ReportNo. 7139-TR CountryEconomic Report Trinidadand Tobago Towarda Programof PolicyReform and RenewedGrowth in Trinidadand Tobago Public Disclosure Authorized (Ir Two Volumes) Volume II: Sector Reviews April18, 1988 LatinAmerica and the CaribbeanRegion FOR OFFICIALUSE ONLY ( I Document of the Worl k, ° " Public Disclosure Authorized ' (_ MNCgoI .3~~~~~~~~~~~~C Public Disclosure Authorized Public Disclosure Authorized Thisreport hasa restricteddistribution and may be usedby recipients only in the performanceof their officialduities. Its contenitsmay not otherwise be disclosedwithout WorldBank authorization. CURRENCYEQUIVALENTS Until December 1971 US$1.00 - TT$2.00 TT$1.00 - US$0.50 From December 1971 to July 1972 US$1.00 - TT$1.84 TT$1.00 - US$0.54 From July 1972 to June 1976 The TT$ was allowed to float in line with sterling. As of May 1976 US$1.00 = TT$2.65 TT$1.00 - US$0.38 From June 1976 to December 1985 US$1.00 = TT$2.40 TT$1.00 = US$0.42 Since December 1985 US$1.00 - TT$3.60* TT$1.00 - US$0.28 * Except fqr imports of essential items which, until January 1987, were traded at the US$1.00 = TT$2.4 rate. FOR OFFICIALUS ONLY This report is basedon the work of an IBRD mission to Trinidad and Tobago in October 1987 led by Mr. N. Ramachandran. Contributing to the report were Messrs. Auty (manufacturing), Atkins (agriculture), Brown (tourism),Payot (planningorganization), Ramsaran (publicfinance and fnancial sector) and Grdjic (statistics). Thisdocument had a stcted distributionand maybe usodby recipientsonly In the perfomance of theirofficial dutis. Its contnts maynot otherwise be discloedwithout World ankauthoraton. INIDAD AND TOBAGOt VOLUME II TABLE OF CONTENTS Page No. I* THE MANUFACTURINGSECTOR ................................ 1 The StructureOf Production and Trade to the Mid-Eighties 1 Prospect for the Heavy Hydrocarbon-Based Industries............. a.*. ...... a............ 4 Prospectsfor the Non-HydrocarbonManufacturing Sector 13 InstitutionalReform For IndustrialPromotion 18 23 II. THE AGRICULTURAL SECTOR 26 Agriculturein Context ........... 26 GovernmentPolicy 29 RecentTrends in MajorAgricultural Subsectors 33 InstitutionalStructure .......... 38 Conclusionsand Recommendationso ...... ..... 40 III. TOURISM SECTOR REVIEW ... ................... 42 The Tourism Sector 9909009.... .... * 42 Recent Developments 44 Xarket Potentialand Prospects ...... 45 Policiesand Incentives4...... 47 SupportingPolicies ....... 50 Concluslbon 54 Recommendations............ 054 IV. INSTITUTIONAL STRUCTURE FOR PLANNING .................... 56 Planning Institutions ........................ 56 Integrated Socio-Economic Development Planning ....... 58 Integrated Regional Development Planning 0*904000*0**0 59 National Planning Data ............. 59 Financing the Pre-Investment Phase 60 Standardizing Project Proposal Documents 60 Monitoring the General Economic Situation ............ 60 Technical Assistance Requirements ... 60 Conclusion 61 Chaiter I THU MAWNFACTURINGSECTOR THE STRUCTUREOF PRODUCTIONAND TRADETO THEMID-EIGHTIES 1.1 Tnidad and Tobago's exporience as a long-established exporter of crud aendrefin ed hydrocarbons had imposed 'dutch disease" effects on the economy even before the first oil boom. As Table 1.1 shows,on the eve of the first oil shock,the non-oiltradables sactor (basically agriculture end manufacturing) was much smaller than the norm for a country of similar size and levol of development. In 1972, agriculturo and manufacturing combined generated 282 of non-oil output, compared with a norm of 422. The share in non-oil output of agriculture (an Important source of inputs in the early stages of industrialization) was below 62 and less than 40S of the norm. Although output in the manufacturing sector was almost 802 of tho norm, it was dominated by refined petrochemicals, whose markets were to decline sharply after the second (1979-81) oil boom. Moreover, manufacturingother than oil refining wa relctively uncompetitive end heavily dependent on protections like most Caribbean countries during the post-war period, Trinidad and Tobago has favored a strategy of Import substitution over competitive manufactured exports. 1.2 Industrial production expanded during the oil booms of 1974-78 and 1979-81, but its share of non-oil output shrank and its viability was uncertain. The contribution of the new large-scale gas-based Industries (notably steel, fertilizer and methanol), establisned with windfall investments during the booms, was disappointing, primarily because of chronic marketing problems that reflected a persistent overcapacity in the international steel and petrochemical markets. Moreover, their relatively meager expansion was offset by the sharp decline in oil refining, hitherto the dominant manufacturing sector. Meanwhile, the uncompetitiveness of the non-hydrocarbon manufacturing sector was exacerbated by the appreciation of Trinidadend Tobago'sreal exchangerate, especially during the secondoil boom. 1.3 Manufacturingvalue addedwas TT$1.43billion In 1986,accounting for 8.22 of GDP end 10.42of non-mining GDP. Food processing dominated (35Z), followedby assemblyindustries (23S) and petrochemicals(172), includinggas-based petrochemicals. 