Tuesday, 30 June 2015

Trinidad and Jamaica should Reconsider Strategic Alliance in the Mineral Sector

William Demas – former Head of the Economic and Planning Division of the Government of Trinidad and Tobago – compared the 5-year national plans of Jamaica and Trinidad and Tobago (T&T) in his book The Economics of Development in Small Countries, first published in 1965, and noted that:

“...both plans anticipate a slow-down in the rate of growth of G.D.P. as compared with the 1950’s. In both cases growth rates of G.D.P. of 5 per cent are projected..., in both cases, the slow down in the rate of growth of G.D.P. is the result of the anticipated slowing down in the rate of growth of the mineral export sectors to 3 per cent – bauxite in Jamaica and petroleum in Trinidad.”

The existence of relatively cheap oil imports as prevailed in the 1950s through to the OPEC action in 1973 factored in Jamaica’s economic growth.  But, the international oil market has changed.  Oil prices have hovered around US$100 per barrel since the end of the last decade and prices of US$150 – US$200 per barrel are projected on recovery from the global recession. 

The Jamaican dollar devalued by an average annual rate of 212.6% from 1970-2005.  From 1990-2006, GDP grew 1.1% on average while energy use grew 2.5% per annum.  In 2006, the value of oil imports amounted to 87% of export earnings.

Zia Mian, a retired senior World Bank official and international energy consultant, states in an article titled “Jamaica’s Energy Challenge – part III”, in the Sunday Gleaner dated 30 March 2008, that: “Jamaica’s economy is relatively energy intensive.  Per capita energy consumption is estimated at over 10 barrels of oil equivalent (boe)”. 

Jamaica has one of the highest rates of energy consumption in Latin America and the Caribbean region.  This is mainly due to the heavy usage of energy by its bauxite/alumina sector.  Jamaica operates four alumina refineries. All of these use oil to convert bauxite to alumina, which is then shipped to smelters overseas for further processing to aluminium.

Oil is the most significant cost involved in producting alumina. According to data from the Jamaica Bauxite Institute, Fuel/Energy represented 40% of the operating cost of producing alumina in 2009, when operating costs were US$ 217.40/metric tonne; and 52% in 2012, when operating costs were US$ 345.80/metric tonne.

Carlton Davis, author of Jamaica in the World Aluminium Industry 1938 – 1973, former Cabinet Secretary and chairman of the Jamaica Bauxite Institute, stated in an article entitled: “Energy Cost and our Economic Future – Future of Alumina Sector Hinges on Energy Cost”, in the Mona School of Business Nov/Dec 2011 issue, that:

 “Given the importance of the cost of energy in the production of alumina and the consensus that oil will be more expensive over the long-term than natural gas or coal it is incumbent that oil is replaced by one of these two fuels.  However, it is necessary for the industry to increase the efficiency of whatever fuel is used.  Given what is at stake the Government has a lead role in affecting this transformation.”

According to the Economic and Social Survey Jamaica 2012, export earnings from the bauxite/alumina sector declined by 11.5% in 2012: crude bauxite by 7.5% and alumina by 12.4%.  This decline was partly due to the “global slow down associated with the European debt crisis” but also the result of:

·         Lower alumina prices, where Jamaica could not compete due to its relatively high cost plants; and

·         Increased global competition from newly commissioned, more efficient, alumina plants.

Two of Jamaica’s refineries are slated to be converted to coal-fired electricity generating plants in the near future; and the remainder converted for use of natural gas. According to Carlton Davis, “...data from the alumina sector indicates that using natural gas would require less capital investment than coal”. Conversion of a plant from oil to natural gas would cost US $30 million, while conversion to coal costs US $250 million.

Zia Mian also states in an article entitled “Cross-Caribbean Energy Link-Up”, in the Sunday Gleaner dated 29 September 2013, that: “After T&T informed Jamaica that it had no gas to honour its commitment to supply 1.125 tonnes of LNG per annum to bauxite and power sectors, I developed and suggested an interim gas-supply option. This option was predicated on trilateral cooperation among Jamaica, T&T and Venezuela”.

