By Tarron Khemraj
This column will examine various aspects of economic policy in Guyana. I will argue that Guyana’s economic policy is deeply influenced by the International Monetary Fund (IMF) and the World Bank (WB). In addition, I will argue that the IMF and WB have narrow policy mandates that do not address the transformation of Guyana’s largely backward production structure and the creation of jobs. However, we should not expect these global financial institutions to articulate production-based policies in an economy like Guyana. Therefore, when the pro-government folks cite a favourable report or comment from an IMF/WB report, they are missing the fact that these comments are highly circumscribed and pertinent to a specific mandate of short-term stabilization rather than structural production transformation and the creation of work. Usually these pro-government commentators cite the IMF/WB reports to cover up the government’s failure to implement an indigenous economic policy framework for 16 years before the recent hype of the Low Carbon Development Strategy (LCDS). While I am sympathetic to the notion of protecting our forests assets, I see the LCDS as a weak and incomplete development strategy on which I will comment in a later column. The reason why I put off a discussion of the LCDS is because we have to understand where we are now when it comes to Guyana’s economic policy agenda.
However, before proceeding let us summarize the key arguments of the past two columns as they are germane to this column. We have noted that Guyana’s macroeconomic stability is rooted in weak macroeconomic fundamentals. In addition, it was noted that foreign aid and remittances play critical roles in maintaining a false sense of stability and progress. Furthermore, real stability and progress cannot emerge until Guyana starts to produce goods and services that satisfy the following conditions: (i) the products are not at the low end of the global hierarchy of products; (ii) the products are not produced in sectors susceptible to early diminishing returns; and (iii) the products have high income elasticity in the export markets.
Misir and the market
Guyana’s economic policy agenda – which is deeply influenced by the philosophical outlook of the IMF/WB – has an underlying assumption that the free markets will deliver economic development. All that government needs to do is privatize all state enterprises, liberalize the banking sector, implement the VAT, promote new financial products via what is known as financial innovation, establish a stock exchange, promote market-based monetary policy, institute financial markets legislation, focus on poverty reduction via foreign aid and soft financing. None of these policies, however, focus on for instance promoting active industrial policy that can create jobs by transforming the production sectors. None of these policies focus on one of Guyana’s main constraints retarding development – the intractable ethnic relations and a flawed and titivated 1980 Burnham Constitution.
Therefore, I found Misir’s letter in the Stabroek News (July 26, 2009) to be very much influenced by this worldview of market fundamentalism. The Pro-Chancellor cited a paper from the Journal of Monetary Economics that argues for the market’s evaluation of macroeconomic fundamentals. Misir is using this article to rebut my previous two columns in which I argue that sound fundamentals can only result from producing valuable products that the rest of the world needs. Before I explain what is wrong with Misir’s viewpoint, we must understand that this rabid pro-market viewpoint is emanating from a man who has used Marxist class argument to explain Guyana’s political conflicts. According to Misir, the source of Guyana’s conflict stems from class interactions rather than adverse ethnic relations and networking in an ethnically bi-communal society (See Misir’s paper on the GINA website: “Social marginalization and ethnicity: a preliminary study”). Therefore, even Misir who uses Marxist analysis is now on the market fundamentalism bandwagon and worldview. We should also understand that the worldview of market fundamentalism was encapsulated in a set of policies known as the Washington Consensus.
Therefore, the notion that markets can value and internalize macroeconomic fundamentals (or variables) is a problematic one as markets in Guyana are not complete. The latter implies that markets and market participants actually exist in Guyana to establish a price by processing Misir’s preferred macroeconomic fundamentals. But this is not the case. For instance, the Guyana stock exchange is suffering because of the limited listing by companies and the low trading volumes; we do not have a secondary government bond market, let alone a corporate bond market. The money market is illiquid and trading activities are limited or non-existent. Hence, the market’s valuation of macro variables (or indicators) in times of crisis or tranquillity is non-existent. In other words, the article cited by Misir is not very relevant to the structure and institutional setting of the Guyana economy.
By the way, uncovering these economic structures in the Guyana and Caribbean setting is another reason why UG should focus some more on research so our enthusiastic Pro-Chancellor would cite articles closer to home rather than having to rely on the Journal of Monetary Economics, which really focuses more on the institutional context of the advanced economies (in particular the United States) which have deep but yet incomplete markets (economics students at UG should find out what’s a complete market – sorry Editor but I am instinctively a teacher so I had to get this off my chest!).
Stabilization policies
The first strand of Guyana’s economic policy is monetary policy that focuses extensively on price and exchange rate stability. The Bank of Guyana (BOG) implements monetary policy with the help of a tool from the IMF known as financial programming, which involves placing targets on the monetary aggregates; the latter is premised on the notion that inflation is caused by an excess amount of money chasing too few goods. To a large extent, I believe, the BOG has done its task of stabilization. The BOG has also not monetized the government’s debt (meaning it has not printed money recklessly) and as such has played an important role in maintaining short-term price stability. Of course, in the first place, it is not easy to monetize the debt by printing money under an IMF stabilization programme.
Fiscal policy also seems to be on a more sustainable path in recent years. The government has also reduced the fiscal deficit as a percentage of GDP (see my column of July 15, 2009). The latter would have played a role in maintaining the price stability.
However, what we need to understand is both monetary and fiscal policies are aimed at short-term economic management. In the Guyana context, and in most developing countries, these two aspects of economic policy have focused on the short-term. Therefore, reducing the government’s budget deficit or stabilizing the money supply – while helpful and important – do not necessarily lead to the kind of production transformation that is required (see last week’s column).
