By Tarron Khemraj
Recently I had the chance to listen to a reasonably good speech made by President Jagdeo. In the presence of thirty plus economists and central bankers from the US and the Caribbean, during a key feature of the recently concluded 41st Annual Monetary Studies Conference, President Jagdeo made two important points. First, he noted that productivity is important to a country’s development. Second, he mentioned what Guyana would do should REDD funding really materialize, as the LCDS envisages, after the Copenhagen conference to replace the present Kyoto agreement. According to the President, he would invest heavily in food production. I agree with the point on food production. However, I still believe Guyana could simultaneously move into sugar ethanol, bio-diesel and other renewable energy sources. We do not need to, and should not, clear forests to produce bio-fuels. The Demerara and West Berbice sugar estates need to be saved. Furthermore, coconut plantations can be created to make bio-diesel and the many other products that can come from coconuts. Coconut trees also absorb carbon and could claim carbon credits under present Kyoto arrangements. I would develop the latter point in a later column.
On the issue of productivity, one can never overemphasize its importance for increasing long-term living standards for the masses. As a matter of fact, I have been underscoring its importance in the letter columns and in these columns. It is the first time I have ever heard a PPP leader mention that productivity is essential for Guyana’s economic development. However, the PPP’s record, and specifically, President Jagdeo’s record in proposing policies that would enhance Guyana’s productivity is at best mediocre.
Before I outline what is meant by productivity, its measurement, and some specific conditions that impede Guyana’s productivity (hence development), I have to comment on the other half of the President’s speech. He castigated technocrats who criticized the LCDS (there was only one technical person in the audience who critiqued the LCDS). According to the President, these technocrats do not know what they are talking about. But the President’s punch line – in the presence of at least thirty economists and bankers from Guyana, the Caribbean and the US – was to let us know that ultimately the politicians make the decisions.
However, the greatest economist of the last century, John Maynard Keynes, had something to say about this issue. I would only quote Keynes as he wrote the final pages of (The General Theory of Employment, Interest and Money) and then proceed to the meat of this column. Here is J.M. Keynes: “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…it is ideas, not vested interests, which are dangerous for good or evil.”
Of course, there are many ideas that have been floated in Guyana over the years to make it a better country where its citizens will largely desire to remain at home. Our politicians since independence in 1966 have not been good at utilizing good ideas. One such old idea holds that a persistently positive growth rate of productivity is essential to raising the living standards of everyone. Indeed, wages and salaries can only increase in the long-term through increasing productivity. Politicians have tried to break out from this truth – the connection between productivity growth and high living standards – by printing money to pay for wage increases even though the society is experiencing stagnant or negative productivity changes. However, the latter typically results in capital flight, balance of payments crises, the loss of foreign exchange reserves, and ultimately increasing inflation and socially harmful currency depreciation.
In the economics literature productivity is usually measured in two forms. First, there is labour productivity, which equals total output divided by the number of workers or hours worked. Take for instance GuySuCo. Productivity would mean total value of output divided by the number of workers employed by the sugar corporation. In spite of the recent political tussle between GAWU and the corporation over wage increases, ultimately it is the value of output that matter for a better living standard for sugar workers and their families.
The politicians made a decision several years ago, in spite of the fact that several Caribbean academics were writing since the mid-1980s that the preferential sugar prices received from Europe could one day be reversed or eroded, to invest heavily in a sugar factory for Skeldon. It turns out that the decision is more consistent with political calculations than economic ideas and logic. I have noted several times in these columns (and originally in my donkey cart economy letter earlier this year), that sugar as a commodity is unlikely to generate the kind of productivity growth that is necessary to augment the welfare of the masses. There was an era when sugar did well, but its time has passed as diminishing returns must eventually materialize for such commodities. There are also two other important logics I had noted. First, the price of sugar has not done well over the decades because of the number of substitutes that exist. Second, as people (Guyanese, Caricom nationals and the rest of the world) get richer they do not necessarily consume more sugar in proportion to the increase in wealth. A sure way to increase productivity, I believe, is to produce goods and services that people would purchase proportionately as they get richer.
Economists, however, have a second and broader measure of productivity instead of labour productivity. The broader measure is known as total factor productivity (TFP), which estimates how efficient the society utilizes labour, capital and natural resources. In other words, a country could experience positive GDP growth but negative TFP growth. The latter would imply the country is not utilizing its resources in the best possible manner. In the long-term as diminishing returns step in it is essential for TFP growth to lead the way. It is important to note that two research papers from the IMF have documented the negative historic growth of Guyana’s TFP. What are some factors in Guyana that have retarded the TFP growth and thus hinder our long-term development?
The first reason has to do with a lack of national purpose and consensus for economic development. The LCDS is a very recent proposal and before it the National Development Strategy was ignored. Of course, the LCDS is far from the best articulation of policy for Guyana.
The second reason relates to the political system under the current tinkered 1980 Burnham Constitution. The system leads to perverse and inefficient outcomes that ultimately retard TFP. There are two channels I would like to emphasize that could account for the perverse outcomes. First, the main political party only promotes those within its rank who are obedient to the group-think method. Anyone who dissents against the dominant party position is banished or marginalized within the party. For instance, Mr Khemraj Ramjattan was forced out from the PPP; while Mr Moses Nagamootoo is marginalized for dissenting. Mr Balram Singh Rai faced the same fate many years ago. The message sent to the young leaders in the PPP is sycophancy is virtue; but new ideas are vice. The second channel has to do with the nature of national politics that is polarized along ethnic lines. Intra-ethnic group networking is very important in Guyana. It so happens that those in the right ethnic network win most of the new top positions and state contracts. Moreover, the group-think syndrome has conspired with the intra-ethnic group networking to engender significant inefficiencies in the system that inhibits Guyana’s productivity. It has also led to the feeling of alienation of the other main ethnic group (African Guyanese). Unless a better Constitution which legitimizes cooperation rather than alienation is crafted, I see Guyana developing in an unbalanced manner that is ultimately socially explosive.
The third reason why Guyana experiences low TFP growth has to do with the depletion of human capital through migration. Human capital is essential for organizing and utilizing labour, capital and raw materials in the most efficient manner; more importantly, it is essential for creating new technologies and generating new ideas – the engines that keep living standards increasing. One aspect of the depleted human resource base is significant outward migration of the investor and entrepreneurial class. Another aspect is the limited focus of the government on funding research at the local university and vocational education at technical schools. The government just does not have a vision for what UG really could be. Furthermore, the university itself does not seem to care about pursuing avenues of independent funding. There are just not enough researchers (yes technical people) who are readily available to absorb foreign technology and make them suitable to domestic circumstances.
In closing, therefore, the total factor productivity of the country is determined by the existence of a favourable political environment that promotes cooperation and nurture independent ideas, limits feelings of alienation, and the existence of a core group of entrepreneurs, researchers and innovators. The President’s LCDS is yet to address any of these issues.
Please send comments to tkhemraj@ncf.edu
