It is possible that the rapid economic growth in the Trinidad and Tobago economy from 1994 to 2008 may have perpetuated a type of irrational exuberance in the dormant economic period that followed.
“Irrational exuberance” was a phrase first used by Alan Greenspan but made popular by Robert Shiller, one of the winners of the 2013 Nobel Memorial Prize in Economic Sciences.
In a now-famous speech in 1996, Greenspan said, “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?”
Shiller famously utilised the concept of irrational exuberance later on to explain that housing prices in the U.S. were growing at a pace that would eventually trigger a precipitous crash. Shiller’s forecast was correct, and housing prices in the U.S. eventually came down.
In T&T, what has happened is that the rapid buildup of economic rents associated with the expansion in gas-based output prompted a very sharp rise in economic activity.
In this regard, one is tempted to ask whether T&T also experienced some form of irrational exuberance regarding its economy.
As a starting point, let us consider the economic rents earned from the petroleum sector. These rents increased partly because of rapid growth in the petroleum sector, mainly from natural gas, in the past two decades.
The rapid increase in natural gas output and the increase in the price of crude oil and natural gas for a large part of the data period helped usher in a golden period of economic growth, from 1994 to 2008.
The growth has since sputtered, however, and since 2008 has averaged -0.196 percent per annum (2009 to 2014), compared to an average of 7.6 percent during the golden era of growth (1994 to 2008).
But also during this period, there was an even sharper increase in the size of the services sector spurred by spending associated with energy rents.
Indeed as the economy began to overheat wage demands outstripped productivity and asset prices soared. An impression of the economic bubble and its associated size may be obtained from the difference between nominal and real GDP in Table 3 below.
The economic bubble precipitated by the rapid inflow of rents contributed in part to an irrational allocation of scarce resources.
This irrational allocation is reflected in the relative size of the economy’s transfer and subsidy programmes, in addition to the overall increase in employment in community, social and personal (CSP) services at the expense of manufacturing and agriculture. Even more, a careful look at the data would indicate that in some sectors of the economy, particularly in the services sector, there has been a decline in output per worker.
The continued buoyancy of real estate prices in T&T, even though some of the core fundamentals of the economy may have necessitated a greater degree of downward motion, may be suggesting some degree of irrational exuberance therein.
Indeed, the economy has been experiencing clear-cut overall stagnation, the prices of the main export goods have softened and their associated output levels in the past few years have declined.
Even so, from 1994 to 2008 the construction sector prospered, but thereafter it showed a sharp level of deterioration between 2008 and 2012. Since that time, however, there has been some element of a recovery.
Relatively low mortgage rates since 2008 have helped keep the demand for mortgages high, and this in turn has helped keep the median prices of real estate assets high.
The economy will have to recalibrate during the next five years, as there is little fiscal wiggle room left. The public has to compel politicians to rein in their impulsive spending and irrational exuberance if fiscal sanity is to return to the private sector.
Let’s not just sit back and watch these events unfold, but rather let’s lobby and help shape the events as they happen.