The objective of this initiative was to purchase natural gas from Venezuela, have it liquefied in Trinidad, and ship it to Jamaica. In September, Trinidad signed a bilateral agreement with Venezuela to resolve their border issues and share natural gas from fields which lie on those borders. This “recent bilateral deal has reopened the opportunity for Jamaica to buy natural gas from Venezuela and liquefy it in T&T”.

In fact, “T&T’s United States LNG market is now minimal and T&T has been selling LNG to Far Eastern markets”, and “the costs of transport to those destinations are generally high”. So, a strategic alliance between Trinidad and Jamaica at this time could prove mutually beneficial.

A World Bank project has been underway in Jamaica for some time now to support the development of a regulatory environment for introduction of natural gas.  The preferred fuel for the recently tendered 360 MW generating plant is natural gas; and, one of the bidders intended to source this fuel from Puerto Rico, which would have meant Jamaica would have been getting Trinidadian LNG via Puerto Rico.

In this regard, I support Zia’s recommendation that Trinidad and Jamaica “must give this opportunity another  try and see if it could reduce the cost”, though I would add not only in electricity generation, but also in alumina production.

In the 1960’s, the only endeavour cheap oil did not allow Jamaica was to have its own aluminium smelters; though there was a proposal in the 1970’s to have Jamaica’s bauxite shipped to smelters built in locations such as Trinidad. The more recent cancellation of Trinidad’s Alutrint smelter complex should not end further collaboration between these two nations in the mineral sector. Both nations, in Jamaican paralance, need to “wheel and come again”.

Related articles:
Could the ‘Singapore Experience’ have started in Trinidad?
Singapore: Lesson to Jamaica

Paul Hay is a Jamaican national, founder of PAUL HAY Capital Projects: a consultancy, based in Kingston Jamaica, with a vision of providing strategic planning and implementation services to organizations for non-residential facilities in the Caribbean.

Friday, 12 June 2015

Could the ‘Singapore Experience’ have started in Trinidad?

                  Figure 1: Real GDP per capita, 1996 US$ [Source: Penn World Estimates of Real GDP per Capita]

Lee Kuan Yew, Singapore’s first Prime Minister, died on 23 March 2015; and on 29 March 2015, the Straits Times published an article titled “The Singapore That Lee Kuan Yew Built” which stated that he “...foretold the transformation of the country from a tiny slum-ridden trading post ...” back in 1959.

On 1 April 2015, another article in the Straits Times, titled “Interactive Map: How Twittersphere Reacted to News of Mr. Lee Kuan Yew’s Death”, stated that over 1.2 million related tweets were sent in the week preceding his death. Unwittingly, I may have contributed to this statistic.

A Trinidadian Information Technology professional had posted one of my articles “Singapore: Example to the Caribbean in Doing Business” with the comment “Caribbean leaders think they can cut and paste Singapore success story here, they need (sic) address productivity and innovation first”.

I don’t know if he actually read the article, but we tweeted at length on the matter and I advised that transformation was a slow process and “Lee Kuan Kew (sic) was in power for over 30 years to oversee Singapore’s development”. Shortly thereafter, I received a tweet that Lee Kuan Yew was dead.

 His leadership of Singapore has been chronicled in his book From Third World to First – The Singapore Story: 1965 - 2000. In this, he describes a meeting in 1980 between Jiang Zemin, then mayor of Shanghai, China, and Ng Pock Too, then director of Singapore’s Economic Development Board (EDB).

Jiang, who would later become China’s President, was studying how Singapore’s EDB developed special economic zones and attracted foreign direct investment (FDI). Jiang had commented that China could provide all the amenities cheaper than Singapore, but then enquired: “What is the secret formula?”.

In response, Ng explained “...the key importance of political confidence and economic productivity”. Lee further explained in the text that “There was no danger of confiscation. Our workers were industrious and productive, and there were minimal strikes”.

