Photograph: Kyle Walcott 

Reflections on Stability, Growth, and Economic Renewal

Authored by: Winston Dookeran

The Core Logic of Growth Theory

At the heart of growth theory lies the Harrod-Domar model, which underscores a fundamental relationship: the nexus between a nation’s savings rate and its capital-output ratio. The lesson is unambiguous: higher savings, combined with a lower capital-output ratio, create the conditions for sustained economic growth.

This core logic has since evolved into the framework of endogenous growth theory, where the accumulation of both physical and human capital emerges as the central drivers of long-term progress. Growth, in this perspective, is not merely the product of external forces, but the outcome of deliberate choices that strengthen a nation’s capacity for innovation, productivity, and resilience.

The evidence is clear. Oil-rich nations across the Arabian Gulf, such as Oman, the United Arab Emirates, and Qatar, have translated these principles into prosperity, while the Asian Tigers, such as Hong Kong, Singapore, South Korea, and Taiwan, have transformed themselves into global exemplars of rapid growth and equitable wealth creation.

Their experience reminds us that even small states, constrained in size but expansive in vision, can secure their place in the global economy. What is required is the firm pursuit of warranted growth rates, the balance point where investment, productivity, and stability converge. Above all, we must recognize that equitable development is not the by-product of growth, but its very foundation, the pivot upon which sustainable progress rests.

Is the TT Economy in a Disequilibrium Trap?

There are three common types of disequilibrium in an economy: cyclical, secular, and structural, each measured by the size of the discrepancy between supply and demand, leading to persistent surpluses or shortages. In the aggregate, these imbalances often manifest in the balance of payments. A disequilibrium trap arises when the combined forces of the market and the state persistently produce mismatches between supply and demand, preventing the system from reaching stability.

Cyclical disequilibrium is usually the result of disruptions in trade flows and can, at times, be self-correcting. Secular disequilibrium emerges when fundamental factors such as technology, economy-wide action, or demographic trends undergo lasting change. Structural disequilibrium, however, is deeper: it reflects enduring shifts in the economy’s structure, production capabilities, and external balances, which are not easily reversible.

A cursory review of current data suggests that Trinidad and Tobago is experiencing all three types of disequilibria. The cyclical volatility of the foreign exchange market and the imposition of new tariff measures, the secular shifts in production functions and consumption behavior, and the structural transformations in the finance equation, including pension funding and changes in the tradable-non-tradable balance,  all converge to create widespread imbalances in the balance of payments.

Policy responses must therefore be aligned with the sources of disequilibrium. This requires measures to raise the national savings rate, attract net inflows of funds, correct distortions in wage and price structures, and reduce the capital-output ratio through technology, productivity gains, and institutional reforms that strengthen competitiveness.

Yet, the evidence points to something more fundamental: the TT economy has entered a permanent disequilibrium trap. Markets, across both the public and private sectors, do not clear, even momentarily. Adjustments intended to restore balance through prices, exchange rates, and interest rates often collide rather than synchronize. The outcome is predictable: widening fiscal deficits, weak foreign exchange buffers, and negative interest rate differentials, which in turn accelerate capital outflows and worsen balance of payments pressures.

In such a scenario, the warranted growth path drifts off course. Traditional policy prescriptions, whether deficit financing, devaluation, or diversification, will not suffice to restore balance. Even transactional fixes, such as transfer pricing adjustments, fall short of addressing the systemic nature of the trap. What is required, instead, is the construction of a new model of analysis, one that can more precisely identify the sources of disequilibrium and chart the policy choices necessary to move the economy onto a path of stability and sustainable growth.

Macro-Systemic Measures Towards a High-Level Equilibrium in the 2026 Budget Statement

The disequilibrium trap is marked by recurring boom-and-bust cycles, driven by fluctuations in prices and output, bubbles within the financial sector, persistent imbalances between supply and demand, economy-wide spillovers and externalities, and distortions in the statistical data, as claimed in the large and steadily negative figures in the item ‘errors and omissions’ in the national accounts of TT.

The pathway to a high-level equilibrium cannot be immediate. It requires a long-term horizon, punctuated by short-term adjustment measures that incrementally steer the economy towards stability. At the center of this transition must be the restoration of balance in the external accounts, the Balance of Payments, complemented by the design of a sustainable finance equation, recalibrated on an annual basis.

Yet, these macro-systemic measures demand more than the simple balancing of numbers. The arithmetic must add up, but so too must the geometry and the algebra. In this construct, arithmetic captures the empirical realities of the economy, geometry speaks to its underlying structure, and algebra reflects the policy choices that connect them both.

Only by aligning these dimensions, empirical, structural, and policy-driven, can adjustment measures be credibly linked to the logic of the growth path ahead. It is within this alignment that the sustainable course of action can be found.

Rethinking Fiscal Policy for the Future

Looking beyond any single budget cycle, the foregoing analytics point to the need for deliberate and unambiguous choices in fiscal policy. These macro-systemic measures must evolve into cohesive, long-term programs — not short-term fixes — forming the basis of a renewed fiscal strategy to address the persistent disequilibrium in Trinidad and Tobago’s economy. What is required is a fresh start: one that restores credibility, redefines priorities, and builds the foundations for stability, equity, and sustainable growth. The following ten-point framework outlines key focus areas that can guide this transformation, offering practical pathways toward a balanced and resilient economy.

