AN EMPIRICAL ESTIMATION

OF PRODUCITVITY AND
GROWTH IN AN ENERGYDEPENDENT ECONOMY
Sustainability in Trinidad & Tobago
L.K. Narine, M. Boman, A.D. Ali & S. Moonsammy
Department of Agricultural Economics and Extension
Faculty of Food and Agriculture
The University of the West Indies

Trinidad & Tobago

Background
T&T:

1. Global leader of ammonia exports

2. Largest supplier of LNG to the USA
3. The second largest exporter of methanol
4. Highest GDP per capita (est. 31k) in the Caribbean
Latin America
The energy sector:

1. Accounts for > 40% of GDP

2. Contributes 80% of total exports
3. Utilizes 5% of domestic employment

and

Productivity Concerns
The real growth rate has slowed from 7.5% in 2008 to

1.6% in 2013
Although the natural resource stock is comparable to

wealthy countries like Norway (when adjusted for

population) and Brunei, T&T has a significantly lower
GDP per capita and slower growth rate.
Without a petrochemical sector, Barbados has

performed at a similar level to T&T

Aim
To evaluate if T&Ts economy is converging

toward, or diverging from, a weakly

sustainable path by considering productivity
levels of total capital stock (reproducible and
non-renewable resources)

Objectives
1. Estimate historical productivity of capital input (k) and

non-renewable capital input (E) by estimating factor

shares and total factor productivity growth
2. Estimate the steady state level of total capital stocks k

and E (steady state capital according to the Solow

growth model)
3. Verify any deviations in actual capital stocks and

steady state capital

Sustainability

Sustainability if W1 W0 and so on, i.e. dWt/dt 0

Sustainability by this definition does not imply that utility in each future period

t must be as high as its current level

Weak Sustainability
Solows version of sustainability agrees with

Hicksian income; the level at which an

economy can indefinitely consume while
maintaining its stock of total capital
In this framework, there is unlimited

substitution between man-made (reproducible)

capital and natural (non-renewable) capital

Sustainability Measures
Measures

Description

Genuine Savings

Stock-based measure of the true rate of gross savings

after accounting for human capital investment, natural
resource depletion and damages caused by pollution

Total Factor Productivity

TFP reflects the contribution to output as a result of the

more efficient use of capital or the adoption of new
production technologies

Factor Shares

Measures the marginal contribution of each factor (k, E) to

output growth, used as a proxy for the Ease of capital
substitution

Investments (Solows framework)

=k+E
k* = i*+ k
Depreciation of k and E determines i*
If the extraction rate , i* . Therefore, (k*)

Variables
Variables

Description

Genuine Savings

The difference in savings after accounting for the sum of

depreciation on natural and man-made capital, expressed as a
fraction of national income

Reproducible
Capital
Non-renewable
capital
Mean saving rate

Value of the total stock of reproducible capital (const. US$)

Value of the stock of non-renewable energy resources (const.
US$)
Actual mean rate of savings over the entire time period

Term

GS

k
E
s

TFP growth rate

TFP growth rate over the entire time period

Depreciation of k

Actual rate of depreciation or consumption of reproducible

capital over the entire time period

Actual extraction or depletion rate of non-renewable resources

(hydrocarbons) over the entire time period

Depreciation of E

Convergence to Sustainability
The economy is thought to converge to a

sustainable path when:

GS = 0
k (reproducible capital stock) is at least as

productive as E (non-renewable capital)

the gap between k and the steady state level of

total capital (k*) is minimized

Results: Genuine Savings

50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Genuine Savings (% of GNI)

Net national savings (% of GNI)

Results: Factor Productivity

0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05

1990 - 1994

1995 - 1999

2000 - 2004

2005 - 2008

-0.1
-0.15

TFP:

Factor share of k

0.02

0.05

Factor share of E

0.07

0.05

Parameters used to estimate k*

Parameters

Denotation

Value

Actual mean saving rate

0.300

Overall TFP growth rate (1990 2008)

0.050

Observed depreciation of reproducible capital (k)

0.100

Observed depreciation of non-renewable capital (extraction rate)

0.300

Coefficient of k (estimated coefficients of a log-log regression)

0.330

Coefficient of E

0.670

Actual capital stock vs. Steady

state capital
4500
4000
3500
3000
2500
2000
1500
1000
500
0

Actual Capital Stock (k)

Steady State level of Total Capital (k*)

Discussion and Conclusions

Genuine savings: T&T passed in earlier time

periods (preceding 2002); in recent years

(post 2002), the country failed
Solows primary focus was the particular

conditions which allowed constant or nondeclining consumption over time:

< : non-renewable resource flow accounts

for less than half the value of production.

Coefficients indicated that E contributed

significantly more to output than k [ > ]

In the period 2005 2008, k became unproductive

to output growth for the first time in 19 years.

Rents from oil and gas increased; investments in k

remained unchanged

From 2003 onwards, unproductive reproducible capital

and greater productivity in E resulted in escalated

requirements of k* levels
In later years, peak productivity in E was roughly 6

times greater than the highest level of productivity in k

The gap between required k* and k widened

considerably; k was unable to offset depreciation in

both k and E

Stiglitz (1974) showed that if TFP is large

enough, reproducible capital accumulation can

offset the effects of non-renewable resource
depletion.
If this is indeed the case, Trinidad and Tobagos

economy is at an impasse having experienced

small TFP growth coupled with insufficient
investments

Results of GS, TFP, factor shares and k*

indicated some level of convergence toward

sustainability in the 1990s, but considerable
divergence from a sustainable path from 2002
onwards:
Therefore, T&Ts economy is DIVERGING from
a weakly sustainable path

Thank you!