption increaced by 27 percent of non-mining output,
r e l a t i v e t o the base period before the w i n d f a l l s as shown by the dotted l i n e
i n Figure I. So measured, it accounted f o r m c b of che second w i n d f a l l .
Despite c o n t r o l s , i n f l a t i o n rose to 14.7 percent i n 197'9, 17.5 percent i n 198u
and 14.2 p e r c e n t i n 1981. This w a s a sharp jump f r o n t h e p l a t e a u of 11
percent i n 1976-78.
S u b s i d i e s f o r g a s o i i n e , cenenc;. food, and p u b l i c u t i l i t i e s rose f r o n
TTS264 m i l l i o n i n 1978 ( 3 7 e r c e n t of GDP) t o ITS860 m i l l i o n i n 1381 (5 percent
of GDP). Using a wider d e f i n i t i o n t h e new prime m i n i s t e r e s t i m a t e d
s u b s i d i e s a t TTS1.3 b i l l i o n i n 1981 (Chambers, 1982). This represented one
t h i r d of o i l revenues: s e e Figure 3. I n 1982 g a s o l i n e s o l d f o r US$0.32 a n
imperial g a l l o n while the ex-refinery c o s t was cuice t h a t and the pump c o s t a
w a s USS1.64 (!-liniscer of S t a t e E n t e r p r i s e s 1982). With l i t t l e i n c e n t i v e t o
economize, g a s o l i n e s a l e s increased from 0.75 m i l l i o n b a r r e l s i n 1972 t o 2.7
n i l l i o n i n 1981.
46. The "Dutch Disease: Weakening of Non-oil Tradeables
Real output of t h e mining s e c t o r a t 1970 p r i c e s f e l l by 4 percent
during the second o i l boom; t h a t of a g r i c u l t u r e by 10 percenc and thac uf
nanufacturing by 5 percent. The share of nonmining tradeables i n nonmining
GDP s l i p p e d f u r t h e r behind its Chenery-Syrquin n o m , as shorn i n Figure 4;
tha: of a g r i c u l t u r e f e l l t o 3.3 percenc and t h a t of manufacturing (including
r e f i n i n g ) t o 17.7 percent. The divergence between Trinidad's s e c t o r a l output
p a t t e r n and its norm was g r e a t e r than t h a t of any of the above comparator
c o u n t r i e s : Gelb, 1984. I n d u s t r i a l production f a l t e r e d a s high domestic
i n f l a t i o n p l u s t h e l i n k with t h e a p p r e c i a t i n g U.S. d o l l a r ~r.4ed.
competitiveness and appreciated the r e a l exchange race eo 12$ by 1981 ( f r o n
t h e 1970-72 base of 100). Several l a r g e manufacturing f l m s vent out of
business i n 1981 (Central Bank, 1981).
Wage trends and l a b o r s u b s i d i e s were i n p o r t a n t c o n t r i b u t o r s to t h e
d e c l i n e of nonoil tradeables. The s p e c i a l works program (T)E'H'U) spent an
e s t i n a t e d TTS110 inillion i n enploying 50,OUU people rn 1980 (about 10,000
people a t any given t i a e i n t n a t year). Vork was l i g h c (two nours a day) ana
wages were high a t TT$20 a n hour. This a t t r a c t e d workers p a r t i c u l a r l y r r o n
a g r i c u l t u r e : 1-UB, 1983. There is l i t t l e evidence thac ~EWil's work Gas weJ.1-
conceived o r t h a t i t made a 6 s i g n i f i c a n t supply-side contribucion t o outpuc.'
Vage i n c r e a s e s were i n c r e a s i n g l y divorced from p r o d u c t i v i t y and the a b i l i t y of
-
employers
i
-
LO ?ay. The I n d u s t r i a l Court Lacked conpecence to d g t e m i n e the
-
f i n a n c i a l x i a b i l i t y of s e t t l e m e n t s , so thac wage agreeme:lcs ouLstripped
p r o d u c t i v i b . i n 1977-81 i n d u s t r i a l . la.bor productivity excluai?& o i l and sugar
grew by approximately 2.4 percent a s r e a l .,rages rose by 5 percent a year.
