Are Oil and Gas Smothering the Private Sector in Trinidad and Tobago?

Jan 2017
Facing what looks like a prolonged period of economic contraction due to a sharp decline in energy fortunes, Trinidad and Tobago is increasingly looking towards the private sector to play a greater role in stimulating economic recovery and transformation. This narrative is not new and is consistent with the country's continuous pursuit of diversifying its hydrocarbon-dependent economy. Such expectations should be grounded in reality and context. Unfortunately, there are no empirical studies on the country's private sector that can provide relevant guidance. Therefore, this report is the first contribution to empirically answering questions related to the performance and challenges facing the private sector in Trinidad and Tobago. Given the sense of urgency expounded for the private sector's enhanced role in supporting economic growth, creating employment, and improving the economic welfare of the nation's citizenry, we find that there is much work to be done. Firm-level performance indicators suggest that the majority of firms are either stagnant or declining. In addition, total factor productivity measured at the firm level is relatively lower in Trinidad and Tobago when compared with other countries in the Caribbean, labour productivity has been declining since the great recession, and private investment is significantly lower than the average for other small commodity-exporting countries. Hence, a concerted policy effort is required to transform Trinidad and Tobago's private sector into an engine of sustainable growth. This study examines factors relating to the profile of firms, macroeconomic conditions, the business climate, and laments of businesspersons as possible constraints to performance. The findings reveal that an unfavorable macroeconomic environment and business climate affects all firms in the private sector. With respect to the former, the main issue relates to an overvalued exchange rate -a negative externality of being hydrocarbon-dependent. An unfavorable business climate reflects governmentpolicies, regulations, and public services that hinder rather than promote a dynamic, export-oriented and innovative private sector. Moreover, the profile of private sector firms -an important determinant of performance- is unfavourable in terms of age, size, legal form, and trade orientation. Estimates from this study suggests limited access to financing, and labour and crime constraints are the three main microeconomic factors that weigh negatively on the sales growth of firms.