By Tarron Khemraj
Introduction

By now readers would realize a common theme of these columns is the need for structural transformation of the Guyana economy. In my column of July 22, 2009, I provided data which show the Guyana economy has remained virtually the same over the past several decades. The manufacturing sector has remained flat over the years. The economy depends on traditional agriculture and primary resource extraction. Therefore, the Development Watch column of July 29, 2009 concluded that we ought to interpret sound macroeconomic fundamentals as involving favourable structural change in addition to the regularly touted price stability. In this column, I would define structural transformation and outline some principles under which it must occur. I then use the example of housing development to show a missed opportunity for such a change. This column sets the stage for the next one which examines specific proposals to achieve this transformation.

To define structural production transformation we have to go back to the classical development economics of Rosenstein-Rodan, Ragnar Nurkse, Arthur Lewis and others. Relatively more modern economists like Nicholas Kaldor also emphasized structural change and economic growth. Recently a UN paper argued structural change drives economic growth among low income countries while technology and productivity growth matters for higher income countries. Essentially the definition goes as follows – as the aggregate output of agriculture increases (non-traditional agriculture in the case of Guyana), the share (or percentage) of agriculture in GDP declines. In other words, while agricultural output increases, the manufacturing and service sectors must increase even more thus sustaining long-term economic growth.

In essence, moreover, the notion of structural change gives rise to one of my main disagreements with the PPP government. I am not convinced that the policies this government has articulated since 1992 are intended to achieve this task. I do not intend to remain quiet in the presence of palliative and backward policies.
A key binding constraint

There are several core binding constraints (lack of finance, limited skilled human capital, limited physical infrastructure and crimes) that could preclude the kind of policies necessary for structural change. However, I would like to highlight the underlying ethnic voting and persistent low-intensity ethnic conflict/distrust as potentially the main one. As some readers would have discerned, I advocate industrial policy. However, Korean-type, Japanese-type or Taiwanese-type industrial policies would be complicated in an ethnically bi-communal society as Guyana. There would have to be political cooperation and a set of laws that govern such cooperation. One way to get this done is via constitutionally backed power-sharing after each free and fair election. There are several viable models that have been proposed by Guyanese over the years. While industrial policy is essential to push Guyana, I recognize it would lack the kind of national consensus it needs under the current political arrangements.

Some economic principles
for structural change

These principles are intended for guiding economic policies. There are some universal principles no matter the nature of the country. Firstly, Guyana must produce goods and services that are valuable at home, in CARICOM and abroad. Secondly, as domestic income, CARICOM’s income and world income rise, the demand for Guyana’s produce must rise at least proportionally (the technical term is Guyana’s produce must fetch high income elasticity).  Thirdly, industrial policy must be cognizant of ethnic impacts (Mr. Ravi Dev made this point several times). Fourthly, policies must be based on cooperation among private investors, government and labour unions. Fifthly, policies must not create environmental degradation. Sixthly, policies must take the society away from dependence on remittances and foreign aid. These must become less important over time. Seventhly, foreign investments would be accepted as long as domestic content requirements are satisfied and sufficient linkages are created. Eighthly, small businesses must be complemented by a core set of large industrial clusters. Ninthly, infrastructure must mainly be linked to industrial and farm development.  Finally, the Diaspora must be involved in Guyana’s development.

Stabilization policies

While necessary, stabilization policies are tasked mainly with maintaining stable prices and exchange rate. These policies often include a sustainable fiscal policy, which means government deficits must not be monetized (by printing money) so as to lead to loss of foreign exchange reserves and hyper-inflationary pressures. In Guyana-type economies when citizens have excess local currency they tend to convert them into foreign assets and currencies; thus pressuring the exchange rate. Therefore, one of the first things the IMF does is make sure our government cannot maintain unsustainable fiscal policies.

The second set of stabilization policies is monetary policy, which is also related to fiscal policy. The Bank of Guyana has done a remarkable job in this department. There is evident stability in the exchange rate, which helps to maintain stable prices.

However, these policies are insufficient to achieve structural transformation. Furthermore, IMF policies are mainly intended for short-term stabilization and not structural transformation. Therefore, when the IMF writes a glowing tribute (which government letter writers like to cite) to the government over the ostensible stability, they are doing so from a narrow mandate.
A missed opportunity

Guyanese are reminded about the government’s housing drive. The government is quite proud of its achievement in providing house lots. Political agents run into overdrive mode when anyone even questions the government’s housing policy. I support the push for housing development and I am sure most Guyanese do. However, the government missed an opportunity to pursue industrial policy and engender the development of essential manufacturing industries. For instance, most components to make and furnish houses are imported.

Nevertheless, the housing drive creates a captive market for pre-fabricated housing components, doors, windows, cupboards, fencing, furniture, refrigerators (Guyana once made these under L.F. S. Burnham), landscaping, etc. These industries (owned by private citizens) should have been given protection, incentives and priority concomitantly with the housing drive. While some components will always have to be imported, a national policy should have ensured that most of the parts are sourced from Guyanese firms. The post-1992 elites could have also demonstrated commitment by using locally made manufactured components.  These matters cannot be left to market forces as many consultants from the IFIs would want us to believe. Without conscious guidance and encouragement from the State, Guyana would keep importing most of its components for housing and therefore miss one opportunity for transforming the economy. Such a policy not only creates temporary jobs for carpenters and other technicians for building houses, but also new industries and jobs from which wealth is generated. Therefore, the ability to service the debt/mortgages from housing loans is enhanced.

Another captive market the government has refused to take advantage of is the market for fuels for vehicles. Citizens cannot stop using their vehicles. Thus, to save the Demerara and West Berbice GuySuCo estates, the AFC proposed that a national ethanol policy be implemented – an E10 policy (for starters) so as to reduce the demand for imported gasoline. Not only does Guyana reduce the energy import bill, she creates new industries for renewable energy. It is also well known that a 10% ethanol mix in gasoline can work just as well with current vehicles.

We have to stimulate several industries at the same time because workers’ income in one firm becomes the purchasing power of another firm’s output. The latter is an old idea stretching back to Rosenstein-Rodan’s famous 1943 academic paper on industrialization. Modern economists have been able to model and extend this basic idea in mathematical equations to show the importance of demand spillovers among sectors within an economy. I believe there could be substantial demand spillovers between firms providing housing and building items (especially furniture and refrigerators) and those workers in new renewable energy industries. Here I have provided the example of only two sectors. But the same principle is enhanced as we add more sectors and firms to the economy.

Of course, these firms would eventually grow up and compete in CARICOM (under CET first) and then move on to the world stage. The latter must be the objective. There is no need to wait for the silver bullet hydroelectric plant to start doing these things. Remember cars and SUVs cannot run on hydro (unless we have full electric cars which everyone will agree is a far way into Guyana’s future).

Another important point that is often missed in the ethanol debate is the notion that Guyana will be substituting a percentage of imported gasoline for locally made ethanol. This will occur in the future. There is therefore a social benefit of this policy which will not be internalized into the private revenue calculations of GuySuCo should it go this direction. This social benefit is the present value of future savings from not having to import gasoline (using a suitable discount rate).
Please send comments to: tkhemraj@ncf.edu