Over the same period p r o d u c t i v i t y decreased 10 percent a year i n s u g a r , 4.3
percent i n o i l r e f i n i n g , and 2.1 percenc i n c h e n i c a l s .
The p u b l i c s e c t o r wage b i l l was TTS3.1 b i l l i o n i n 1982, almost twice
chat of 1981 and four times t h a t of 1978, though revenues had been p r o j e c t e d
t o drop and a d e f i c i t of TTS3.3 b i l l i o n (almost 14 percenc of G3P) was
f o r e c a s t . The f i s c a l d e f i c i t averaged 67 percent of o i l revenues i n 1982-
83. Across t h e economy, 1983 pay n e g o t i a t i o n s Gere heavily i n f l u e n c e d by t h e
i n f l a t i o n a r y s p u r t from t h e second o i l boom. Three-year sett;lenents c a l l e d
f o r a minimum of 42 percent i n c r e a s e i n two o i l companies; f o r 50 percenc i n
t h e Water and Sewerage Authority; f o r 65 percent i n the P u b l i c Telep.hone
,.,
company; f o r 62-80 percent f o r government s a l a r i e and f o r 94 percent I n t h e
sugar i n d u s t r y ( C e n t r a l Bank, 1982). The t r e n d of i n c r e a s i n g r e a l wages,
p a r t i c u l a r l y i n sugar, is shown i n Figure 2, a s is t h e r e a l exchange r a t e
which a p p r e c i a t e d f u r t h e r , .to a n average of 150 i n 1982-83.
The Collapse of . \ g r i c u l t u r e . Even b e f o r e t h e s t a t e began t o a c q u i r e
sugar o p e r a t i o n s , s t r o n g unions had captured much of the b e n e f i t s f r o a
economies of s c a l e i n t h e l a r g e , foreign-owned p l a n t a t i o n s . The r e s u l t i n g low
p r o f i t a b i l i t y discouraged f u r t h e r investment: huty, 1976. I n 1970 and 1975
T a t e and Lyle, uhich was r e s p o n s i b l e f o r nine t e n t h s o i T r i n i d a d ' s sugar
c a p a c i t y , withdrew and sugar became state-owned. This e l i m i n a t e d the t h r e a t
of c l o s u r e &d '* high p r o f i t s i n t h e 1974-75 s u g a r soou m d e t h e unions nore
-
denanding. --'&en the government completed purchase it conceded a 100 percent
pay r i s e t o S u g a r workers who had forced s e v e r e s t r i k e s when t h e i t acquired
-
n a j o r i t y ownershi? i n 1970.
From t h e t i m e of t h e f i r s t o i l boom sugar production had f a l l e n
i n c r e a s i n g l y s h o r t of t h e i n d u s t r y ' s 220,000-ton c a p a c i t y . dy 1979 it had
f a l l e n :o two t h i r d s and by 1981 t o one t h i r d of capacity: s e e Figure 4 . At
t h e sane time r e a l wage r a t e s r o s e by 30 percent b e t r e e n 1975 and 1981. I n
1979 c o n s u l t a n t s e s t i m a t e d t h e c o s t of sugar production i n Trinidac. and Tobago
a t US$445 a t o n compared t o USS240 i n A u s t r a l i a ( L a n d e l l H i l l s 1979). But
t h a t study used unduly f a v o r a b l e assumptions; t h e a c t u a l c o s t of production
was about $800 a ton. By t h e e a r l y 1980s y i e l d s had i a l l e n t o 3.7 t o n s of
s u g a r per h e c t a r e , one t h i r d of y f e l d s i n A u s t r a l i a and one half t h e l e v e l of
two decades e a r l i e r i n Trinidad and Tobago. By 1983, Caronk. sugar .was
re.:eiving an e s t i m a t e d TT$300 m i l l i o n a y e a r i n s u b s i d i e s (9 p e r c e n t or o r 1
revenues) while its average c o s t s were f i v e times those of a reasonably
e f f i c i e n t producer. R a t i o n a l i s a t i o n w a s p o l i t i c a l l y d i f f i c u l t because most of
t h e 30,000 workers : d i r e c t l y and i n d i r e c t l y dependent on sugar were Indian.
