No easy remedy
Behind the sound and fury in public debates, self-serving government pronouncements, and the studied misdirections and deceptions in statements made by various economic authorities, readers should be reminded that presently we are witnessing the confused economic responses of a state, whose essential dynamic continues to be a vehicle for criminal enterprise. As such ostrich-like and make-believe public policies, the real risk of regulatory meltdown, and the crisis of credibility in regard to public policy are systemically integrated facets of the criminalized state operating at a time of unprecedented global economic crisis.
I have elaborated in previous Sunday Stabroek columns on the degeneration of the Guyana state into a vehicle for criminal endeavours. I will not repeat those discussions here, as my only concern is to remind readers that we are not faced with random and unrelated occurrences. As I shall show in the weeks to come, all are directly linked to the state’s pathological condition. There is therefore, no easy remedy.
Risk
Last week, I argued that the country faces a real risk of regulatory meltdown, if the Commissioner of Insurance continues to feel compelled to act outside existing legal regulatory provisions. Pervious action (inaction) on her part has been rationalised on the ground of protecting “policy holders.” This is absurd. When a regulator feels compelled to act in this manner, then clearly the regulatory provisions should be amended forthwith. If this does not happen, firms will know for the future that the particular regulatory provision is effectively inoperable, as was the case with CLICO. They could therefore, act accordingly without risk of penalty.
This is a situation of moral hazard, which all regulations have a duty to prevent.
Further, by identifying the interests of “policy holder” as the crucial consideration, the Commissioner fails to publicly address the fact that a key purpose of regulation is to contend with “trade-offs” among different stakeholders in the regulatory process. There is a professional obligation to show that, not only the interests of “policy holders” are being considered, but in this instance those of 1) “investors” in CLICO’s depository-banking operations (disguised as insurance business) 2) the “general public,” and 3) the integrity of the entire financial system. The reason why “policy holders” were prioritized should then be explained.
Due diligence
Based on recent events, there is the further issue of “due diligence.” It does not augur well that the central bank let senior management of Hand-in-Hand Trust Corporation plead that several other depositors in the Stanford Financial Group got burnt, as if this were justification for their failure to do “due diligence.” Effective banking regulation requires that the first priority must be that those who hold funds in trust are responsible for them, and must perform effective “due diligence.”
The central bank should always stand ready to publicly refute utterances from financial managers, which introduce rationalisations for their failure to fulfil their bounden duty.
It would be a sad day for Guyana, if without regulatory rebuke, such pathetic claims continue to be publicly offered as solace to investors whose funds have been compromised, as in the Stanford Financial Group’s Ponzi scheme.
From the perspective of the criminalized state, recent events betray a not surprising and continuing crisis of credibility. However, for financial markets to work effectively, public policy must be credible. In Guyana this is clearly not the case, and, we may therefore, ask: why?
For the remainder of this column I shall introduce some of the main factors, which have contributed to this sad state of affairs.
Official statistics: Missing, misleading and massaged
On several occasions in the past I have drawn attention to the weaknesses of official economic and financial statistics. This is a major factor in credibility. Statistics are routinely published late. Often, key data are either published very irregularly or not at all. Good examples are unemployment and poverty data, and estimates of the underground economy capital flight, and remittances. Moreover, all too frequently, when finally published, inadequate notation makes the meaning of several of these statistics unclear, as in the Appendix tables to the 2009 National Budget. Worst of all, many persons now believe that published official statistics are massaged to conform to the wishes of the administration.
Indeed these circumstances have been going on for decades. In the years of the PNC administration this was excused by claiming the “high cost” of data dissemination. Today, with the Internet, this particular excuse is no longer tenable.
Inconsistency and incoherence
A second factor behind the credibility crisis is the many revealed inconsistencies and incoherence of public policy. Consider a few examples thus:
1) Right up to last October (2008) when it was officially signed, the government had consistently focused on the detrimental consequences of the Cariforum-EC, Economic Partnership Agreement (EPA). Four months later, to the astonishment of many persons, the 2009 National Budget did not address the EPA. To say the least, this omission has confused economic actors about government’s intent.
2) In similar vein the National Budget does not offer a serious discussion of the global financial crisis, credit crunch and economic recession. Yet, in the National Assembly debates, under intense pressure from Opposition parliamentarians and other public commentators, this ended up as perhaps the single most referenced topic in the debates!
3) When the Value Added Tax (VAT) was introduced many assurances were given that the tax would be “revenue neutral.” Being a regressive tax, the government knew that the greater burden of the tax would fall on the poor. With a rate of 16 per cent, assurances were thus given that the VAT would not raise more revenue than that raised by the taxes it replaced. Yet, despite being almost daily confronted with this earlier promise, the government has continued to reap a bumper harvest from the regressive VAT tax, with no regard to “revenue neutrality.”
4) Finally, we may further ask: does anyone in Guyana believe that a credible sugar “turn-around” plan can be produced in the one month the government has allotted for this task, when appointing the new Guysuco Board? Does anyone believe that after the long secular decline of the industry since the late 1960s when sugar output was about 370,000 tonnes that a production “turn-around” can be achieved in two years? Does anyone believe that a government can be sincere when predicting a growth rate for the economy this year, which is greater by more than one-half that of the previous year, (that is, 4.7 vs 3.1 per cent).
There are several other instances, which reveal that government’s economic actions are not treated as credible. Next week I shall continue from this point, developing the idea that the crisis of credibility is a mirror-image of the risk of regulatory meltdown and the practice of make-believe economics. In turn, these derive from the more general condition of the state.
