Introduction
In last Sunday’s column I argued that government activity is operating as a drag on the national economy. Several features of government spending exemplify this outcome, including 1) the poor to negative value returns for public sector spending, particularly its capital expenditures; 2) the unfortunate politicization of what should be commercial/business relations between the government and private businesses; 3) the widespread existence of situations where politics seemingly trumps economic efficiency in resource allocation; 4) the substantially reduced role played by the ‘rewards-punishment’ incentive mechanism, which routinely operates in private markets; and 5) the high private burden of taxation required to support this very high level of government activity, which in turn disincentivises private effort. These outcomes are reflected in the fact that several government development projects/programmes are extremely controversial and the subjects of intense public debate and criticism in the public media. These include the Amaila Falls project; the one laptop per family programme proposed by the Office of the President; the hydraulic projects centering on the Hope Canal; the proposed Marriott Hotel; and several housing projects around the country, including Pradoville II. These illustrations do not include the weekly, if not daily media exposure of very shoddy work performed by government contractors.
No doubt, it is as a result of all these considerations that several readers have queried whether there is any area of government involvement in the economy which is justified. Despite my expressed concerns, I believe that there are eight definite areas of the economy and society where government activity is essential in Guyana. These are considered in what follows.
National security
First, although private activity can be more involved in areas such as national security; the preservation of the rule of law; the protection of citizen’s well-being and property rights; and contract enforcement, these activities are best suited for government to be the main provider. In other jurisdictions (but in Guyana to a far lesser degree), private businesses are involved in such law and order areas as property and citizen protection; apprehension; incarceration; contract enforcement; mediation and arbitration; and investigation. Indeed several areas of national defence are also being ‘contracted-out’ to private businesses!
While there is the consideration that the Government of Guyana’s involvement in these areas leaves much to be desired, based on public complaints and actual outcomes, I still consider the government as the organization best suited and therefore obligated to ensure that these activities are satisfactorily delivered to the society. What are required are public vigilance, strong institutional and legal safeguards, and the political will to deliver these services fairly and effectively.
Macroeconomic balance
The second area where the government activity is best suited to deliver is the maintenance of macroeconomic balance of the overall economy. One of the distinctive features of a private market-driven economy, such as Guyana, is that as it changes over time, overall macroeconomic imbalances routinely occur. These imbalances are seen 1) internally, especially in fluctuations in the level of employment and changes in the price level; and 2) externally, in the deterioration of the balance of payments situation and/or adverse movements in the value of the currency in relation to others.
Because of recurring imbalances one of the primary tasks of government is to correct them and prevent them from impeding the growth and performance of the economy. Clearly private business cannot fulfil this obligation. The government has at its disposal, several policy tools to help it perform this function, including the Bank of Guyana and its monetary instruments, and the Ministry of Finance and its taxation, spending and borrowing powers.
External trading environment
A third area where government activity is absolutely essential in Guyana is in the promotion of a suitable external trading environment. While it is true that it is mainly individuals and firms, which buy and sell goods overseas, a public enterprise like GuySuCo sells its sugar abroad, as well as buys chemicals, fertilizers, machinery and equipment from abroad. The more important consideration, however, is for government to establish the general framework under which external trading takes place. We see this function exercised clearly in the Treaty of Chaguaramas and the creation of the Caribbean Community and the effort to promote the CSME. The recently concluded Cariforum-EC, Economic Partnership Agreement (2008) is another example. Similarly, global trade negotiation under the World Trade Organization (WTO) is a task for government not private business, although the latter is expected to advise the former on the positions it should adopt.
Equity
The fourth area I shall address this week is the role of government in promoting an equitable distribution of income and wealth in the society. While private markets (and competition) drive economic efficiency, this is obtained with no regard as to how the benefits from improved economic efficiency are distributed. There are several ways by which the government can pursue this. One is by vertical re-distribution, such as the use of progressive taxes. Progressive taxes require that those with higher incomes and wealth pay a greater share of their income and wealth in taxes than those with lesser incomes and wealth. The government can also redistribute income horizontally, which it does when it pays national insurance benefits, pension or old-age benefits to all who qualify, irrespective of their income and wealth.
In Guyana efforts to redistribute income do not appear to have been very successful. The Gini-Coefficient, which is a measure of inequality in the distribution of income, remains high in Guyana, over 40 per cent by the most recent estimates.
Next week I shall continue this discussion and also consider the other areas where government activity is needed.
