The Impact of Macroeconoinic Policies in Trinidad and Tobago

This research falls under the problem area of the effects of structural adjustment policies on the development of the private sector. Despite more than a decade of adjustment, investment performance in many developing countries has shown significant decline.¹ Empirical studies show that total investment was adversely affected by factors such as external indebtedness and macroeconomic instability which led to a lack of investor confidence. Private investment, in turn, was affected by a fall-off in public investment due to the complementarity of these two components, with the effect of the real exchange rate on private investment being complex.² The lack of private investment response to macroeconomic adjustment pointed to a need to explore the heterogeneous behaviour of firms in developing countries as well as the financial constraints on private investment (FitzGerald 1992a & 1992b).

Sensible people do not get involved in arguments about whether economic progress is due to government activity or to individual initiative; they know that it is due to both, and they concern themselves with asking only what is the proper contribution of each. (Lewis 1955: 376)

This chapter describes the context of the study relative to what constitutes the private sector in a developing country, Trinidad & Tobago, focusing on the environment in which the firm operates and the patterns of behaviour and structural features that characterize the economy and the firm. These structures and patterns have been influenced by the historical processes and institutions through which the economies of many developing countries have evolved, giving rise to a heterogeneous private sector. Thus, the aim of this chapter is to provide some insights that can afford a better understanding of the impact of macroeconomic policies in a developing country context. Some of the main issues discussed in this chapter are:¹

In the application of structural adjustment in developing countries, macroeconomic policies are normally recommended by the IMF and the World Bank as part of a package of stabilization and economic restructuring. Emphasis is given in these macro policies to appropriate price signals that ensure the proper functioning of markets. These price incentives ought to lead to the efficient operation of firms, increased profitability and investment - particularly in the traded goods sector. Adjustment policies do not clearly articulate the manner and the processes by which firms adjust to become more efficient. To better understand the impact of the macro policies, it is worthwhile to understand how these policies affect the firm and possibilities for adjustment.

This chapter sums up the argument of the study, presents the hypotheses, and provides information about the data such as: the sources of data/coverage, the method of collection, sampling design, the strengths and weaknesses of the data. It therefore sets the foundation for the formulation and investigation of the study hypotheses, in addition to providing information about the technical aspects of the study, the quality of the data, and the limitations relative to the interpretation of the results.

In this chapter, the analysis of the performance of firms during adjustment begins with the evaluation of selected variables in the production and asset structures of firms over the period 1983–94 relative to firm size. Following the presentation of the theoretical aspects and hypotheses in the previous chapters, this analysis attempts to bridge the gap between the macro and micro aspects of the study by looking at factors in the structure of the firm that are likely to be affected by relative price changes. These factors can in turn affect the profitability and investment outcomes of firms. This analysis addresses some of the main themes highlighted in the formulation of the hypotheses in Chapter 4, such as heterogeneity based on size/access to resources, the inherited production/asset structures of firms and changes in relative prices brought on by the need for economic adjustment.

The previous chapter explored selected variables in the cost and asset structures of firms based on differences with respect to size of firm. Another area of distinction is firm ownership (foreign/local), which, like firm size, has relevance in the access to and cost of credit to finance investment and working capital. It is argued that foreign firms, as a subgroup of actors in the private sector, are part of a global network that relies on intra-group sales, can have favoured access to banks both local and international, and can borrow internally from parents and affiliate companies (FitzGerald 1993).

In Chapters 5 and 6, the themes of heterogeneity and structure were explored from the perspective of firm size and ownership. Examination of these themes continues in this chapter with an evaluation of the effect of policy changes over time looking at variation based on industry. This evaluation is discussed in section 7.2. Section 7.3 presents a summary of the results, and conclusions follow in section 7.4.

This chapter is an empirical investigation of the hypotheses presented in Chapter 4. Chapters 5, 6 and 7 analysed adjustment of firms through structural changes over time assuming a heterogeneous private sector. The analysis models the impact of relative prices on firms using variables in the cost and asset structures, which act as the medium through which the effects of adjustment are felt. The availability of a survey with qualitative responses related to the stated effects and responses of a small sample of firms will support the analyses.¹ By combining both quantitative and qualitative survey data the aim is to obtain the most plausible explanations relative to the regression results.

This chapter summarizes the findings of the study, discusses its limitations and strengths, and derives implications for future policy decisions. Section 9.2 recaps the main focus of the study and offers a discussion of its limitations and strengths. Section 9.3 presents a summary of the findings and section 9.4 presents the main policy implications. Concluding remarks follow in section 9.5.