Other export c r o p s , notably c i t r u s , a l s o d e c l i n e d s u b s t a n t i a l l y d u r i n g che o i l
booms.
Imports i n c r e a s e d t h e i r s h a r e of domestic food s u p p l i e s from 70
percent :o 90 percent over 1976-80 ( > f i n i s t r y of A g r i c u l t u r e 1983). The
governnent had planned t o s h i f t resources from e x p o r t t o domestic crop
production, but more than a decade af ter t h a t decisio21, 70 percent of t h e
a r a b l e land remained i n export crop production and t h e poorly p e r f o m i n g
e x p o r t s e c t o r received n o s t of t h e subsidized farm i n p u t s . I n 1983 T r i n i d a d
and Tobago produced one f i f t h of i t s r i c e needs f r o n r a m s chat dveragea 0.5
h e c t a r e s , y i e l d e d about 2 tons per & c t a r e and took only one crop a n n u a l l y .
i n t h a t year t h e domestic s e l l i n g p r i c e f o r rice yas US$S17 a ton; t h e
s u b s i d i z e d p r i c e guaranteed t o f a r a e r s was USS825 which w a s s a i d t o be
i n s u f f i c i e n t t*>cover c o s t s ( A g r i c u l t u r a l S t a t i s t i c s O f f i c e 1983). I n
c o n t r a s t , mechanised r i c e farms i n Suriname could provide income over U S ~ ~ U O U
p e r h e c t a r e a t i n t e r n a t i o n a l l y c o m ~ e t i t i v ep r i c e s i n about 25 uanaays (one
t h i r d the l a b o r r e q u i r e d i n T r i n i d a d and Tobago) and a t lower u n i t l a b o r
c o s t s .
Reversing O i l Dependence 3y 1981 proven recoveranle o i l r e s e r v e s
were e s t i n a t e d a t 603 m i l l i o n b a r r e l s or ten-years supply, and oj.1 p r i c e s were
f a l l i n g . Xs l a t e a s the middle of 1981 gas-based i n d u s t r i e s were projected t o
y i e l d enough revenue t o o f f s e t t h e d e c l i n e i n o i l u n t i l LXG exports and t h e
downstream i n d u s t r i e s could be developed i n t h e l a t e 1980s (Rampersad
1981b). At 1983 l e v e l s of prL-duction, proven gas r e s e r v e s represented 54-
y e a r s ' supply and probable r e s e r v e s could extend c h i s t o 70 years. The
proposed l a r g e LSG export p r o j e c t had a l e a d t i m e of f i v e t o six y e a r s , s o
t h a t much depended on t h e p e r f o m a n c e of t h e f i r s t round or Point L i s a s gds-
bas2d projects coning on stream.
V. GAS-BASED IXDUSTRIALIZXTION
5 . 1 . The Appeal of Gas-Based I n d u s t r i a l i z a t i o n " '
The f i r s t Phi4 government encouraged c a p i t a l - i n t e n s i v e exporc p r o j e c t s
-
while p r o t e c t i n g i n p o r t - s u b s t i t u t i ~ g industry. The f i r s t gas-based factcr:?
Q
-
-
b u i l t i n the l a t e 1950s near P o i n r L i s a s produced f e r t i l i z e r f o r export. I n
1966 t h e Point i i s a s I n d u s t r i a l ~ e y e l o ~ m e nCorporation was forned t o pronote
t
gas-based in dust^ but najor developcent did not cone u n t i l the f i r s t o i l
boon.