The Poverty Reduction Strategy Paper (PRSP)
Much of the government’s long-term economic strategy is embedded in the PRSP, which was supposedly developed by domestic consultation and submitted to the IMF and World Bank for their blessings and funding. Interestingly the PRSP is seen as an extension of the National Development Strategy (NDS). The PRSP document notes that the NDS is a general document with broad ideas without “(i) an action plan for implementation; (ii) costing; (iii) financing requirements; and (iv) sources of financing.”
The PRSP accepts that the low rate of economic growth in Guyana since the 1970s is the underlying cause of poverty. The document went on to identify four factors that engender poverty in Guyana: (i) poor economic policies during the era of state control; (ii) poor governance; (iii) non-complementing growth-oriented infrastructure; and (iv) deterioration in the quantum and quality of social services.
It would take several columns to fully analyze the PRSP. However, I will outline briefly my take on the most comprehensive long-term economic policy package the government, IMF and World Bank have put together for Guyana. In general, I like many of the broad ideas outlined in the document. But I think the document suffers from several problems – some of which are ideological.
First, I think the issue of poor governance is an important one. The PRSP sees the problem of governance at the regional level and the lack of human resources in the regions to take on developmental tasks. However, the document does not take into consideration the problematic nature of the titivated 1980 Burnham Constitution, which has led to disastrous outcomes given Guyana’s ethnic voting pattern. In other words, the document has to be reformed to take into consideration a Constitution and inclusive governance given the largely bi-communal nature of Guyana’s ethnic politics. Future IMF and World Bank funding should be based on this kind of reform.
Moreover, the document sees the lack of “good” institutions as a manifestation of poor governance. As a result certain institutions (yes, in economics institutions can be laws) to reform the regulatory framework were implemented (eg The Financial Institutions Act). However, while these institutions are important, targeting them does not guarantee growth from production transformation. It should also be noted that these reforms are premised on the idea that the market – in particular financial markets – will take off and sustain economic growth. However, there are good theoretical reasons to believe that finance and financial market development are dependent on production transformation rather than determine production (I publish an article last year in Social and Economic Studies outlining these theoretical arguments in the Guyana context).
Second, the PRSP does not envision a developmental role for the state. The latter imply there is no role for industrial policy. But there is a substantial literature in development economics explaining why industrial policy has not done well in some countries while it has done very well in such places as South Korea, Taiwan, Malaysia, China, Singapore, Brazil, Mauritius, etc. In other words, I believe this is an ideologically based position by the document that emanates from the market fundamentalism notion.
Third, while recognizing that manufacturing is important, the PRSP focuses on low productivity manufacturing such as sugar. For instance, the document sees the Skeldon sugar factory as important to cut cost of production and thus ensure profitability. However, the document does not have a strategy for the Demerara estates or the West Berbice estates. I have noted in previous columns that sugar is a low productivity enterprise susceptible to diminishing returns, low income elasticity and probably high price elasticity owing to the existence of many sugar substitutes. The document does not envisage a role for ethanol or bio-diesel, for instance. In other words, a superior way to save an industry and create wealth is to make a more valuable product rather than cut cost in old outmoded activities.
Fourth, the anti-poverty strategy is palliative in the sense that it is rooted in foreign aid and soft financing for palliative anti-poverty projects (eg building health centres and performing various patchworks) rather than structural production transformation. For example, it is well known that Guyana has the highest electricity rate in the Caribbean and Latin America; thereby creating a major constraint on manufacturing. Why don’t the World Bank and IDB fund a hydro-electric plant with grant financing? And let a major American or western corporation build the aluminium smelter in region 10 so as to create the demand for the energy to reduce the unit price of a large hydro-electric plant. In the long-term poverty is eliminated when people can have sustained work paying good wages.
It should be noted that I am not against building health centres and some of the piecemeal “developmental” projects of the government. However, I have to ask the question: how are these centres going to be maintained if the country does not upgrade its production structure? From where would the nurses obtain a reasonable income? For how long will the country rely on Cuban doctors? Can it obtain soft financing from the IMF/WB/IDB indefinitely?
Fifth, the document does not have a role for foreign direct investments (FDIs) even though it implicitly accepts that this source of funding is important. The financing requirement that the PRSP anticipates comes only from the international financial institutions (IMF, WB and IDB). I am not against receiving funds from the IFIs; but any development strategy which does not target a few large-scale industries (industrial policy) and incorporate a role for FDIs is not serious about long-term development.
Conclusion and miscellaneous policies
This column noted that our government continues to muddle through with a development strategy of questionable underlying assumptions. Moreover, the poverty reduction strategy is palliative and relies extensively on petty projects and financing from the IDB, WB and IMF. There is no long-term vision in the PRSP that will transform the economy. Instead, the document focuses on piecemeal policies that would just keep people above the poverty line rather than focusing on the creation of wealth through sustained work. Furthermore, on the one hand, the PRSP is rooted in liberal free market policies; while, on the other hand, the PPP continues to defend vociferously its Leninist party constitution (and democratic centralism) that has allowed it to implement its party paramountcy in ethnically bi-communal Guyana. In other words, the latter – combined with adverse ethnic networking and the PPP’s groupthink mentality – is the root of bad governance that the PRSP ignores.
In past eighteen months the government has started to move outside the PRSP. They have come up with the LCDS, which many notable commentators have already rightly criticized. Minister Robert Persaud proposed his “grow more food” campaign – but as I have noted in past letters to the press we have to ensure that farmers receive the right returns and prices. The best opportunity for farmers is perhaps the Jagdeo Initiative that aims at large-scale farming for the international markets. Perhaps when Minister Persaud can align his self-interest of small-scale farming (which for me reads subsistence farming) with that of the President, we will finally have one component of a workable development strategy.
