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Managing T&T in an economic downturn
In delivering the ANR Robinson Distinguished Lecture Series on May 4, Former Central Bank Governor Ewart S Williams reflects on how the former prime minister and president Arthur NR Robinson navigated the economic storms of 1987 and 1988 and the lessons we can learn 30 years later.
Blessed with a tremendous intellect, Arthur NR Robinson had a vision for Tobago, he had a vision for Trinidad and Tobago, he had a vision for the region, and he even had a vision for the world. And he lived that vision and made every effort to translate those visions into reality. In doing that, he displayed a level of resilience, courage, and integrity that marked him as a special human being. When I talk of resilience and courage, I am not only talking about what happened in 1990. I am speaking about qualities that were exemplified throughout his life.
Interestingly enough, while ANR is recognised for his many achievements in politics and international law, he is almost never given credit for his role in our economic evolution.
In my humble view, I think his contribution in this sphere is grossly underestimated. In fact, I sincerely believe the foundation that led to the robust economic growth in the period 1995-2008 was established during his term as prime minister.
Some might argue he was under the dictates of the IMF and, as such, had no choice. With this I disagree. Governments always have a choice. What he did, however, was to make the difficult policy decisions which although widely unpopular, were right for the economy at that time. As it turned out, these decisions almost cost him his life and certainly contributed to his demise at the polls.
Before I elaborate on this thesis, I will do something that has become very popular in recent times, that is, to bare one’s soul in the interest of transparency.
I never knew President Robinson very well. From afar he was very upright and very formal gentleman (gentle man, in the original sense of the word). However, when I left UWI St Augustine, I went to work in the Research Department of the Central Bank and my boss was Pat Robinson, ANR’s wife.
That was in 1970, soon after he had given up a most promising career as Minister of Finance and heir apparent to Dr. Williams, “to stand up for his principles and beliefs”, as one commentator put it.
Mr Robinson himself is quoted as saying that he resigned “rather than taking the easy way out by collaborating in suppressing the aspirations of the citizens towards a better life.” Rather strong stuff.
Fast forward to 1987 (when I got a call from my good friend and mentor William Demas inviting me to take a sabbatical from the IMF and spend a year or two as his adviser at the Central Bank. You may recall that ANR became Prime Minister in December 1986 and William Demas took over from Dr Euric Bobb as Central Bank Governor, about a year after.
Demas specifically told me that he got permission from Prime Minister Robinson to invite me to be part of a team to negotiate with the IMF and the commercial and bilateral creditors.
I went through this long explanation just to say that some people may consider me biased in my judgment about the policies introduced and the results. And they are entitled to their views. With my confession out of the way, let me continue.
From my experience, in most democracies, whether in developed or developing countries, the incoming government always alleges that it met the Treasury empty. And this means different things in different situations.
When ANR Robinson became Prime Minister of T&T in December 1986, it was almost literally true. The Treasury was almost literally empty. The period in the run-up to the 1986 elections was a very difficult one for Trinidad and Tobago. After the second oil boom in 1979-1982, oil prices began to decline in 1983: what’s worst was that the price decline coincided with a secular fall in oil production.
In the following five years, oil reached a low of US$10 per barrel and government revenue also fell dramatically. Not unexpectedly, this led to a reduction in government expenditure plunging the economy into a deep recession. Around unemployment reached 22 per cent.
In the vain hope that the decline in oil prices would have been short-lived, the government of the day (that is prior to December 1986), tried to postpone adjustment by running down savings and resorting to borrowing. The Robinson government also tried initially to avoid adjustment, waiting for the recovery in oil prices.
However, the day of judgment came and by the second half of 1988, we could not meet our external debt obligations and had to approach the IMF and The World Bank.
Robinson had come face to face with the boom-bust cycle before. The economy had experienced a boom, in the build-up to political independence in 1962, based predominantly on enhanced oil production. The boom, however, petered out a few years after Independence.
By 1988, with a debt to GDP ratio at about 60 per cent of GDP and with official reserves at less than two weeks of imports, we could not meet our debt service obligations and began to accumulate arrears to external and domestic creditors. There was an immediate need for debt rescheduling and, in fact, we tried to get our external debt rescheduled. However, as was the international custom at the time, both the bilateral and commercial creditors would not discuss rescheduling, in the absence of a standby arrangement with the IMF.
So notwithstanding opposition from the political opposition, the trade unions and civil society groups (and I suspect, even members of his own Cabinet), PM Robinson was drawn into a Standby Arrangement with the IMF and a World Bank’s Structural Adjustment Programme.