I n 1974 t h e g o v e r m e n c s of Trinidad and Tobago, Jamaica, and Guyana
agreed t o conduct f e a s i b i l i t y s t u d i e s of a jointly-owned s m e l t e r a t Point
Lisas. .L?lOCO had put f o r t h an a l t e r n a t i v e p r o p o s a l f o r an LXG p l a n t chat
would have absorbed the g r e a t e r p a r t of gas r e s e r v e s while y i e l d i n g USs15
m i l l i o n i n tax revenues-less t h a n one q u a r t e r of o i l revenues a t t h e t i m e
( X i n i s t r y of ?o-troleurr. 1971). The ?iiZOCO prop0s;rl r-Jas r e j e c t e d i n favor of
gas-based i n d u s t r y , but t h e r e is no evidence t h a t t h e a l t e r n a t i v e s v e r e
s y s t e u a r i c a l l y ccnpared. Though t h e government d i d envisage 50 labor-
i n t e n s i v e douns t ream process i n g p l a n t s , c a p i t a l - i n t e n s i v e heavy i n d u s t r y was
t o dominate t h e f i r s t decade ~f Point L i s a s ' s development ..
Gas-based p r o j e c : ~ wer2 j u s t i f i e d on t h e grounds t h a t they could ( i )
a t t r a c t o u t s i d e f i n a n c i n g a t f a v o r a b l e L n t e r e s t r a t e s ( l e a v i n g o i l revenues
f o r o t h e r uses: Government financed only one t h i r d of t h e average v e c c u r r ) ,
(:i) g e n e r a t e n e t f o r e i p exchange earnings and ( i i i ) provide s u b s t a n t i a l
revenues through taxes arid r e t u r n s on s t a t e e q u i t y . Though they p r o a i s e d few
permanent jobs, c o n s t r u c t i o n em?loynenc, the l a b o r demnds of t h e Fro j e c t e i
downstream f a c t o r i e s and t h e p e m n e n t pool cf s k i l l e d n a t i o n a l s t o be
generated by t h e p r o j e c t s v e r e considered a s benef its (!EC 1981). But a l s o
important was a s t r o n g n a t i o n a l i s t dppeal i n t h e ?rospecc of l e a p i n g from a
p l a n t a t i o n ecoqomy t o a technol.ogicallq s o p h i s t i c a t e d s t a t e . Secause of t h i s ,
t h e government ignored t h e n a i n disadvantages of gas-based i n d u s c r i a l i z a c i o n :
( i ) j.t p r o j e c t e d the p r o b l e m of a n i n e r a l econoEy i n t o enclave i n d u s t r i g 1
---
?
diversification, (Fi) it postponed r e f o m in the nonhydrocarbon seccors and
-
(i i i ) it depended on Arolatile external narkecs
. .
I a 1975 t h e governnent concluded a g r e e n e n t s x i c h W . d . Grace co build
a l a r g e annonia p l a n t and with r h r e e s t e e l f i n s :o c o n s t r u c t a DXI/sceel
u n i t . I n 1976 it agreed t o a j o i n t h o c o f e r t i l i z e r plant. L a t e r lt explored
proposals f o r an aluminm s n e l t e r with National Southwire, an LNG terminal
w i t h Tenneco and a d c o n , a urea p l a n t with Agrico-Chemicals and a methanol
f a c i l i t y with Borden. Bot a l l schemes were implemented before t h e second o i l
boom w a s punctured.
Gas-based p r o j e c t s a r e highly c a p i t a l - i n t e n s i v e . This r a i s e s pressure
f o r premature e n t r y when i n f l a t i o n is expected t o be high and r e a l i n t e r e s t
r a t e s law, a s over t h e mid-1970's. X t y p i c a l vencure such a s t h e rnethanol
p l a n t might have a t h r e e year c o n s t r u c t i o n period and be two t h i r d s loan
. ..,
. .
financed. Repayment would be over 8 years durir.ug Ghich t i n e - C h e . . . p C a ~ ~ r + ~ . : r l d
be depreciated. Thereafter government would o-.-.-Ckr: : >hin~,:+ .~8&&.; .5311ld, be
. .
expected t o l a s t f o r anocher 10-20 years and would be a b l e t o undercut new
p l a n t s b u i l t at higher prices and facing l a r g e c a p i t a l charges.
