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Dutch Disease or Trini Dis-Ease – Businesses are Affected

Cricket. That is the most of what I can remember from that class in University. A decade ago I took an international trade class and first heard of how the decline of Cricket in the West Indies is similar to the decline of the Trinidad and Tobago Economy.  That lecturer, still prominent today, discussed how the Star Child of any situation can ruin it for everyone else and almost destroy an entire system. Brian Lara, one step away from being demi- God to the Caribbean in the early 2000s pushed Caribbean Cricket to world wide dominance. But then something happened. We, the Caribbean people, counted on him too much. The West Indies Cricket board counted on him too much. And the other cricketers, I do not know what went on in their minds, but they started performing less than stellar. I used to love cricket back then. Even before I knew about the Star Child Crisis. After a while of painful defeats I stopped watching new matches and ended up watching cricket documentaries of old school cricketer like Malcolm Marshall and though not many decades behind, Courtney Walsh. When I came to the class and heard the lecturer preach on the pain of West Indies Cricket and compared it to oil in Trinidad and Tobago, it all made sense. Dutch Disease is and was infecting Trinidad and Tobago, and if we are not careful, according to that lecturer, we can all end up like West Indies Cricket on the International Stage.  But guess who, in my opinion, will suffer most – businesses.

So I am sure that you have heard of Dutch Disease in the newspaper. Every year the topic is brought up by a commentator or an academic. Defined simply, Dutch Disease is what happens when you have a large inflow of local currency. Originally such inflows were associated with a high demand for a particular good or service, but now it has been associated with increased aid funding and any other policy that brings a rush of money into a country. A lot of discussion centre around the wide economic consequences, but rarely explain what it does to businesses. This blog aims to address this aforementioned gap.

It is interesting that everyone gets jolly when oil prices surge internationally. We think, government and people alike, “More money, more jobs, more growth!”. Even business people are comforted by the surge in consumer demand. We know with more money from the petroleum industry due to a rise in price, things can get done and things will get better.

We have had two oil booms in Trinidad and Tobago. In the 1970s to early 1980s the rise in petroleum prices and oil output caused a surge in revenues and in government spending. Talk to anyone older than 45 and they will tell you how good the times were. But then by the mid-1980s things changed. The uncertainty of high prices crushed us under the resource curse. We depended on one good for too long and paid a hefty IMF price. Many people migrated because they could not get jobs. One would think that we learnt a drastic lesson from that time. But no, we still got a bit caught up in the 2002 to 2008 boom, though not as drastically. 

So in good times, non-oil businesses experience some negative effects, though they may not recognise them

1) If you are an exporter, competitiveness is crucial in getting your goods and services purchased. When the single commodity is highly demanded in a country, so does the demand for money. This rise in the demand for money causes the price of our local currency to increase. Hence, residents in foreign countries have to give up more of their own local dollars to get $1 TT. Compared to other international producers and given the consumers desire for the best quality product at a lower price, what chance do Trinidad and Tobago suppliers have?

2) Non- exporters also face a similar competitiveness challenge. With a rise in the price of our currency, foreign goods appear much cheaper to local consumers. Given the likelihood of rising costs because of other elements of Dutch Disease, such as an increase in wages in non-export industries, a local firm’s ability to keep prices suitable to the market’s demand will not be easy. For example, in Great Britain, the quadrupling of oil prices brought great economic prosperity in the petroleum sector, seeing this, the British workers from other sectors demanded higher pay. In Trinidad and Tobago, a similar occurrence happened. In the second boom, the wages of the non-export sector became 143 percent higher than the export sector (Hilaire et al, 2012).

3) Grabbers rule in the Dutch Disease economy. If you are a Producer, if you are honest in your aim of making a good quality product that is done with ethical business, you’re going to get frustrated. Because of the amount of money that comes into a country due to the Star Child, some people may create new enterprises with no goal of creativity or innovation. Instead, these advantageous people or Grabbers want a piece of the roti. So, if they are already established, new tendering opportunities are exercised with corrupt activities. New businesses are created solely to get part of the windfall of government revenues. Producers, on the other hand, get frustrated because the corrupt system expects a “gift” for its daily work. In fact, the 2010 Enterprise Survey found that 13.4 percent of 370 businesses interviewed reported that in order to get things done, they have to give gifts. Weak institutions are the result. For more information, see our previous article at the attached link.

4) It is clear that crime is a consequence of Dutch Disease when corruption takes place. But this, coupled with weak institutions such as a lagging court system and inefficient security services, does put a great strain on businesses.  Hence, 74% of firms interviewed in the 2010 Enterprise Survey pay for security. This is close to 20 percent more than the world average. 

5) Lastly, planning for businesses becomes difficult. All production decisions and processes are planned in advance. But Dutch Disease presents an uncertainty for businesses as they cannot plan new innovative methods. Without knowing what the economy will be like, firms may choose to stay stagnant in their manufacturing processes and may even avoid potentially profitable investment opportunity.

So what’s a business to do? If you are an exporter, it’s important to keep track of your international market value. You may set a reasonable price locally, but internationally situations may be different. If it is the case that your foreign value is notably exceeding competitors from other countries, use the variety of marketing strategies available to show your added value. Find some differentiating element in your product and service and identify how these can ease the crucial pain points of buyers. Always remember, the 4 P’s of Marketing: Product, Price, Place and Promotion. If you can’t control the price, given the place you are exporting to make sure to promote that product the right way! The same goes for non-trading businesses. The fact that it is locally produced can also be the differentiating element to “support local”.

In addition, always prepare for that day that oil prices drop. Do not be fooled by the high demand during high oil prices. Keep track of what is going on in the economy with respect to oil prices, our petroleum and natural gas production, our exchange rates and the state of international affairs. Plan for the day that the boom turns downward. Do like the government and have your own Heritage and Stabilization Fund. Even though Dutch Disease presents so many uncertainties, there are indicators that can predict the future economic climate. Companies such as Data Minders Business Research can assess the leading, lagging and coincidental indicators that can tell where Trinidad and Tobago is headed.

Finally, be a Producer and never a Grabber. The only way for our institutions to become stronger is for every business to take a stand on ethics.

References

“Dutch Disease” Accessed August 5th, 2017. www.investopedia.com/terms/d/dutchdisease.asp

Hilaire, A., Henry A. and Krishendath Ramlogan. 2012. “Dutch Disease in Trinidad and Tobago: Then and Now”. Accessed August 8h, 2017. “www.central-bank.org.tt/sites/default/files/Dutch Disease Presentation June 2012.pdf

Melhum, H. Moene, K and Ragnor Torvik. 2005. ” Cursed By Resources Or Institutions”. Accessed August 6th, 2017. www.svt.ntnu.no/iso/Ragnor.Torvik/worldeconomy7.pdf

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