Economist Dr Terrence Farrell
The real cost of gradualism
I have said many times that economics will always trump politics. The foundational principle of Economics is that where a resource is scarce, it cannot be free. Sometimes the real cost of what we use or do may not be manifest for a long time. The world is now learning that lesson as decades of greenhouse gas emissions due to industrial activity, combined with deforestation, is leading to global climate change which will take billions of dollars to mitigate, if we are already not too late! Economists are taught that social costs, which may go unrecognised or ignored, have to be internalised and those costs have to be paid, sooner or later.
The longer you take to recognise and deal with those costs, the more difficult it is to address.
So it took us 30 years to recognise that the sugar industry here was unsustainable. Tate and Lyle gave it up, but we thought that the political cost of increased unemployment was too high, so we subsidised a failed business for 30 years until, ‘water more than flour’, it was closed down. It took us almost 20 years, after failed desulphurisation and gas-to-liquids projects and mounting debt, to pull the plug on the refinery.
There too, for a long time, the political cost of unemployment was judged to be too high. And so it is with WASA, T&TEC, the majority of state enterprises, and the now much talked about fuel subsidy.
It has taken our policymakers several decades to finally understand that the fuel subsidy never had a sound economic rationale.
Sharing in our ‘oil patrimony’ is not a sound rationale. That subsidy has cost the treasury countless billions, is regressive, that is, it benefits the rich more than the poor, promoted excessive consumption of fuel, including diesel
which also pollutes, and distorted the transportation sector by encouraging more private cars and discouraging efficient public transportation. We had a golden opportunity 6 years ago when oil prices dropped sharply, to remove the fuel subsidy entirely. We would have by now, saved billions of dollars and would have started the process of changing our driving habits, our choice of vehicles and even our mode of transportation.
Sound economic policy gave way to political expediency, fear of ‘rioting’, and the default option of ‘gradualism’ or ‘soft landing’.
There are, by the way, many other subsidies out there, some of them well-hidden and completely forgotten by the technocracy. For example, there are peppercorn rents for valuable state lands granted to businesses decades ago which have never been adjusted, and of course, the happy businessmen remain quiet! Employment in the public service may be an ‘iron rice bowl’, but by spreading the work among so many public sector employees, wages are necessarily low, and as a result retired public servants descend into, at best, a ‘genteel poverty’.
Two points are, I think, important. First, market prices convey important information which signal to consumers and producers what they should do. That includes wage rates, which we don’t think of as a price because wages are of course, someone’s income.
It also includes the exchange rate, which signals to the entire economy whether we can afford the imported goods and services we consume and whether to pursue opportunities to earn foreign exchange.
When we subsidise goods and services, we are affecting how people produce and consume and we have to be sure that production and consumption are being steered in the right direction, for the right length of time, and for the right people. Every tax, every subsidy needs to be critically re-examined periodically to see whether it is achieving its intended purpose.
The second point is that ‘gradualism’ is politically attractive. When confronted with policy choices which will inflict pain on the society, our policymakers are minded to kick the can down the road and ‘wait and see’. But the failure to act decisively has real costs, and over time the costs of inaction and delay mount up and eventually, like sugar, like the refinery, like the fuel subsidy now, the costs become unsustainable. Timing is everything.
As an economist, I am driven to the brink of despair when I think about the money and resources we have wasted over the years from the Caroni Racing Complex to ISCOTT, to Gas to Liquids, LifeSport, Beetham Wastewater, the sugar industry, the fuel subsidy, loss-making state enterprises and so many more. This wastage is compounded by our under-saving built into the very design of the HSF, and our under-investment in human capital development and innovation. Maybe one day, political leaders will emerge who, facing up to economic realities, will practice politics as the art of the possible, and not as the art of expediency, soft options, and settling for the lowest common denominator.
The longer you take to recognise and deal with those costs, the more difficult it is to address.
So it took us 30 years to recognise that the sugar industry here was unsustainable. Tate and Lyle gave it up, but we thought that the political cost of increased unemployment was too high, so we subsidised a failed business for 30 years until, ‘water more than flour’, it was closed down. It took us almost 20 years, after failed desulphurisation and gas-to-liquids projects and mounting debt, to pull the plug on the refinery.
There too, for a long time, the political cost of unemployment was judged to be too high. And so it is with WASA, T&TEC, the majority of state enterprises, and the now much talked about fuel subsidy.
It has taken our policymakers several decades to finally understand that the fuel subsidy never had a sound economic rationale.
Sharing in our ‘oil patrimony’ is not a sound rationale. That subsidy has cost the treasury countless billions, is regressive, that is, it benefits the rich more than the poor, promoted excessive consumption of fuel, including diesel
which also pollutes, and distorted the transportation sector by encouraging more private cars and discouraging efficient public transportation. We had a golden opportunity 6 years ago when oil prices dropped sharply, to remove the fuel subsidy entirely. We would have by now, saved billions of dollars and would have started the process of changing our driving habits, our choice of vehicles and even our mode of transportation.
Sound economic policy gave way to political expediency, fear of ‘rioting’, and the default option of ‘gradualism’ or ‘soft landing’.
There are, by the way, many other subsidies out there, some of them well-hidden and completely forgotten by the technocracy. For example, there are peppercorn rents for valuable state lands granted to businesses decades ago which have never been adjusted, and of course, the happy businessmen remain quiet! Employment in the public service may be an ‘iron rice bowl’, but by spreading the work among so many public sector employees, wages are necessarily low, and as a result retired public servants descend into, at best, a ‘genteel poverty’.
Two points are, I think, important. First, market prices convey important information which signal to consumers and producers what they should do. That includes wage rates, which we don’t think of as a price because wages are of course, someone’s income.
It also includes the exchange rate, which signals to the entire economy whether we can afford the imported goods and services we consume and whether to pursue opportunities to earn foreign exchange.
When we subsidise goods and services, we are affecting how people produce and consume and we have to be sure that production and consumption are being steered in the right direction, for the right length of time, and for the right people. Every tax, every subsidy needs to be critically re-examined periodically to see whether it is achieving its intended purpose.
The second point is that ‘gradualism’ is politically attractive. When confronted with policy choices which will inflict pain on the society, our policymakers are minded to kick the can down the road and ‘wait and see’. But the failure to act decisively has real costs, and over time the costs of inaction and delay mount up and eventually, like sugar, like the refinery, like the fuel subsidy now, the costs become unsustainable. Timing is everything.
As an economist, I am driven to the brink of despair when I think about the money and resources we have wasted over the years from the Caroni Racing Complex to ISCOTT, to Gas to Liquids, LifeSport, Beetham Wastewater, the sugar industry, the fuel subsidy, loss-making state enterprises and so many more. This wastage is compounded by our under-saving built into the very design of the HSF, and our under-investment in human capital development and innovation. Maybe one day, political leaders will emerge who, facing up to economic realities, will practice politics as the art of the possible, and not as the art of expediency, soft options, and settling for the lowest common denominator.