5.2 Problens of Entry: t h e Case of S t e e l .
I n 1977, a f t e r withdrawing from the planned j o i n t s t e e l venture the
government began its own venture through ISCOTT. It called for a plant witn
750,000 tons sf b i l l e t and a 450,000 t o n DRI u n i i with a scrap complement.
3ut a n t i c i p a t i o ~ sof scrap shortages prompted the a d d i t i o n of a second D R I
I L
u n i t , adding 25 percent t o c o s t s and unbalancing t h e production chain. The
second D R I u n i t and a construction-cost
- overrun of 30 percent r e s u l t e d i n a
-
f i n a l c a p i t a l c o s t o@L:S$500 n i l l i o n , requiring s u b s t a n t i a l new financing a t
-
high i n t e r e s t r a t e s .
!e
Since t h e domestic m r k e t was only 60,000 tons, two t h l r d of
production was targeced t o the southeastern United Scates where efficient
n i n i - n i l l s a r e among the a o s t competitive i n t h e world (!3arnetc and scnursch
1983). ISCOTT'S u n i t c o s t s a s s m i n g f u l l c a p a c i t y f o r t h e f i r s t DKI u n i t and
80 percent c a p a c i t y f o r t h e b i l l e t p l a n t were US$ &LO/tonne coopared t o US$
270/tonne f o r t h e n i n i n i l l s . A m r k e t i n g survey had warned t h a t ISLOTT woula
need t o r:qdercut its U.S. c o m p e t i t o r s by 1 5 p e r c e n t , but a s u c c e s s i u l 19b2
anti-dumping s u i t imposed a 14 p e r c e n t penalty o n ISCOTT (Chambers 1984).
T h i s l e f t t h e p l a n t w i t h t o t a l l y inadequate markets and annual. c a p i t a l charges
of more t h a n USS100 m i l l i o n . The worst-case p r o j e c t i o n f o r ISCOTT q u i c k l y
became o v e r l y o p t i m i s t i c ; cumulative los'ses t o A p r i l 1982 were almost TT$400
m i l l i o n , e q u a l t o one f i f t h of 1979 o i l revenue (Caribbean Contact 1982). I n
1983 t h e governnent was r e p o r t e d t o be c o n s i d e r i n g mothballing t h e p l a n t .
The unexpectedly s e v e r e world r e c e s s i o n t h a t began i n 1 9 8 1
i n v a l i d a t e d r e z l i n t e r e s t rate, r e l a t i v e - p r i c e and demand p r o j e t ; i ~ ~ ~ r ,AS ~ +
late a s 1980 t h e OECD was f o r e c a s t i n g t h a t g l o b a l s t e e l consumption would
almost double t o 1400 n i l l i o n t o n s by t h e y e a r 2000. Xore r e c e n t p r o j e c t i o n s
i n d i c a t e a rise of only 20 p e r c e n t , t o 900 d l l i o n tons, w i t h almost a l l t h e
r e d u c ~ i o nfrom i n d u s t r i a l c o u n t r i e s ( B a r n e t t and Schorsch 1983). Slarginal,
exporz-oriented new p l a n t s such a s ISCOTT's were t h e a o s t s e r i o u s l y a f f e c t e d .
T r i n i d a d and Tobago would have had a second c r i p p l i n g i n v e s t s e n t had
it proceeded with plans for a 150,000-ton a l u n i n u n smelzer. I r o n i c a l l y t h e
p r i n c i p a l reason f o r abandoning t h e p r o j e c t was t h e government's i n p a t i e n c e
L
w i t h t h e l a c k of progress i n e n t e r i n g t h e i n d u s t r y i n tise t o capcure t n e
widely-anticipated boom i n aluninirnum p r i c e s . By 1980 t h e government vas
c l o s e t o zgreement on a j o i n t v e n t u r e w i t h N a t i o n a l Southwire f o r a US$500
-
a i l l i o n s m e l t e r :o s t a r t up in 1984. It equired an estimated n e t a l ?rice of
6
-
USS0.92 a pound i n 1982 d o l l a r s , b u t i n 1982 t h e ? r i c e of a l u n i n u n c o l l a p s e d
t o USSO.S3 a pound and excess c a p a c i t y nay persis: i n t o the 1980s (Vais
1982). The prudent d e c i s i o n n o t t o proceed s u g g e s t s a n important r o l e f o r
p r i v a t e e q u i t y parzners i n heightening the s e n s i t i v i t y of s t a t e c o r p o r a t i o n s
t o r i s k .