So, the productivity of Singapore’s workforce did play a part in its development, but there was much more. The article tweeted actually examined the World Bank and International Financial Corporation’s “Doing Business 2013” Report, which ranked nations with regard to 10 performance indicators.

Singapore was ranked first overall; and Trinidad and Tobago, the highest ranked Caribbean-Community nation at the time, ranked 69th. In the 1960s, both had similar economic structures, history, and institutions. But since 2007, Singapore has been one of the 5 most competitive nations in the world.

Again in the 1960s, both planned economic development by import substitution industrialization (ISI). To overcome the limitation of its small market, Singapore also pursued a common market with the much larger Malaysia. By the mid 1960s, its growth was erratic, alternating between 4 – 14 percent.

ISI was typically advocated and promoted by colonial administrations. It involved import substitution supported by tariffs and import quotas. In theory, this protection was to be reduced as the domestic manufacturing sector became internationally competitive. But in practice, this was rarely done.

 Initially, Singapore’s per capita income was as low as US$ 2,161 and its infrastructure was very poor. The economy was poorly diversified and poorly integrated globally. Capital was scarce, and there was hardly any FDI. But, a single party ruled the nation for decades, just as Trinidad and Tobago.

Singapore’s traditional entrepĂ´t-trade, related supporting services and processing industries, were declining because direct routes had opened up between markets of the developed world and the other Southeast Asian nations.

In contrast, Trinidad and Tobago had the highest per capita income in the English-speaking Caribbean at US$ 4,370. Early that century, it had started producing oil and natural gas commercially, and this attracted multinational corporations, significant FDI, technology and skills.

Singapore also lacked high-quality institutions with strong governance structures. So, EDB was founded in 1961 as a statutory agency responsible for marketing Singapore and overseeing the establishment of industrial companies.

EDB functions as “a one-stop agency so that an investor need not deal with a large number of departments and ministries”. But, the government planned “broad economic objectives and the target periods within which to achieve them” which were regularly reviewed and adjusted as required.

After the election of the Peoples’ National Movement (PNM) in 1956, Trinidad and Tobago established such an institution called the Industrial Development Corporation (IDC). Economic development plans were also prepared. But, the fundamental goals to be achieved were not clearly defined until 1963.

Trinidad and Tobago used diverse industrial policies since 1956. But from 1958 to 1973, it used three 5-year development programmes based on ISI. By the end of the first, coordination between the government, labour and the private sector was handled by another statutory body.

This body was the National Economic Advisory Council. By the end of that century, IDC was relegated to being an investment-screening agency and remaining functions were distributed to other institutions, such as the Export Development Corporation (EDC).

By 1965, Trinidad became a founding member of the Caribbean Free Trade Association (CARIFTA): an agreement between Anglo-Caribbean states to eliminate trade barriers. However, Singapore was expelled from the Malaya region, loosing its coveted common market which rendered ISI unviable.

According to Lee, “I gradually crystallized my thoughts and settled on a two-pronged strategy to overcome our disadvantages. The first was to leapfrog the region...”.The second part of my strategy was to create a First World oasis in a Third World region”.

Singapore then began its second phase of development. Its path diverged from ISI to export-promotion industrialization (EPI).  It pursued export-oriented growth when few developing countries were doing so. A host of supporting policies were passed, tariffs were abolished, and import quotas minimized.

One of the policies passed was the 1967 Economic Expansion Incentives Act which significantly reduced corporate tax rates to exporting manufacturers. Policies were adjusted as the need arose and sustained growth was realised in this phase. (See figure 1)

In 1968, Lee took a short sabbatical to Harvard Business School, and consulted Professor Raymond Vernon. In 1966, Vernon had published a paper in the Quarterly Journal of Economics which postulated shifting production of goods in their mature phase of development from the First to Third World.  