It was a period of tremendous hardship for most of the population, caused by the introduction of a whole package of some of adjustment measures, to be implemented simultaneously.
The package included a sizable exchange rate depreciation; the closing down or privatisation of a large number of state enterprises, leading to unemployment; tax reform, price and interest rate liberalisation and a sharp reduction in government expenditure, including a 10 per cent cut in public sector salaries. The wage cut was particularly unpopular and greatly undermined public support for the adjustment programme.
PM Robinson had to be convinced that the adjustment effort was absolutely inevitable.
As Willie Demas, Central Bank Governor at the time, explained in his own inimitable way:
“We were living way beyond our means; the country’s income had declined sharply; at first, assuming that the drop was temporary, we used up our savings; and then we borrowed and when we could borrow no more we needed to adjust our living standards.” He would always end by saying: “convince me there was another way”.
From my experience with the IMF, I had come to realise that economic adjustment was always difficult and painful, because it implied hardship.
In the real world, hardship is never distributed evenly. Some groups bear a larger burden than others and, in our case, the poor and the public servants bore the brunt. One can argue that a more judicious calibration of the fiscal adjustment programme would have spread the burden more equitably but that’s easier said than done.
Nevertheless, with the benefit of hindsight the 10 per cent cut in public servants wages was clearly a mistake as it obviously weakened support for the programme.
Having said that, many analysts (myself included) believe that the exchange rate adjustment, the external debt rescheduling, the trade and financial sector liberalisation and the fiscal reforms set the stage for a more competitive economy and created a platform for a strong transformation effort.
Robinson showed enormous courage in adopting and implementing this adjustment package and it succeeded in stabilising the economy. It also opened up significant debt relief and a fair amount of bilateral and external bank financing.
Unfortunately or fortunately, depending on your particular point of view, the pressure to continue the transformation effort was eased by a strong recovery of energy prices, new oil and gas discoveries and a surge in foreign direct investment in the petrochemical sector.
Is now similar to 1986?
As you well know, the period 1994 to 2008 saw 14 consecutive years of economic growth. The years 2000 to 2006 saw real GDP growth averaging close to nine per cent a year, in part, reflecting the coming on stream of new productive capacity in the petrochemical sector.
Many of you might be thinking: is the economy not in a similar situation now?
My answer would be YES and Not Quite.
YES: because the recent exogenous shock (the fall in oil and gas prices and volumes) has been even larger than in any of the preceding periods; what’s more the dynamics of the global energy markets have changed significantly and it is indeed likely that we are facing not a regular business cycle downturn but a more permanent structural change, which economists are calling A NEW NORMAL. To translate, some experts expect oil prices to remain in the US$ 45-60 per barrel price range for the long term.
But, in some ways we are much better off than we were in the late 1980s because we have larger savings as buffers—official reserves of US$ 8-9 billion; and close to US$ 5.5 billion in the Heritage and Stabilisation Fund.
What is also different is that in line with the Government’s determination to avoid having to go to the IMF at all cost, the current administration has begun to implement its own stabilisation programme, phasing in the adjustment over a four-year period, rather than resorting to a BIG BANG approach, which would have had a more devastating impact on the more vulnerable groups.
The initial impact is also a bit more benign than it was in 1987-88; notice that the unemployment rate has not shot up to the levels of previous downturns; that the recession has not been as deep and that inflation has remained relatively contained. Also with our sizable buffers,T&T has not lost access to international capital markets.
Of course, many local commentators and at least one external rating agency have taken the position that the ongoing adjustment is not strong enough and that more should be done. (Ironically, on the other hand, there are others in the society, who still believe that the present dis-equilibrium is all contrived and that we could continue with business as usual.)
The wide variation in diagnosis and prescriptions is not unexpected because in societies like ours, there is a tendency for interest groups to be concerned primarily with their welfare.
Lloyd Best, my old thesis supervisor, would say that notwithstanding words to the contrary, “we have not yet developed a true national psyche, where we look after the interest of the whole rather than our own tribe”.
In his book, “The Mechanics of Independence” Robinson complained about the resistance he faced from domestic and foreign business interests as well as the attitude and philosophy from his political opponents.
Ironically, he also noted that “he had difficulty with the IMF, not in terms of the specific areas of economic reform, but also in relation to their insensitivity to the demands of political independence.” (I guess he was referring to insufficient regard being given to the socio-political implications of the measures).
I worked at the IMF and I suspect that I know what he was taking about. Although, truth be told, in recent years, the IMF and the World Bank have really been making a serious effort to take socio-political considerations into account.