5.3 Ranking t h e Options: Comparative Returns from Gas-Based I n d u s t r y
Table 1 compares t h e seven gas-based p r o j e c t s b u i l t , under
c o n s t r u c t i o n , o r proposed f o r P o i n t L i s a s by the end of t h e second o i l boom.
A11 c o s t s a r e based on i n d u s t r y e s t i m a t e s of t h e o p e r a t i n g c h a r a c t e r i s t i c s of
the P o i n t L i a a s p l a n t s . These c o s t s a r e expressed i n 1982 US d o l l a r ; ; they
t o t a l f o u r and a half t h e 1980 o i l windfall. E s t i n a t e s assume t h a t t h e
p r o j e c t s o p e r a t e a t designed c a p a c i t y .
I n columns X and B t h e netbacks on gas i n p u t s r'sc- ~<a:2$3 t ~ j e c tdr-4
c a l c u l a t e d by assuming a 20 percent pre-tax accounting r a t e of r e t u r n on
e q u i t y and, r e s p e c t i v e l y , 1982 and "long run" p r i c e s of o u t p u t l / The c o s t s
of gas e x t r a c t i o n and g a t h e r i n g n u s t still be deducted i n o r d e r t o a r r i v e a t
a n e s t i m a t e of t h e r e s i d u a l r e n t on gas. The e s t i n a t e s of Table 1 should be
used mainly f o r cciuparison. They stow t h a t t h e proposed LEG p l a n t promises
t h e h i g h e s t netbaclc on gas followed by methanol and amnonia p l a n t s . A t 1982
p r i c e s the o t h e r products, notably n e t a l s , do not y i e l d a p o s i t i v e netback.
A t long-run p r i c e s netbacks excluding LXG average US$l. 1,5 p e r ,;CF, a r e Lowest
I
f o r the n e t a l s and negative f o r s t e e l . The proposed LNG schene is d i s c u s s e d
below.
-11 The nethod of comparison h e r e b u i l d s on a 1975 study of gas-based i n d u s t r y
i n the Persian/Arabian Gulf ( S t a u f f e r 1975).
Table 1: Actual and P o t e n t i a l Gas Netbacks f o r Gas-'dased 1n.dustry
i n Trinidad and Tobago, 1982
%jar Hetals
D R I 12.5 12.68
St e e l 19.9 26.98
3
lllurniniUm 128.0 16.24
'
Chemicals
h o n i a 33.0 13.37
Urea 23.8 1.47
Nethano1 29.3 14.09
Gas Export
L N G ~ 59 .O 8.69
Source: Auty (1983)
Noce: 1. Total investment divided by t o t a l XCF consumed per annun.
2. Gas aetback = r e s i d u a l payment to gas a t wellhead a f t e r
deducting 20% pretax r e t u r n on e q u i t y and a l l other c o s t s
exclusive of gas input.
P r i c e assumptions:
(US$/Ton)
1982 P r i c e s Long Kun P r i c e s
DRI 100
St e e 1 275
XLumin ~ m 1102
Ammonia 130
Urea 130
Xethan01 240
Gas 4 .j/?ICF
3 Proposed p r o j e c t s
Natural gas production and gathering c o s t s vary g r e a t l y by f i e l d and
s c a l e . For l a r g e 3 i d d l e Eastern and North .A�rican f i e l d s they may be USS0.25
per XCF. For Trinidad and Tobago these c o s t s a r e more d i f f i c u l t t o determine
because of geological differences between gas f i e l d and v a r i a t i o n s i n the
t h i n g of sunk investments. I n 1982 d o l l a r s , gas from Trinidad and Tobago's
southeast c o a s t a l f i e l d cost l e s s than USS0.60 per MCF; estimates f o r t h e
c o s t l i e r north c o a s t f i e l d s i n deeper warers and i n more dispersed r e s e r v o i r s
range up t o US$3.00 per HCF. Clearly much of Trinidad and Tobago's gas is
high cost. At 1982 p r i c e s , only t h e LNG p r o j e c t shows 2 s i g n i f i c a n t p o s i t i v e
r e n t . I n u n i t s of heat value, r e t u r n on gas even a t long-run p r i c e s is very
low r e l a t i v e t o o i l .
