T&T and many Caribbean nations are caught in the middle-income trap. The average per capita GDP of Caribbean states in 2022 was US$12,382.
Not bad, you might say, but when compared to the world’s largest economy north of us, we generate five to six times less income per person than the US’s per capita income for 2022 of US$76,399.
The desired economic convergence that development economists speak about remains out of our grasp, and the divergence keeps widening.
In T&T and many other Caribbean nations, our policymakers and average citizens do not pay enough attention to economic growth. Economic growth is important since it allows us to invest more resources into capital like human capital, infrastructure, environmental preservation, and financial savings, the bedrock of any economy.
If the value of these assets is eroded through depreciation, or a lack of investment, future economic activity can be constrained, leading to a lack of meaningful job opportunities for our people and a deterioration in our quality of life. This is already happening, leaving households and individuals vulnerable, vulnerable to many exogeneous shocks such as natural events, global economic shocks or indeed, health shocks such as the COVID-19 pandemic.
When individuals and households are vulnerable there is a greater reliance on public resources to support vulnerable families and homes. But public finances and expenditures depend on taxes paid by the private sector, and the profits upon which taxes are calculated are reliant on the economy’s growth rate.
The T&T and Caribbean economic model of natural resource-based growth has relied on government spending revenues collected from the oil and gas sector or other natural resource-based economic activities like tourism, which are dependent on sandy beaches and coral reefs. But this model of rent-seeking and rent distribution (it has now become rent-selling associated with political patronage) has run its course and can no longer provide the necessary growth rate to help us break free from the middle-income trap, meaning that we cannot move beyond the income threshold associated with distributing natural resource rents and the state directing the economy.
It is not only the Caribbean but also most of Latin America that is caught in this dilemma. We need a new model of state facilitation of economic growth mainly driven by private sector investment and economic activity. State facilitation means providing an environment conducive to private sector competitiveness, smart regulation, or economic freedom.
Economic freedom is an important paradigm for assessing the extent to which individuals and businesses have the flexibility to make economic decisions. In countries with low levels of economic freedom, governments impose coercion and restrictions on liberties, limiting individuals’ and firms’ options, which can stifle growth.
The United States think tank, the Heritage Foundation, releases an annual Index of Economic Freedom that ranks every country in the globe on a scale from 0 to 100 based on economic freedom measures such as tax burdens, property rights, labour freedom, trade freedom, investment freedom, financial freedom, business freedom, monetary freedom, government spending, fiscal health, judicial effectiveness, and government integrity. Their indices range from scores above 80, indicating free markets, 70–79.9 meaning partial freedom, 60–69.9, indicating some freedom, 50–59.9, indicating some unfreedom; and 0–49.9 indicating complete repression.
With a score of 59.5 on the 2023 Index of Economic Freedom, Trinidad & Tobago is the 88th freest economy in the world. The score is up from previous year by 0.7 points. As a comparison, USA scored 70.6, Singapore score 83.9, Mauritius scored 70.6 and Jamaica scored 68.1. Overall, Trinidad and Tobago performed better than the global and regional norms, placing it at position twenty out of thirty-two in the Americas area.
There has been inconsistent development toward a more liberated economy and conducive business environment. Although efforts have been made to diversify the economy, reliance on oil and gas inhibits private sector growth. Judicial independence is high, and institutional stability has been a hallmark of T&T for decades.
Overall, T&T has above-average scores in all categories relating to property rights, judicial performance, and government integrity compared to the rest of the globe. In T&T, the regulatory framework remains opaque despite some advances while the application of rules is inconsistent. The relative flexibility of the labour market allows the country’s highly educated labour force to be matched with employers’ needs.
Both individuals and businesses are subject to a maximum tax rate of 25 per cent (for individuals) and 30 per cent (for most corporations). The percentage of GDP accounted for by taxes is 21.1 per cent. Over the past three years, average annual government spending stands at 32.4 per cent of GDP, while the average annual budget balance is -8.2 per cent of GDP. The government’s debt is equivalent to 60.6 per cent of GDP. To close this fiscal gap, we must grow the economy.
If we are to escape the middle-income trap, reduce household vulnerability and build true resilience from the bottom up, T&T and the rest of the Caribbean will need to implement policies that foster greater economic freedom and therefore growth that will allow us to converge to truly high-income status. Individuals with good job prospects, earning higher incomes can save for a rainy day and can provide adequately for their families and households.
Resilience comes through strong broad-based economic growth that spreads wealth to all families. Of course, wealth that is more evenly distributed is dependent on other policies such as good quality education and quality heathcare for all. These are “pre-distribution” policies which we will discuss in the next article.