II. Retrospective

Since the discovery and development of significant oil and gas deposits in the 1950s, Trinidad and Tobago’s economy has evolved into a dual character--a dominant oil/gas sector that is fairly capital intensive and a non-oil/gas sector with service industries as the main activity. Economic policy through early 1980s focused on public sector led industrialization as a catalyst for private sector development. The activities of the public sector--including large-scale investment in enterprises and the installation of an expansive domestic infrastructure--was financed mainly by revenues from the oil/gas sector. However, employment by the oil/gas sector is relatively small and reliance has been on the non-oil/gas sector to generate employment opportunities. As petroleum prices rose in the 1970s, public sector employment and investment in productive activities expanded rapidly. At the same time, government subsidies to public enterprises (both directly from the budget and indirectly through exemptions and government-arranged loans) increased to compensate for high wages and other inefficiencies in production. Foreign investment in domestic industries was promoted through generous tax holidays, extensive tariff concessions on imported inputs and restrictions on entry in affected industries. During this period, the trade regime became increasingly protectionist, featuring trade licensing with a growing negative list and quantitative restrictions on imports and the exchange system had fairly comprehensive controls on foreign exchange transactions. Inflation rose from about 4 percent in 1971 to an average of about 15 percent a year in 1972-81 and the real effective exchange rate for the Trinidad and Tobago dollar appreciated by 24 percent during this period. Largely because of oil/gas exports, the external current account registered significant surpluses and the level of international reserves was built up to US$3.3 billion by end-1981.

During 1982-91, Trinidad and Tobago experienced virtually uninterrupted declines in output and in the level of gross official international reserves. Real GDP fell by a cumulative 25 percent and per capita income declined by about 33 percent. Gross official international reserves fell from US$3.3 billion at the beginning of 1982 to about US$340 million at end-1991. These declines resulted from the downturn in oil production and price--with a deterioration in the terms of trade of about 30 percent--as well as from insufficient policy responses because the authorities initially viewed the trends as temporary. Although inflation declined from an average of 15 percent a year in 1973-81 to 10 percent a year in 1982-91 mainly because of lower import prices, the real effective exchange rate for the Trinidad and Tobago dollar appreciated by more than 50 percent between end-1981 and end-1984 before devaluations in 1985 and 1988 restored some of the loss in competitiveness. As the large external current account deficits were financed through drawdowns in international reserves as well as borrowing, external debt rose from only about 13 percent of GDP in 1981 to about 46 percent of GDP by 1991. Debt service rose from about 7 percent of exports of goods and nonfactor services in 1981 to 30 percent by 1991.

Reflecting the deterioration in the external terms of trade and the accompanying decline in income, national savings fell from 35 percent of GDP a year in 1980-81 to 15 percent of GDP in 1991 (falling as low as 8 percent of GDP in 1986). Public sector savings declined from 20 percent of GDP a year in 1980-81 to an average of 5 1/2 percent of GDP in 1982-91 owing to the sharp loss in government revenue from oil/gas taxes. At the same time, private sector savings fell gradually from about 15 percent of GDP a year to 11 percent of GDP a year in 1982-91, as attempts were made to maintain real consumption levels. The weak savings efforts in turn constrained investment which fell from 28 percent of GDP a year in 1980-81 to an average of 19 percent of GDP a year in 1982-91. ^1/ During the same period, unemployment rose steadily from about 10 percent of the labor force in 1982 to about 19 percent in 1991, after peaking at 22 percent in 1987-89. The unemployment trend reflected the economic downturn following the sharp fall in oil prices as well as a shift to more capital intensive industries and production, the downsizing of the public sector, and less construction of infrastructure. This situation was exacerbated by the 1985 legislation which provided for generous severance payments. ^1/