By Tarron Khemraj
Introduction
Financing economic development is not going to be an easy task. The Jagdeo Administration has sought to circumvent the binding constraint of limited developmental funds by pursuing a LCDS, which is premised on obtaining funds for not cutting down Guyana’s forests. While innovative, the LCDS is dependent on many variables, especially global political ones, beyond the control of Guyana and President Jagdeo. Therefore, we have to move on and even revisit old ideas for the purpose of economic development financing. By economic development financing, I would like to emphasize the financing of bio-fuel industries, agro-industrial processing and packaging of farm products, furniture and other forms of manufacturing, cultural industries and eco-tourism, and a new inland city to replace Georgetown (as we can now expect a greater than 2 degree rise in temperature). Of course, infrastructure financing is essential and the current PPP government has made positive strides on the infrastructure front, although I am not in agreement with the sequencing of some infrastructure projects.
The focus on development financing must be realistic, within our control, and intertwined with farm and industrial production. According to economic theory, the financial system is supposed to intermediate the savings of the society from those who have surplus cash to those with good ideas who would like to invest and accumulate wealth for themselves, savers and society. This theory was emphasized by foreign consultants and economists who advised the Guyana government (PNC and PPP) that liberalizing the financial sector would release private enterprise and intermediate in the most optimal manner the society’s savings into investments. Therefore, with the intention to liberalize finance Guyana dismantled its only development bank – the Guyana Agricultural and Industrial Development Bank (GAIBANK) in 1995. There are several reasons given for the problems GAIBANK encountered; however, the rapid devaluation of the Guyana dollar (part of the liberalization agenda) was detrimental to GAIBANK which had significant foreign liabilities. This institution was actually making money as Dr. Kenrick Hunte had indicated in the past.
In spite of good attempts to liberalize the financial sector and promote financial innovation, we still see sub-optimal channelling of savings to sound investment projects. There are several reasons for this outcome, but definitely the risky nature of venturing into new and alternative industries is one of them as was pointed out recently by Mr. John Tracey. There is however another kind of risk – risk associated with fundamental uncertainty that is not measurable. Thus, in a world of fundamental uncertainty there is a role for state intervention of various kinds; in this case a development bank.
The Guyana financial system is in a present state where our stock market is illiquid and trading is infrequent; not many firms are willing to go public. We have privatized several state-owned entities but never offered equity shares that could be traded on the stock exchange (this was done in India and Brazil), thus adding liquidity and depth to the exchange. There is no long-term government bond market, let alone a corporate-bond market. The development of a vibrant corporate-bond market is also dependent on firms listing on the stock exchange. The money market for commercial papers (a short-term financial instrument that listed firms can use to manage cash flow) is non-existent. Again a commercial paper market would be dependent on firms coming out and listing on the stock exchange.
The Guyana financial sector, however, is still dominated by commercial banks, which are natural oligopolies that desire safe loans (can’t blame them for that), wide loan-deposit rate spreads, government securities, foreign assets and excess reserves. Commercial banks subject themselves, and rightly so, to a different corporate governance mandate to maximize profits and shareholder returns. The commercial banks have contributed immensely to employment creation of good jobs. The key problem however is that, given the problem of fundamental uncertainty, the objectives of commercial banks may not coincide with the need to transform the production structure of the economy to higher value products.
The role of the state
There is a long debate in economics as to what should be the role of the government in development. Most students are taught the mainstream story that the government should pursue stabilization policies (fiscal and monetary policies), enact and enforce laws (especially property rights), and defence. Once these things are done private enterprise and markets will get the task of development done. The history of economic development, however, does not conform to the story of a minimum state; particularly in the early stages of development.
In his 1955 book (Theory of Economic Growth), Sir Arthur Lewis noted that “no country has made economic progress without positive stimulus from intelligent governments.” Of course, “intelligent” is the key word as Lewis also warned of the “mischief done to economic life by governments.” Since independence Guyanese have many examples of such mischief or bad governance. Nevertheless we do not have the luxury (as they do on CNBC and Fox Business channels) to ignore the role an intelligent government can play in the process of development. Given the evidence of history, I think it is futile to engage in debates of whether markets or the state is best to guide development. A better deployment of energy would be to try to improve on the mistakes of past governments in order to mould an intelligent and effective government that could play a facilitating role for the private sector to be more effective.
Also there is an abundance of examples from scholarly work of people such as Alice Amsden, Ha-Joon Chang, Peter Evans, Robert Wade, and others who have shown how governments can pursue intelligent industrial policies in which the private sector takes the lead with prodding support from an activist state. Government policies have been important for shaping global giants like Toyota, Hyundai and Samsung. For instance, the Japanese car industries received close to 40 years of tariff support before giants like Toyota were able to compete globally. Brazil’s Embraer (maker of airplanes) was formed by the government and then later privatized. State development banks have played a critical role in all this. Even recently The Economist (which sees itself as a free market newspaper) grudgingly acknowledged successful industrial policy in Brazil when it accepted that Embraer was first formed by the government and then sold to private investors (note the Brazilian government still owns shares in Embraer). The same was said for a large Brazilian steel maker.
In the same issue of The Economist (Nov 14th 2009), the newspaper also reluctantly noted that Brazil established a giant government development bank with a balance sheet larger than the World Bank’s. Interestingly, the Brazilian government finances the development bank (the BNDS) from taxation (but other sources are also used). According to The Economist BNDS is profitable and at times it even outsources some credit analysis of tricky loans to private banks, which collect a fee. The BNDS has also been an important source of stable finance for Brazilian companies during the global financial crisis. Incidentally, when President Lula recently proposed building a hydroelectric plant in Guyana this very development bank was invoked as the source of financing.
Another interesting story coming out of Brazil is Petrobras (the oil company), which is state-controlled, but a percentage of its shares is publicly traded on the stock market. This confounds the typical corporate governance models students are taught in business schools. Here we have a state-owned company with privately owned shares traded on a stock exchange. The good thing about this arrangement is any business (state or privately owned) that is traded on a stock exchange must be subjected to transparency and public scrutiny. We have lost this opportunity as most state corporations were sold off already. Nevertheless, it is my belief an intelligent Guyana government can actually start agro-industrial businesses (with private individuals) that could be further privatized by selling shares to be traded on the local stock market. I know it is a radical idea but perhaps necessary.
Conclusion
This essay sets the stage for the next one by noting that a state development bank is an essential component of an industrial policy framework; a policy set moreover which focuses on transforming production for the purpose of creating high quality jobs. The development bank is intended to complement the financial system and improve the intermediation of the society’s savings to investors. Once properly managed the development bank can lead to the deepening of the financial system.
Next column I would get into the specifics. First, I would propose several principles under which such a bank must operate so as to minimize the problems the old GAIBANK faced. Second, I would propose some points on how to finance the liability of the bank.
Kindly send comments to:
tkhemraj@ncf.edu