Despite r e s e r v a t i o n s abouz gas-based lnius%rl&&qation, Turqss lad,
Seade, 1979 argued I n I t s favour. They pointed t o e x t e r n a l i t i e s of such
p r o j e c t s i n t r i g g e r i n g more broadly based i n d u s t r i a l i z a t i o n and expansion of
L."
domestic 5 :ills. S t a u f f e r , 1975 considered the case f o r gas-based
i n d u s t r i a l i z a t i o n s t r o n g e s t where-as i n Trinidad and Tobago--oil reserves
were small and gas mostly non-associated. But even a t long-run p r i c e s , the
gas-based i n d u s t r i e s b u i l t o r under construction i n Trinidad ana Tobago a r e
unlikely t o c o n t r i b u t e more than 20 percent of the country's t o t a l 1982
exports and w i l l y i e l d l i t t l e n a t u r a l r e n t on gas. The proposed LSG project
4 L
has therefore assumed c r i t i c a l isportance a s the best prospect f o r a l l e v i a t i n g
overdependence on t h e shrinking o i l s e c t o r . -
-
Wheras .4noco's proposal gas costed a t tiS$275 n i l l i o n i n @71 d o l l a r s
the T e n n e c o / ~ ~ d c oproposal made i n the l a t e 1970s was costed a t &$2.5
n
E !c
b i l l i o n i n 19g8 d o l l a r s , t h e t a r g e t year f o r start-up. After a l l o c i n g f o r
i n f l a t i o n , the d i f f e r e n c e i n s i z e between the two p r o j e c t s and a reported c o s t
underestimate i n t h e 1971 scheme, t h e c o s t s a r e comparable: NEC, 1979. While
ISCOlT involved a t o t a l cap3.tal investnent equal t o l e s s than LO percenc of
Trinidad and Tobago's 1982 GDP the c o s t of the LVG proposal a y be about 80
percent of t h a t f i g u r e . Although a s e r i e s of o b s t a c l e s have delayed a c t i o n
t h e scheme is t h e only one capable of e x p l o i t i n g n o r t h coast gas f i e l d s by
moderating t h e i r high c o s t s i n a 50150 n i x with lower-cost gas from t h e
s o u t h e a s t coast. The average gas c o s t ac the vellhead would then be aoout
USS2.25 per XCF, not f a r above the netback f r o n 1982 L A X p r i c e s Fn Table 1.
Under long-term m r k e t i n g conditions the scheae would a l s o generate t v i c e the
cash flow of the other gas-based p r o j e c t s and s t a b l e LXG c o n t r a c t s would be a
b u f f e r a g a i n s t nore c y c l i c a l exports. But only i f t h e p r i c e 02 L::G is above
t h a t assumed f o r the e s t i n a t e s i n Table 1, o r it cij~.>s ~f .~xr,racs5i~w &Pe
lower, would any t r u e rent accrue t o the government. The prices compare t o
t h e $4.50 border p r i c e f o r Mexican and Canadian gas i n 1982, the $2.80-$3.40
range f o r new wells i n the United S t a t e s and $7.30 f o r deep gas i n t h e United
S t a t e s . The main r o l e of LXG is t h e r e f o r e t o enable government t o o b t a i n a
posssibly high, though r i s k y , r e t u r n on domestic investments; only an LiiG
p r o j e c t using gas from the o l d e r , cheaper, f i e l d s would have generated a Large
r e n t component .-11
*
-I / The e s t i n a g d c o s t s of gas e x p l o r a t i o n and gas &athering d i f f e r oy a r a c i o
of about 10-to 1. Yuch of the discrepancy l i e s i n the uncertainty of
exploring and gathering and i n t n e nore s c a t t e r e d f i e l d s co oe prospected
i n the l a t e r proposal. These f i e l d s a l s o Lie i n deeper x a t e r chan tne
f i r s t generation of gas f i e l d s .
