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Letter: Construction does not grow an economy
Published on January 10, 2017Email To Friend    Print Version

Dear Sir:

There is a view in certain quarters, which apparently includes the Trinidad and Tobago government, that one way of recovering from the current recession, due to the fall in foreign exchange income to the country, is for the government to spend on construction to stimulate the economy. Besides providing jobs directly, such activities, by the multiplier effect, can provide additional jobs and other economic activity in the country; since construction needs the supply of goods and services from allied consultants/professionals and material providers. Further, the argument goes, that construction is also labour intensive and such stimulation will surely provide for the jobs already lost due to the recession.

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A fundamental observation is that the Trinidad and Tobago energy sector does not by itself make much of an impact directly on the rest of the economy. It is mainly through the government spending, including its energy sector income and the associated availability of foreign exchange that the growth of the non-energy sector is generated.

For example the decline in energy prices in the 1980s led to a sharp contraction of the economy and in particular construction’s contribution to GDP fell from some 17% in the 1981/82 to 7.7% in 1990. It would appear that construction swings in tandem with the fortunes of the energy sector, government’s energy sector earnings.

Though construction is indeed closely related to economic growth, this does not imply that providing incentives and even government spending on construction projects lead to economic growth; construction is at best the result of otherwise engendered economic growth.

Since construction requires a substantial input of imports, including special skills due to the lack of such local capabilities, greater spending on construction will increase the outflow of foreign exchange earned. This is indeed the crucial point.

The recession today in Trinidad and Tobago is about a substantial decrease in foreign exchange earnings such that the demand for imports, for foreign exchange, exceeds the supply from exports. Since in our small open economy it is virtually impossible either to increase our exports or replace imports by locally produced goods and services in the short term, the only real option is to reduce the demand for imports, reduce aggregate demand onshore.

Surely, given the shortages of government income, any construction will most likely be fed by borrowings, savings or sale of assets, which as we have already seen also increase the demand for foreign exchange directly, and indirectly via the support of the local liquidity in the market via wages/salaries and payments for goods and services.

Since construction does not drive economic growth or development, the use of foreign exchange savings or foreign borrowings to fund the demands of such construction in a recession is at best an expensive palliative that has to be paid for when the economy recovers.

The only real short term option we have, if the oil/gas prices and production do not recover is to reduce onshore economic activities that demand foreign exchange and the rate of doing such can be controlled by the judicious use of our foreign exchange reserves, Heritage and Stabilisation Fund savings and careful foreign exchange borrowings.

The massive construction drive announced by the prime minister of Trinidad and Tobago after his government’s two-day retreat – highways, a port, hotels etc. – may be desirable in certain areas – hospitals – but its demand on the available foreign exchange will be prohibitive.

Mary K King
St Augustine
 
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Comments:

Carson C. Cadogan:

Well said.

Vinci Vin:

Dear Ms. King:

You wrote: The massive construction drive announced by the prime minister of Trinidad and Tobago after his government’s two-day retreat – highways, a port, hotels etc. – may be desirable in certain areas – hospitals – but its demand on the available foreign exchange will be prohibitive." But you should add another caveat, that is, "if construction of buildings, ports, highways, hotels, etc. results in the creation of permanent jobs above and beyond those jobs derived from the actual construction process, then the construction would contribute to the expansion of the economy." For example, investments in ports and highways could contribute to the creation of jobs in the trade and transportation sector. It can also lead to productivity gains and be an incentive for investors to enter certain industries that are served by those infrastructure.

Construction of shopping centers, warehouses, factories, etc. can add to the creation of permanent jobs in those sub-sectors. And do not forget that unless the wages paid to the construction workers and the materials are totally siphoned off by foreign entities, construction would add to the money supply and thereby support forward linkages to other parts of the economy. In other words, we need to look first on the impact of such policies on the domestic economy and advocate for policies that limits the seepage of the money to foreign sellers.

This is a very important concern as it provides the opportunity for deeper insights in government stimulating policies.

By the way, new construction projects could also be a predictor of future economic developments in T&T.

Best regards,

Vinci Vin



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