Development Watch
By Tarron Khemraj
Introduction
My columns have elicited quite a campaign of letters to the press promoting spin, misinformation and distractions. Several old friends of mine still living in Guyana have emailed me to say the columns must be having an impact given the angry letter responses. I really do not need to respond to the personal attacks. After all, I am confident in what I have written; and the ideas I write down in these columns are based on ten years of my academic research on the Guyana economy. My ideas are continually being refined and reviewed in rigorous academic peer-reviewed publications. It would be interesting for the government folks who write the uninformed letters to enlighten the Guyanese people on their credentials to comment on the matters on which they have chosen to write.
Scholarly citations as misinformation
Google has come in useful for the spinners who cite scholarly academic work for the sole purpose to distract from the issue at hand. One pro-government letter writer just alluded to the abstract of an academic paper published in the Journal of Monetary Economics (JME) and became an authority overnight. This individual seemed to have dabbled in the abstract of the article (and a few selected pages) and came out as an authority to make the categorical pronouncement that the article “surely destroys Khemraj’s arguments.” As I have noted last week, the academic paper that was published in JME has limited applicability to Guyana because of the underdeveloped nature of our country’s financial sector. I must know a thing or two about finance and banking in developing economies. After all, I do not merely Google abstracts – I partake in pushing forward the frontier of knowledge in my field. Now that I got that out of the way, let me explain briefly why the academic paper is not relevant to Guyana.
My key argument is the IMF and World Bank have narrow measures of macroeconomic fundamentals. I have noted that Guyana can only boast about sound macroeconomic fundamentals when it transforms its economy and relies less on remittances and foreign aid (as a percentage of GDP) and produce goods and services on which the rest of the world place a high premium. As I have noted, the IMF focuses only on short-term stabilization (which I do not see as a problem) and not long-term structural production policies; moreover, the Guyana government, which is responsible for long-term structural production policies (example industrial policies), has simply failed to deliver on that regard. Of course, the case is often made by the government folks that I fail to factor in the large debt the PPP government took over from the PNC. The pro-government folks note that it took seventeen years to achieve “financial viability.” The latter is a red herring and is no reason why this government should have failed to deliver on more robust growth in the past seventeen years. I will take this issue up in more detail in a later column.
The JME paper – to which our Googling Scholar (GS) alluded – utilizes movements in stock returns (capital gains + dividends) as a measure of macroeconomic fundamentals. The article makes the assumption that stock markets are a superior gauge of “effective” macroeconomic fundamentals in times of financial and economic crisis and in periods of tranquillity. The first problem I have with the article is it proposes a very narrow interpretation of macroeconomic fundamentals. Stock traders never think five or ten years into the future and the issue of changing the production structure is usually not on the minds of these traders. The second problem I have with the article is Guyana’s stock exchange is highly underdeveloped and trading typically takes place one day per week and sometimes for ten minutes only on that day as there are not many trades to conduct. Many firms are not willing to list on the Guyana Stock Exchange and trading is highly susceptible to manipulation. The third problem I have is Guyana and most developing countries possess financial systems that are dominated by banks. This is likely to occur indefinitely as was noted by Joseph Stiglitz in an academic paper (in Oxford Review of Economic Policy) in 1989. The latter point was supported by a more recent paper in the World Bank Economic Review; the authors found the de-listing and high concentration of trading activities in many developing economies. Therefore, stock returns are not such a good measure from which to calculate “effective” fundamentals that suit Guyana’s circumstances. Guyana’s macroeconomic fundamentals will be sound/stable when the economy starts to upgrade itself to a higher and more productive commodities and services.
Static versus dynamic analysis
Our Googling Scholars (GSs) have noted that my column is static because it does not take into considerations the financial crisis. As noted above, one GS has already cited in the wrong context the JME paper from which the critique that my analysis is static came. Dynamic analysis in economics utilizes time. Usually differential and difference equations are used to model the time path of economic variables. Well, we do not need to do that in the Stabroek News. Simple charts and tables will get the point over for the man on the street (and hopefully OP!). Any analysis that occurs over time is dynamic – thus it is clear my columns are dynamic in nature. As I have noted in past columns, I am concerned with economic growth from long-term structural transformation of the Guyana economy – that’s as dynamic as it gets. The point I want to get over to my readers is do not get distracted from the irrelevant use of technical terms from the GSs.
Of course, my critics can make the point that I am not considering the recent global financial crisis. But this is a very recent phenomenon that did not commence since 1998. What happen to Guyana’s economic growth from 1998 to 2007? This is another matter I will take up in the next columns. We will have to compare Guyana with other small open developing economies to make a meaningful judgement here.
Do I view remittances as evil?
One GS noted that I see remittances as evil. Well, that’s a very strong term. I certainly do not see this inflow as evil. I have noted it helps to stabilize the foreign exchange rate. But I also said it provides a false sense of success and postpones the need for vital reform of governance and production policies. You see when families’ consumption is propped up by remittances, it allows the government to claim success that did not result from meaningful domestic employment. This is not the kind of long-term development strategy that the government will want to promote. I have noted in my first column that remittances cannot be seen as a substitute for foreign direct investments (FDIs); it has a terrible dual – the depreciation of Guyana’s precious human capital base; and a developmental strategy can hardly be fashioned around these inflows when there is a serious shortage of human capital at home (see Development Watch column of SN July 8, 2009).
Next week we will look at: “Slow fyah, mo fyah and the Guyanese growth stagnation.”
Send comments to:
tarronkhemraj@gmail.com