Introduction
Last week’s column concluded the treatment of Guyana’s new National Accounts series and resumed the discussion on the impacts of the global crisis on the economies of Guyana and the wider Caricom region. I had resumed at the point where I was discussing the financial impacts of the crisis, having already covered such topics as the “triplet deficits” (private sector, current account and fiscal account) and the dependence of these economies on “debt and capital inflows-led” drivers of economic growth.
I had also traced in broad outline trends in capital inflows to the region, noting the shift from official sources (governments and international financial institutions (IFIs) to private inflows. Six major considerations lie behind this shift, but I was only able to treat with the first, that is, the decisive public policy shift away from a “protectionist-inwardly focused development path” towards an outwardly-focused and open policy stance.
From official to private
capital inflows
A second consideration behind the shift from official to private capital inflows was the creation of a dedicated macro-economic, legal, regulatory, and institutional framework in support of private capital inflows. This was supported by participation in IMF and World Bank stabilization and economic reform programmes. One result of this shift is that in this period the region signed over 70 bilateral investment treaties (BITs) with other nations.
A third consideration was the effort of Caricom to avoid situations where external firms were playing one country off the other as they bargained for investment incentives. A start was also made on the still uncompleted project of promoting capital market integration in the context of the Caricom Single Market and Economy (CSME).
A fourth consideration is that Caricom member states sought to systematically exploit the geo-strategic and location advantages of the area. This was aided by the then Cold War between the Soviet and USA blocs. With the end of the Cold War, location advantages continued to be exploited, for example, 1) being on the same time zone as the Eastern seaboard of the USA and 2) the very short distances away from all major economic North American economic hubs, by global standards. The migration of a large Caribbean diaspora to the USA and Canada also fostered capital inflows to the region.
Indeed, the latter promoted strong cultural ties between the region and North America. This added to those arising from colonial ties to Britain and through Britain, the wider European Union. Further, the relatively large African and Asian populations of the region strengthened cultural ties with Africa and Asia.
Finally, in developing regions, a major deterrent to both private and public investment flows is the risk of political and social instability. While by our standards there was considerable political and social instability in the region: coups (Grenada and Suriname); black power and insurrectionist upsurges in Trinidad and Tobago; political-ghetto-racial upsurges in Jamaica and, political-racial conflict in Guyana, by world standards these paled in comparison. Investment in the region was considered less ‘at-risk’ than for other developing areas, including at the time Latin America, where serious political conflict, coups, civil war and dictatorships were far more common.
One notable feature that should be noted as an aside is that with the development of an indigenous investment class (whether resident locally or abroad) all the governments of the region have continued to treat foreign direct investment (FDI) as superior in its productivity. This is attributed to its better access to technology and skills, but this gap has narrowed considerably in recent years as many successful regional firms will attest.
Risk-averse
As the global crisis intensified after the middle of 2008, it became clear that 1) foreign investors had become very risk-averse and 2) the credit crunch had led to their downgrading of the business outlook. New foreign direct investments were frozen or completely abandoned. Further, those investments already in train were put on hold, as we saw with regional investments in bauxite-alumina, energy, gold, and tourism facilities (hotels, golf courses and, theme parks. Portfolio investors and other lenders rapidly re-arranged their portfolios in favour of safer assets. This ‘flight to quality’ lowered returns, but risk was reduced.
The impact of these negative developments varied across the region because countries’ dependence on foreign capital inflows varied. At the regional level, FDI has been much more important than financial (portfolio) capital. This is unusual when compared to the rest of Latin America, where as a rule portfolio investments and short-term credit have provided the principal means for those countries to close their financing gaps. To this extent though, the Caricom region has been fortunate, since financial capital (due to its greater liquidity) is much more volatile than direct investment.
The fate of ODA
Since the global economic crisis, rich countries have come under severe budgetary pressures as they have seen 1) fiscal revenues decline, and 2) face increased pressures to provide bailouts due to the financial meltdown, and increased expenditures on stimulus packages. This combination has forced the governments of advanced economies to re-prioritize outlays away from overseas development assistance (ODA).
Indeed, along with their G20 partners the rich countries have pressured the international financial institutions to take up their shortfalls. Thus for example, at the G20 Summit of April last year a line of credit equal to US$1100 billion was proposed for the IMF-World Bank Group to on-lend to developing countries. It was coming out of this initiative that the increase of Special Drawing Rights (previously discussed) was distributed to the region by the IMF last year.
One issue which gave rise to much anxiety last year was the announcement by both Canada and the United Kingdom that they had embarked on a major programme to reorganize their ODA flows to the region. At this point readers should recall that, because of the high per capita incomes of several Caricom member states, they no longer qualify for concessionary rates on IFI borrowing.
Next week I shall continue this discussion and address the global economic crisis impact on remittance flows and trade credit in Guyana and the wider Caricom region.