The Stability of the Balance of Payments

The Balance of Payments (BOP) is the central monitor of a nation’s economic relationship with the rest of the world. For open economies like Trinidad and Tobago, its stability is not optional, it is essential to survival and sustainability.

It serves both as a mirror of international competitiveness and as a guide for policy shaping exchange rate adjustments, trade strategies, and financial regulation. Persistent disequilibria, whether deficits or surpluses, undermine growth, weaken employment prospects, strain reserves, and risk unsustainable debt.

A credible budget must therefore begin with the BOP and its projections. Only by keeping external accounts, exports, imports, and capital flows in balance can the economy secure reserves, strengthen competitiveness, and lay the foundation for sustained growth.

A Sustainable Finance Equation
A sustainable finance framework aligns fiscal and monetary policies with national revenue and investment capacity, ensuring that growth is not dependent on excessive debt or short-term inflows. It should incorporate innovative instruments, such as diaspora bonds and currency swaps, which provide the opportunity to raise ten-year financing at minimal or zero cost of capital, while also addressing structural challenges such as the actuarial financing gap of the National Insurance Board.

Raising the Savings Rate
Increasing national savings requires both domestic incentives and the engagement of foreign-based nationals to channel net inflows of funds. By raising the proportion of national income saved by households, firms, and the state, the economy can create a robust pool of resources to finance domestic investment rather than relying heavily on foreign borrowing. Low-cost, accessible, and technologically efficient instruments, including cash apps and diaspora bonds, supported by the technical expertise of institutions such as the World Bank, can be adapted to Caribbean conditions to mobilize savings effectively.

Lowering the Capital-Output Ratio (COR)
Improving the efficiency of capital use, measured by the COR or Incremental Capital-Output Ratio (ICOR), enhances national productivity by reducing the amount of capital needed to generate additional output. This can be achieved through technological progress, improved management practices, sectoral diversification, and access to funding. A lower COR not only optimizes domestic investment but also guides strategies to attract and leverage external savings.

Encouraging Investments with Net Inflows of Funds
Investment efficiency, measured by the Incremental Capital-Output Ratio (ICOR), reflects the additional capital required to generate a unit of output. Improving this efficiency requires targeted inflows directed toward technological progress, increasing economic complexity, and linking financing to growth. Attracting foreign direct investment (FDI) and portfolio flows that bring new capital and technology rather than speculative short-term funds that deplete reserves is essential to raising the marginal efficiency of investment and supporting sustainable development.

Buffering the Exchange Rate
Trinidad and Tobago should pursue diplomatic initiatives to arrange currency swaps under facilities such as the FEMA Repo Arrangement with the Federal Reserve Bank, as well as similar agreements with other major trading partners, including China and India. These swaps, combined with managing the exchange rate within a flexible band, enhance foreign currency liquidity during periods of market stress, mitigate volatility, and reduce speculative pressures on the domestic currency, thereby supporting overall financial stability.

Targeting the Warranted Growth Rate
Achieving a warranted growth rate requires identifying the “balanced” rate consistent with savings, investment, and external stability, and aligning national income growth with the economy’s capacity for sustained investment and full employment. Catalytic fiscal and institutional measures, including targeted spending, taxation, and structural reforms, are essential, with the state acting as a strategic catalyst. Linear growth strategies without institutional reform are unlikely to succeed; non-linear approaches, by contrast, accommodate the evolving frontiers of development knowledge and foster innovation-led progress.

Endogenizing the Equity Goal in Development
Equity should be a central objective of development policy, not merely a by-product of growth. This could involve a comprehensive actuarial study to establish a universal basic income, supported by legislation to create a national framework ensuring a livable income for all citizens over the age of seventeen. By making equity an internal driver of policy, growth strategies can actively reduce poverty, share wealth more broadly, and operate within a self-sustaining, market-based model.

Creating Externalities to Support Physical and Human Capital Accumulation
Policies must account for the spillover effects of economic activity, quantifying both the social costs and benefits of projects. By designing and internalizing positive externalities, such as improved infrastructure, education, health, and research and development, investments can more effectively enhance both physical capital (factories, roads) and human capital (skills, knowledge), ensuring that growth is efficient, sustainable, and socially inclusive.

Restructuring the Institutional Framework for Performance

Effective governance is the cornerstone of any policy framework. Institutional reform must align goals with measurable performance, establish clear rules, and strengthen transparency and accountability. By creating more capable and responsive state and regulatory institutions, policies can be implemented efficiently, sustained over time, and achieve their intended outcomes.

These measures gain additional clarity when viewed through the lens of contemporary growth theory, the knife-edge dynamics of capital efficiency, the tectonic shifts in global trade and technology, and the geopolitical determinants of national success or failure. Ultimately, the test of policy effectiveness is captured in Amartya Sen’s insight from Development as Freedom: economic development is not merely about increasing wealth but about expanding the freedoms and capabilities of the people it serves.