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UWI TODAY
– SUNDAY 9 JULY, 2017
INNOVATION CONFERENCE –
June 27 & 28, 2017
The eminent economist, Schumpeter,
said that an economy
develops based on creative destruction as entrepreneurs
exploit market opportunities through technical innovations
that simultaneously destroy old industries and approaches.
This disequilibrium and change brought about by the
innovative entrepreneur are the norm in a healthy economy,
a sustainable economy. If, then it is concluded that our
private sector, our entrepreneurs are weak in innovation
or are non-innovative then it equates to saying that our
economy is unhealthy, unsustainable.
The Evidence
A recent report by the IDB, “Are oil and gas smothering
the private sector in T&T,” took a look at the constraints that
appear to beset the development of the on-shore economy of
the country. One of the first topics addressed was whether
T&T suffers from Dutch Disease. The conclusion was that
T&T shows the presence of this disease in an overvalued
exchange rate, a falling share of the non-booming tradable
sector (manufacturing and export agriculture) and
increasing unemployment share of the service sector (non-
tradables). The report uses the Real Effective Exchange
Rate (REER) and its own adjusted measure, the AREER1,
to demonstrate these effects of the disease. For this
presentation it is sufficient to indicate two symptoms that
indicate overvaluation of the currency; one, the association
with the Purchasing Power Parity (PPP), and the inability
to meet the demand for imports by the foreign exchange
income earned by its exports.
Given the economy of T&T where the major earner of
foreign exchange is the energy sector, during a bust it is the
norm to expect that the reduced foreign exchange income
would be unable tomatch the demand for imports as during
the boom, unless some counter cyclical spending had
occurred during the boom. The PPP is of less significance
seeing that T&T is a small open economy that imports
almost everything it requires. Hence the difference in
prices will be the result of transport and distribution costs
(markup). The latter could be exorbitant seeing that many
people are tending to on-line shopping, given also the
low productivity of the on-shore delivery process. Some
economists say that the so-called overvaluation of the
currency is not the core problem, but possibly an indication
of this low productivity.
The problem then is not the overvaluation but what
should be done about it. For example, what is the optimum
value of the exchange rate that would in T&T’s case bring
demand for foreign exchange into synch with the supply?
Since the demand for foreign exchange can be reduced by
both a devaluation and fiscal means, the optimum decision
has to be what mix of these controls can bring about the
demand/supply equilibrium. This suggests that there is no
unique exchange rate that can fix a so-called overvalued
currency since, for example, at the current exchange rate
the balance may be achieved by fiscal means alone.
The IDB’s investigation of the on-shore sector turned
up the following:
• The on-shore sector’ growth has declined significantly
since the global financial crisis.
• Private investment points to declining labour
productivity; note this impact on the REER.
• Human capital, access to finance, institutional
weaknesses, infrastructure and an overvalued exchange
rate are among the main factors contributing to the low
levels of investment and low growth; note the impact
of low investment on innovation.
• Firm characteristics are mostly unfavourable for
increasing sales and total factor productivity, both of
which are important if the private sector is to be the
driver of diversification, sustainable growth which
today depends on innovation.
• The evidence shows that most firms are either stagnant
or declining. Many are old firms and family-owned or
influenced.
Insufficient investment, low access to financing and
human capital by local firms are synonymous with lack of
innovation in the private sector, forcing the firms into decay.
The IDB report also addressed the perception of the
firms themselves as to the problems of doing business on-
shore in T&T. This report was augmented by the results
of the 2014 Productivity, Technology and Innovation
(PROTEqIN) Survey2. The latter says that the most serious
obstacles as seen by the firms were an inadequately educated
workforce; access to finance; crime; macroeconomic
environment; customs and trade regulations; corruption;
cost of finance; tax rates; electricity and telecommunication
inadequacies. According to the IDB, these complaints were
very similar to those elicited by the World Bank in its 2010
survey.
One may find it hard to understand why the firms
find it difficult to find adequately educated people, given
the current education system in T&T. Moreso, the IDB’s
information shows that some 79%of the graduate workforce
emigrated and are usefully employed abroad. Possibly
there is a mismatch between the education system’s output
(though other economies find use for them) and what the
local firms require. When asked why current graduates
are not trained by local firms, the reply was that this is an
added cost and even so, after training they may leave the
firm. Again, these are the people in these firms who would
be expected to drive innovation, the source of sustainable
development.
The other input which would restrict growth and
innovation in firms is financing. The IDB report quotes
the ROSE-C3 review which demonstrated that compared
with the rest of small economies of the world, the ratio of
domestic credit to GDP is lower than the benchmark for
this group of countries. Access to finance is a constraint
for most firms. This applies to firms operating in the retail/
distribution sector and small startups that are budding
innovators. There is little credit, no venture capital or major
grant funding, though ExportTT is attempting to help small
firms with small grants.
In small, open economies, economic survival depends
intimately on the ability to export and today being
competitive is a function of the innovation of the firm.
In the economy of T&T, outside of the energy sector, not
many firms are exporters. The IDB report suggests that
large, young and foreign-owned firms in the manufacturing
sector are more likely to be exporters. But only a small share
of on-shore T&T firms, 14%, reported that a percentage of
their sales come from direct exports.
R&D expenditure in T&T is low. T&T spends some
0.04% of its GDP on R&D, the major source of innovation,
while the average for ROSE-C countries is 1.2%. Firms claim
that they spend some 0.95% of sales on R&D, innovation.
But this is focused on non-technological innovation
(organizational and marketing). Though public sector
support is provided to exporters the evidence suggests
that most firms do not benefit and have a great difficulty
in achieving export promotion targets. Further innovation
expenditure is low and this weighs negatively on the firm’s
productivity and export performance.
An Analysis
The foregoing suggests that the economy is defined
by a set of variables that say how the economy is behaving,
a set of inputs or controls on the economy which drives
the state variables, economic behaviour, depending on
the dynamics or model of the economy, the outputs of the
Why InnovationPerformance
HAS BEENWEAK INT&T
A view fromacademia
B Y S T . C L A I R A . K I N G A N D M A R Y K . K I N G
Professor St. Clair King at the Innovation Conference at the Teaching
and Learning Complex. Seated next to him is Ronald Hinds, CEO
of Teleios Systems Ltd, whose presentation also focused on why
innovation performance has been weak, but his was a view from the
private sector.
