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Maroc Maroc - NEWSDAY.CO.TT - A la Une - 02/Oct 21:24

Dookeran: Economy in disequilibrium trap

FORMER finance minister Winston Dookeran says Trinidad and Tobago's economy has found itself in a disequilibrium trap. He said this is something which government needs to address when it presents the 2025/2026 budget in Parliament later this month. Dookeran made this and other observations in a paper published by UWI's Institute of International Relations, dated October 1. "At the heart of growth theory lies the Harrod-Domar model, which underscores a fundamental relationship- the nexus between a nation’s savings rate and its capital-output ratio." He said this theory was something which the oil rich nations of the Persian Gulf (such as UAE and Kuwait) and the Asian Tigers (such as South Korea, Japan and Singapore) understood in terms of their respective economic development. "Their experience reminds us that even small states, constrained in size but expansive in vision, can secure their place in the global economy." Dookeran said, "Above all, we must recognize that equitable development is not the by-product of growth, but its very foundation, the pivot upon which sustainable progress rests." All economies are prone to cyclical, secular, and structural disequilibrium. Dookeran said TT must analyse which of these phenomena it is experiencing. "A cursory review of current data suggests that TT is experiencing all three types of disequilibria." He added this is seen in the cyclical volatility of the foreign exchange market and the imposition of new tariff measures and the secular shifts in production functions and consumption behavior. Dookeran said all of these factors "converge to create widespread imbalances in the balance of payments." Against this background, he continued, policy responses must be aligned with the sources of disequilibrium. "This requires measures to raise the national savings rate, attract net inflows of funds, correct distortions in wage and price structures, and reduce the capital-output ratio through technology, productivity gains, and institutional reforms that strengthen competitiveness." Dookeran suggested current economic data suggests the economy has entered a permanent disequilibrium trap. He said signs of this include public and private sector markets not clearing and adjustments intended to restore balance through prices,exchange rates and interest rates, collide instead of synchronising. "The outcome is predictable: widening fiscal deficits, weak foreign exchange buffers, and negative interest rate differentials, which in turn accelerate capital outflows and worsen balance of payments pressures." In such a scenario, Dookeran continued, the warranted growth path drifts off course. "Traditional policy prescriptions whether deficit financing, devaluation, or diversification will not suffice to restore balance." He said the pathway to bringing the economy to a high-level equilibrium cannot be immediate. "It requires a long-term horizon, punctuated by short-term adjustment measures that incrementally steer the economy towards stability." The budget, Dookeran continued, must serve as the opening steps in a renewed fiscal strategy aimed at confronting the disequilibrium trap in the economy. He said this strategy must set the stage for deliberate and unambiguous choices. Macro-systemic measures, Dookeran continued, should translate into immediate, actionable programs, designed not as piecemeal fixes. He said the fiscal strategy which the budget outlines has to be one "that redefines priorities, restores credibility, and establishes the foundations for long-term stability, equity and growth." Dookeran identified stability of balance of payments (BOP) as a core element of this strategy. A BOP, he continued, is the central monitor of a nation’s economic relationship with the rest of the world. "For open economies like TT, its stability is not optional, it is essential to survival and sustainability." He added, "A credible budget must therefore begin with the BOP and its projections." Types of economic disequilibrium • Cyclical disequilibrium is usually the result of disruptions in trade flows and can, at times, be self-correcting. • Secular disequilibrium emerges when fundamental factors — such as technology, economy-wide action, or demographic trends undergo lasting change. • Structural disequilibrium reflects enduring shifts in the economy’s structure, production capabilities, and external balances, which are not easily reversible. The post Dookeran: Economy in disequilibrium trap appeared first on Trinidad and Tobago Newsday.

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