According to Lee, “Vernon dispelled my previous belief that industries changed gradually and seldom moved from an advanced country to a less-developed one”. Acting on Vernon’s advice, Lee accelerated EDB’s marketing effort to US multinational corporations.

In Lee’s words, “This campaign has been the most important element of a carefully orchestrated development strategy that has led to Singapore experiencing what is probably the most dramatic single-generation improvement in comparable living standards in the history of mankind”.

So, innovation also played a part in Singapore’s development: which supports the previous suggestion that Caribbean leaders need to address innovation. Terrence Farrell – former chairman of the macro-economic sub-committee of Trinidad’s Vision 2020 project also confirms Trinidad’s need of innovation.

In his book The Underachieving Society: Development Strategy and Policy in Trinidad and Tobago 1958-2008, he states that “There was little technology transfer, innovation or research and development occurring in any industry in Trinidad and Tobago”.

However, this should not be construed to mean the Caribbean lacked innovation. Farrell acknowledged that Trinidad’s underperformance can be attributed in part to the deficiencies and mistakes in policy: one of which was the limitation of ISI compared to EPI.

The St. Lucian Nobel-laureate Sir W. Arthur Lewis was one of the advisors to Trinidad and Tobago on its first 5-year plan, and his name is usually associated with the ISI strategy, but he actually postulated EPI as early as 1954 in his definitive work “Economic Development with Unlimited Supplies of Labour”.

He had actually proven that colonial economies with export-oriented plantations could achieve industrialization, and this was later branded the ‘Puerto Rico Model’. Teodoro Moscoso of the Puerto Rico Economic Development Administration (Forento) was also an advisor on that plan.

According to Farrell, “The presence of these two men in particular was a clear indication of the direction in which the newly elected PNM administration intended to take the economy...”. However, these men were not involved in formulating the subsequent 5-year plans.

Nevertheless, the PNM did approve an economic development plan similar to the ‘Puerto Rico Model’ back in 1956. But by 1958, this was deemed unsuccessful and abandoned because Trinidad and Tobago could not match the incentives Puerto Rico was offering US investors.

The institutional structure for ISI (i.e. taxes, legislation, etc.) was in place at that time; and Farrell states that:  “The PNM’s economic programme differed from those of its predecessors only in the extent and vigour of its intended industrialization programme”.

In the first 2 years of the first 5-year plan, the increase in real per capita income reduced in comparison to the plan it replaced. “But, there was no explicit embrace of the idea that import substitution had to lead to export-promoting industrialization”.

Farrell suggests that “the reason for this was perhaps that imperative for generating foreign exchange through manufactured exports was muted by the strong performance of the dominant petroleum industry that had expanded refining capacity significantly”.

An incomes policy was also a necessary element for the success of EPI, so Singapore established a tripartite wage negotiation system to facilitate stability in wage bargaining and deter labour militancy. In 1971, Singapore also established the Manpower and Training Unit to provide industrial training.

 This did not occur in Trinidad and Tobago. According to Farrell, the Industrial Stabilization Act of 1965 “had become a dead letter, until replaced in 1972 by the Industrial Relations Act”. Nevertheless, a tripartite committee was appointed in 1968 to deliberate on the feasibility of an incomes policy.

But, its “recommendations were never implemented and the subject of wage restraint was dropped...” until 1974. In addition, the government also facilitated “…low-level, low productivity employment in the civil service, the local government bodies, and statutory corporations and later on in state enterprises”.

This led to increased expenditure on wages and salaries and “less of government expenditure was available to be directed to capital expenditure on social overhead capital and infrastructure that could promote external economies and increase productivity”.

From figure 1, it should be noted that Singapore eventually overtook Trinidad and Tobago by the end of the final 5-year programme from 1968 to 1973. According to Farrell, the plan “was an impressive document” but “was never implemented as intended for it was interrupted by profound social conflict”.

These included “the trade union unrest in 1969, the wider social unrest and army mutiny of 1970, culminating in the declaration of a state of emergency, an acceleration in inflation from 1972, without precedent in the nation’s history…”.