1 4 All three leadingmanufacturing subsectors are flawed,and none furnishesa sure foundationfor rapid expansion of production. Food vrocessina draws on a domestic agriculture that does not provide a competitivebase for sizablo and rapid exportgrowth and suffers from deficiencies in packaging. Some exportmarket niches have beon established in fruit juices, ethnic foods and fresh vegetables (which take advantage of the limitedsurplus air freightcapacity), but initiallythese gains are likely to be offsetby subsectorallosses through rationalization, notably of the extremely high-cost domestic sugar industry. The assembly -2- Table 1.12 NON-OIL ECONONT PRE-SHOCKSTRUCTURE AND CHANGE, 1972-81 (Perc.nt) Actual Share Chenery and Syrquin Norm al Initial Conditions Agriculture 7.6 16 Manufacturing 19.5 26 Construction 6.0 = 6 Services 66.9 52 (Mining) 20.5 2 Average Annual Change. 1972-81.at Constant Prices Agriculture -0.31 -0.49 Manufactuting -1.03 0.20 Construction 0.37 0.05 Services 0.99 0.35 Dutch Disease Index b/ 1972 +14.2 1972-81Change +10.5 Source: A. H. Gelb, 9WindfanlGains. A Blessinaor a Curse? A ComparativeStudy of Six Oil ExportingCountrios 1973-84,0 iimeo, World Bank,Washington, D. C., 1986,p. 14. a/ The norm is calculatedfrom H. C. Chenery,and M. Syrquin, Pqttepnsof Develoument1950-70, Oxford: Oxford University Press, 1975. bl Index - normal share of agricultureplus industryminus the actual share of agricultureplus industry. industries are dominated by completely knocked down (CKD) autos (502 of subsectoroutput), which are of lowerquality and greatercost than are imported vehicles. CKD is a prime candidate for closure. As to petrochemicals, the mid-eighties' expansion of gas-based fertilizers and methanol was almost exactly offset by the collapse of refined oil product. Other resource-based industries (such as ceramics and wood processing), along with apparel and tourist goods, are perceived locally to present growth opportunities, but none Is sufficiently large to boost GDP significantly in the medium term. 1.5 Although there-areno obviousmanufacturing subsectors that can be targeted for growth, the recent performance of individual manufacturing firmsdoes providegrounds for optimism. Evidenceemerged during the post- boom periodof more productiveuse of infrastructure,plants, labor and freight. Policy measures thereforeneed to concentrateon the competitive environmentof the firm rather than,as hitherto,on the sector. -3- Tabl 1.2: CBMNGINGSTRUCTURE OF TiE MANUFACTURIRGSECTOR, 1970-87 1970 1975 1980 1985 1987P Value (TT8billion, currentprices) Total CDP 1.771 5.300 14.966 18.140 15.933 Non-oilGDP 1.643 3.445 9.090 14.460 12.715 Manufacturingt 0.397 0.792 1.338 i.676 1.941 Food,Drink & Tobacco 0.397 0.792 1.338 1.676 0.690 Textiles,Garments, Footwear,Readwear 0.015 0.026 0.073 0061 0.092 Printing,Publisblhg & Paper 0.013 0.026 0.046 0.109 0.167 Wood & RelatedProduct* 0.008 0.023 0.061 0.061 0.037 Oil Refining 0.166 0.319 0.416 (0.002) 0.155 Petrochemicals 0.032 0.045 0.078 0.280 0.241 OtherChemicals 0.041 0.088 0.222 0.292 0.037 MiscellanousManufacturing 0.008 0.021 0.025 0.031 0.052 vo!2" (1980-100) Total CDP 59.8 68.5 100.0 83.3 n.a. Non-oilGDP 59.3 65.9 100.0 83.3 n.e. Manufacturing 83.7 78.3 100.0 87.4 n.-. Food,Drink & Tobacco 56.3 83.2 100.0 87.4 n.o. Textiles,Garments, Footwear,,Hedvar 122.7 93.3 100.0 39.5 n.a. Printing,Publishing & Paper 93.6 108.5 100.0 79.4 n.o. Wood & RelatedProducts 42.6 66.7 100.0 56.3 n.o. Oil Refining 197.7 94.3 100.0 36.9 n.s. Petrochemicals 80.8 50.5 100.0 294.4 n.oe Other Chemicals 71.0 78.8 100.0 83.5 n.a. AssemblyIndustries 40.8 57.5 100.0 72.2 n.o. MiscellaneousIndustries 96.2 162.0 100.0 77.2 n.o. P - Preliminary n.a. Nct available. Sourc-j NatlonalIncome of Tridad and Tob-eo1966-85, Port-of-Spain: CSO, 1987. 1.6 Unfortunately, the Impressive improvements in productivity generated by the more efficient post-boom use of resources have been associated with rising unemployment (Table 1.3). Particularly sharp dclines in employment occurred in textiles, garmnts, footwear and headwear prior to the mid-eighties' devaluation and in the assembly industries thereafter. However, the unemployment rate in the manufacturing sector was close to the national average of 172 In early 1986. This rate was significantly better than those for oll (262) and construction