V I . CONCLUSION.
The experience of T r i n i d a d and Tobago over t h e Last decade
i l l u s t r a t e s t h e p o l i t i c a l and economic o b s t a c l e s t o avoiding i n c r e a s e d
dependence on n a t u r a l r e s o u r c e r e n t s . D e s p i t e i n i t i a l l y c a u t i o u s f i s c a l
p o l i c y , t h e p o l i t i c a l need t o d i s t r i b u t e r e n t widely a c r o s s t h e economy l e d t o
t h e r a p i d grovth of s u b s i d i e s t o consumers, l a b o r and f a i l i n g firms. Tnis u s e
of t h e w i n d f a l l was e s p e c i a l l y pronounced r e l a t i v e t o t h a t of cooparator
c o u n t r i e s , because of T r i n i d a d ' s d e n o c r a t i c p o l i t i c a l system and t h e
v u l n e r a b i l i t y f e l t by t h e government t o organized p r o t e s t a f t e r 1970. While
r e a l consumption b e n e f i t e d from s u b s i d l e s and p r i c e c o n t r o l s , t h e s e , t o g e t h e r
with wage i n c r e a s e s , r e a l a p p r e c i a t i o n and t h e extensi-on- ,d?' "public odnets h i p
undernined a g r i c u l t u r e and manufacturing, t h e s e c t o r s producing nonhyarocarbon
t r a d e a b l e s . Windfalls financed t h e pos tponenent of fundamental change needea
t o a r r e s t a g r i c u l t u r a l d e c l i n e and improve manusacturing's.coapetitiveness.
I..
Over 1972-81 c o n t r a c t i o n i n t h e s h a r e of nonnining t r a d e a b l e s i n nonmining bDP
r e l a t i v e t o its n o m was t h e g r e a t e s t i n t h e s a n p l e of comparator c o u n t r i e s .
Thus, although T r i n i d a d and Tobago ended the second o i l boom with
SUS2.6 b i l l i o n i n n e t a s s e t s abroad its econony was f a r nore oil-dependent
than e v e r before, a s revealed by t h e magnitude of f i s c a l and c u r r e n t account
r L
d e f i c i t s i n 1982-83. Its attempts to diversify had emphasised gas-based
i n d u s t r y , t h e r e t u r n s on much of which, e s p e c i a l l y s t e e l , promised t o be
-
-
low. Eagerness t o spend oil'jrevenues l e d t h e government t o downplay t h e r i s k
involved i n such l a r g e p r o j e 8 t s and t o "go it alone" which conpounded
h
n a r k e t i n g problems when demafld f o r e c a s t s proved t o be o v e r o p t i n i s t i c because
it had no dounstrean foreign partners. Gas-based i n d u s t r y has pre-enpted
cheaper gas from LNG--the one p r o j e c t which could have y i e l d e d a p p r e c i a b l e
r e n t , t o supplement t h a t f r o n o i l .
R e l a t i v e t o o t h e r o i l c o u n t r i e s T r i n i d a d ' s experience over the o i l
booms has nad some p o s i t i v e f e a t u r e s . Its citizens have reaped large
consumption g a i n s and i t ended with a s u f f i c i e n t reserve cushion t o a d j u s t
smoothly t o f a l l i n g o i l revenues. The danger over the nexs few y e a r s i s t h a t
p o l i t i c a l c o n s i d e r a t i o n s w i l l s o slow t h e adjustment process t h a t t h e councry
e n t e r s i n t o crisis a s have t h r e e of its f i v e comparators, Ecuador, Nigeria and
Venezuela.
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