Dear Editor,
Following our criticism of his earlier article, your business columnist Mr. Christopher Ram has taken up the challenge to justify his position on the issue of export allowances. Readers will judge for themselves whether he has done so adequately and come to their own conclusions as to the desirability, or not, of this feature.
Permit us please though the opportunity to offer readers a broader view than that proferred by Mr. Ram which in our opinion is simplistic, misleading or erroneous.
He begins by saying that this allowance “gives substantial tax relief to all but eleven products (not services) exported to non-Caricom countries”. He was comfortable in making such a bold claim even though he later admits that “tax data in Guyana are impossible to come by” and that with regard to who may be beneficiaries, admits that “such information simply is not publicly available.” Mr. Ram should have pointed out that the incentive does not “give substantial tax relief”, it merely offers it. The distinction of course is central to the issue, given that in order to enjoy the benefits, companies have to meet certain demanding criteria. As we see later, it is not happening.
Cost and benefits.
Your columnist claims and would have readers believe that “export allowances were introduced as an incentive for companies engaged in foreign exchange earnings”. Compounding this misinformation he goes on to say that when the allowances were introduced in 1988 the black market for foreign exchange was thriving and now that things have changed substantially ” the economic justification for its retention seems to have reduced substantially”. In other words, abolish it.
What has conveniently been ignored is the fact that the Guyana dollar has suffered a massive devaluation during this very period, now trading at 200 to 1 against the US dollar versus 10 to 1 as it was then. This points to the fact that forex earnings continue to be insufficient and inadequate.
The argument is being framed incorrectly if focused on forex earnings. Before that can be realized, a promoter has to come forward, an investment has to be made, jobs will be created, goods have to be produced, exports have to be made to non-Caricom countries and if this happens and if the percentage of such sales in relation to the total sales of the company reaches 61%, the company will enjoy a tax rebate. In all of this the economy will benefit in many ways including payment of PAYE, etc.
Mr. Ram insinuates that this concession was in response to requests. We are not aware that this was so. This incentive was not lobbied for and was introduced by Government for a specific and desirable purpose i.e. to diversify the economy and encourage value-added production for export. Has it achieved this goal to any significant extent? Let us look at the export figures.
The Bank of Guyana (BOG) site gives it as follows:
Total exports and imports for the years 2004 – 2006 are as follows:
US$Mln. 2004 2005 2006
Total Exports 589.1 551 601.3
Total Imports 646.9 783.7 885
This shows that exports as a percentage of imports declined from 91% in 2004 to 70% in 2005 and further to 68% in 2006. In other words our forex earnings are insufficient and considerably less than our imports. Total value of non-traditional exports (the ones that could qualify for the tax rebate) is not only static but has even declined marginally from US$162.7 million in 2004 to US$157.7 million by 2006. If anything these figures would suggest that existing incentives, such as this allowance and others are insufficient and that more are needed if we are to reverse the situation whereby imports are outstripping exports. One of these we strongly feel is that sales to Caricom markets as well should qualify for this rebate.
Is Guyana the only country that offers incentives to encourage exports? The answer is no. All countries do it ; from the mighty to the lowliest. Just this week an article in the NY Times (February 1, 2008) had the following to say:
– After years of complaints from the United States and Europe about China’s growing trade surplus, authorities here (China) have removed incentives that once favoured exporters of cheap goods.
– Starting last June, for instance, China removed or reduced tax rebates on hundreds of items for export.
– But the actions are also part of Beijing’s desire to move China higher up the global manufacturing chain – away from the least-finished products, like plastic children’s toys, toward more advanced exports that require skilled labour, like small electronics and even automobiles.
What is clear from this is that even China still gives its exporters tax rebates and that it was only as recently as June 2007 that it moved to “remove or reduce” such rebates but not on all of its exports. Moreover, this was only done in response to pressure from the US and EU. Bear in mind that China’s annual trade surplus with the USA exceeds US$250 billion and with Europe it is about the same amount.
Let us look again at Guyana’s export performance. In the case of the wood sector which Mr. Ram singles out for attention in his article the figures reveal a most disturbing trend. While total exports of timber rose from US$45 million in 2004 to US$70.3 million in 2006 this was due mainly to a surge in log exports which is undesirable as it is value-added exports that are needed. The BOG site has this to say : “Receipts from plywood exports by Barama (which was the main exporter of plywood) amounted to US$8.5 million, a decline from US$9.7 million at end 2005.” Ten years prior Barama’s exports of plywood were some four times greater than this and they did not export any logs. Surely this must point to what an uncompetitive manufacturing destination this is. Why else would anyone want to send logs halfway around the world? Again it is clear ; if we want to break the mould of being just a source of raw materials then the state has to act as the catalyst. We are convinced that plywood exports alone could reach US$200 million annually and total manufactured wood products an equal or greater amount than this. The Vincente Molinos report which was done in 1994 (funded by the Carter Center for the Ministry of Finance) showed that whereas just 7 jobs are created per 1000 cubic metres of timber if exported in log form, 111 jobs would be created if the same volume were exported as architectural millwork, i.e. kiln-dried and machined. Moving higher up the value chain e.g. pre-finished flooring, doors, cabinets, furniture etc. would create even more jobs and commensurate economic activity. The situation is not what Mr. Ram points it to be i.e. of a private sector seeking handouts from the government. The famous, almost fabled potential of Guyana that has been spoken about for the past 50 years has not materalised and will not unless we are indeed honest with ourselves.
I am not an economist or academic but do know that all countries create incentives to stimulate development and to create jobs. I also know that no country, great or small is going to complain about Guyana’s paltry US$160 million of exports which Mr. Ram goes to great lengths to belittle, even ridicule.
Your business columnist does his reputation as an analyst of some substance no favour when he allows pettiness and vindictiveness to get the better of him as is the case in these articles.
There are other fallacies and weaknesses in Mr. Ram’s article that we will address later. The weak grasp of developmental economics that he displays should not be allowed to go unchallenged.
Yours faithfully,
Ronald Bulkan
Precision Woodworking
Limited