Recognising that their development programmes had failed to meaningfully improve employment and seeking to counteract the social disruptions of the time, the government abandoned fiscal restraint which resulted in a near 6-fold increase in inflation: from 2.5 percent in 1970 to 14.8 percent in 1973.

Beside deficiencies and mistakes in policy, Farrell also identifies 3 other factors that could have contributed to that nation’s underperformance. These are: “the problem of implementation; the impact of ethnicity; and the ‘culture’ factor”.

With regard to the latter, he states: “that people of a country may actually not aspire to the standard of living of the richer and more developed countries. They may choose to work less hard, be less innovative and productive, and consume more because they value leisure, conviviality and pleasure more…”.

In hindsight, Singapore’s real per capita income, though initially lower, increased faster during Trinidad and Tobago’s first 5-year plan, even though both nations pursued the same ISI strategy. It fell in 1965, on loosing the common market with Malaysia, but recovered during the second 5-year plan.

Singapore’s real per capita income exceeded that of Trinidad and Tobago just when oil prices started to increase, following the Arab/Israeli war in 1973. But, it was the inability of Trinidad and Tobago to implement the third and final 5-year plan that was its undoing.

It is paradoxical that foreign exchange gained from Trinidad and Tobago’s mineral resources may have prevented its switch to EPI; and poor management of its human resources (practically Singapore’s only resource) was responsible for Singapore eventually achieving the higher real per capita income.

Trinidad and Tobago’s per capita income increased relatively steadily under the former plans. Had it maintained this, it would have at least postponed being overtaken by Singapore. To attain the ‘Singapore Experience’, Trinidad and Tobago needed to address the 4 factors identified by Farrell.

Farrell also stated that, a “...strong growth spurt in the latter half of the 1970s pushed Trinidad and Tobago ahead on Singapore for a few years between 1978 and 1983”. But, “by 2008, Trinidad and Tobago’s GDP per capita was only...49 per cent of Singapore’s”.

Poor implementation is responsible for Trinidad and Tobago starting well but failing to stay the course and to maintain its support systems. For example, IDC predated Singapore’s EDB. But by 2005, the functions of both the IDC and EDC were transferred to its Ministry of Trade, Industry and Investment.

Whereas Singapore’s EDB continues to exercise its mandate of marketing Singapore and overseeing the establishment of industrial companies, Trinidad and Tobago no longer has their statutory body so mandated to attract non-oil FDI.

Whereas Singapore recognised from the onset that its economy was too small, Trinidad and Tobago did not appreciate that it needed to promote export: even though EPI was postulated by an internationally-acclaimed Caribbean economist; and, there was also no regional economic grouping prior to CARIFTA.

Whereas Singapore changed strategy in response to deteriorating economic environments, Trinidad and Tobago seemingly arbitrarily switched to ISI which offered no improvement over its lifespan when compared to the former plan, which was not even allowed to complete its duration.

Trinidad and Tobago never built upon its first 5-year plan as would have been reasonably expected from the calibre of expertise available to it. But, Singapore maintained EPI from 1965 and was able to increase its per capita income at a faster rate.

Singapore gained the first-mover advantage in EPI and it would be reasonable to assume that its rapid rate of development will never be replicated, especially with the large number of competing Third-World nations presently seeking to attract FDI.

Nevertheless, Lee Kuan Yew had charted the course from Third World to First by strong and decisive leadership, macroeconomic stability, and high quality institutions and infrastructure. But, those that seek to navigate this path cannot do so blindly.

First, they need to survey their own domestic conditions en route to become intimately aware of its currents and hazards. Then, they need to implement only those principles needed to stay the course. Adjustments will no doubt be required, but their sights need to be firmly fixed on the next port of call.

Paul Hay is a Jamaican national, founder of PAUL HAY Capital Projects: a consultancy, based in Kingston Jamaica, with a vision of providing strategic planning and implementation services to organizations for non-residential facilities in the Caribbean.