Thursday 21st April 2005

Innovation before wage hike
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By Dr Rolph Balgobin

It is indeed interesting to hear the noises coming from various quarters regarding the recently announced minimum wage hike.

Business is making the predictable sounds about higher prices, while labour argues that the increase is right and just. Petitions are collected outside supermarkets, while corporate representatives like the ECA question the way the rise is calculated.

All of this misses the point and in fact takes us far from the real issue facing T&T, that is, we may be entering perilous economic and social territory while looking the wrong way.

The energy distortion

The rebased Central Bank GDP statistics demonstrated the stark contrast between the energy and non-energy sector in T&T. The former is growing while the latter is stagnant, with some aspects in decline.

The energy sector is capital intensive and employs relatively few. The non-energy sector employs far more. The energy sector accounts for about 40 per cent of GDP, while the non-energy sector generates the balance. (See table)

So the fact that the energy sector is growing but still accounts for the minority of GDP should be of concern because the majority of the economy is almost at a standstill in relative terms.

This has largely escaped the attention of the public and of public commentators, perhaps because the sheer volume of visible money from the energy sector is proving a considerable distraction. But take energy away and we are left with a mediocre economy in global terms.

The big challenge

If it is to activate the quiet parts of the economy T&T needs to be thinking about wealth creation precisely at the time when it thinks its biggest problem is wealth redistribution.

This is showing up in various government initiatives and from the utterances of many key leaders in the society.

That government is the worst placed to act as an agent of redistribution is not in doubt.

All over the world, governments have failed signally in this regard. So “tax and spend” is not going to be an efficient or effective mechanism for redistributing wealth.

In any event, “tax and spend” will merely serve to reinforce the culture of entitlement which is damaging to productivity and innovation. Raising the minimum wage is important, but will ultimately continue to drive an impending inflationary spiral if we do not increase personal productivity.

This cannot be on the low-value-added end. It must be on the innovation end if we are going to support the kind of cost of living which is emerging here.

The Government’s responsibility is not only to set what the minimum wage should be—the far bigger worry is what we need to do with the economy in order to ensure that our growth and development is sustainable.

The value added challenge

It has long been recognised that countries blessed with significant natural resource endowments seem to be at a disadvantage when it comes to economic development.

Many of the nations considered to be “developed” in the world do not have such large endowments and have innovated themselves into competitive positions.

In part, this may explain why countries like ours stay on the extractive end of the economic continuum rather than migrating to the innovation side as quickly as others seem to.

But in a world which depends on knowledge more and more, our capacity to add value through innovation is becoming crucial.

If we want to build a sustainable economy, we need to get the non-energy part moving in an innovative direction and we need to start adding more value in the energy sector also.

This is easier said than done, but a good place to start is by redefining what innovation means to us.

Process innovation

Innovation should not automatically mean product innovation.

By accepting this Schumpeterian definition, T&T pits itself against larger, better-resourced economies that have a 40-year head start.

These economies support clusters of firms which share, explicitly and implicitly, the costs of innovation and market testing.

T&T does not have this luxury, although we do have some interesting clusters being developed.

We cannot hope to replicate the product innovation successes of the biotechnology and computer industries by building technology parks.

We are decades late and lacking serious research institutions, high calibre research personnel, firms willing and able to fund relevant research, and an appetite for big risks which lead to big rewards. The list goes on and on.

There is an alternative. As markets mature, the industries that serve them tend to fragment horizontally, so that the value chain becomes “unpacked” and sector-specific firms emerge.

As this happens, product innovation gives way to process innovation. It is here that T&T can make its mark.

Unlike product innovation, process innovation depends on the acceptance of industrial paradigms, rather than its rejection.

Product innovation seeks to redefine and cannibalise industries.

Process innovation seeks to advance existing logic through evolutionary thought rather than come up with revolutionary, explosive ideas.

This is a useful route to consider because T&T is already a major user of foreign technology without being a significant producer in its own right.

It is therefore a relatively simpler and less research-intensive side of the innovation chain from which to enter the play.

Percentage contribution to GDP by industry

Industry 1999 2000 2001 2002 2003

Petroleum 30.9 32.6 32.9 34.7 39.8

Non-petroleum (agriculture based) 73.2 71.9 72.4 70.5 65.2

Manufacturing (1) 7.4 7.3 7.5 7.3 6.7

Services 64.3 63.2 63.5 61.7 57.2

FSIM (2) (4.2) (4.5) (5.4) (5.2) (5.1)

Gross Domestic Product 100.0 100.0 100.0 100.0 100.0

1) Excludes oil refining and petroleum industries.

2) Financial Intermediation Services indirectly measured.

Source: Central Statistical Office, National Income Division.

Dr Rolph Balgobin is the executive director of the UWI-Institute of Business.

He can be reached at 662-9894, e-mail address: [email protected]

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