Introduction
In last week’s column I discussed two concepts which readers should find useful as we proceed to evaluate the impact of government activity on the economy of Guyana. These concepts are economic efficiency and market failure, as economists strictly define them.
One approach I can take towards appraising the impact of government activity on the economy is a micro approach. This approach emphasizes the evaluation of specific government activities, after they are classified by type, sector and coverage, for purposes of the analysis.
Using this approach is, however, not practical for a series of Sunday columns, as the list of specific government activities is huge. Instead, I shall use a macro approach. This approach summarily looks at the impacts of government activity as a whole on economic growth and development in Guyana. Where convenient I will, however, use specific activities as examples, to illustrate my argument.
Diminishing returns
The first macro or overall observation I wish to make is that there are several painful signs that the rate of return on government activity has been rapidly diminishing and could well be in very negative territory. This is obvious if we look carefully at the current and capital expenditures of both the central government and public enterprises.
To my mind, this is strikingly evident in relation to 1) infrastructure expenditures; 2) public building works (schools, community and multi-purpose centres); 3) sectoral expenditures in areas like agriculture and manufacturing; and 4) government transfers aimed at moderating the widening gap between rich and poor and the eradication of persistent pockets of poverty. I shall illustrate some of the evidence in these areas as we proceed.
Politics trumps
economies
Second, the significant growth of government activity in the economy has created a situation in which politics too often trumps economic efficiency in determining the allocation of economic resources. With the capacity of the government to provide subsidies with little or no push back from the public and private business, the role of economic efficiency criteria in the allocation of resources is diminished.
The use of cost-benefit analysis (CBA) has become trivial when choosing among alternatives for public expenditure. Indeed, it might be argued that while CBA assessments may continue to be undertaken, their results do not shift the political priorities for resource use, which the government establishes.
To be fair, one does not expect technical measures to always guide decisions to allocate resources.
The government may want to satisfy goals which it thinks the society prefers, and so would want to deliberately override economic efficiency criteria.
This is acceptable. However, the routine neglect or trivialization of technical measures in the decision-making process is a sure recipe for economic waste.
Third, the politicization of the resource allocation mechanism does not only flow from the government to the non-government sectors (mainly private business). As the government has grown, private businesses and other non-government sectors have not stood idly by or remained passive over this development. Specifically, these sectors have resorted to using their political influence over the government to secure their interests.
The politics of the government-private sector interaction either replaces or infects the business and economic development relations that should exist. Make no bones about it; the private sector is very busy trying to ‘use’ the government, even as the weight of government activity in the economy continues to expand.
In this public-private interaction the resort to influence-peddling easily morphs into the undermining of due process. Influence peddling and lobbying subtly extend to forms of bribery and corruption.
Incentive mechanism
Fourth, the extensive engagement of government in activities that could be provided privately reduces the rewards/punishment discipline of private markets. In private markets when businesses satisfy the market place they reap the reward of private profit; if they do not then the cost of inefficiency, mismanagement and failure to deliver the goods and services in the required amounts, at the required times, results in business failure.
No such reward/punishment incentive mechanism exists for the delivery of government produced goods and services the population may not want or need. A good example which comes to my mind is the continued use of public resources to produce the Daily and Sunday Chronicle.
Fifth, because government activity requires the ‘command’ of resources held by the non-government sectors, the cost of this transfer from non-government sectors to the government (particularly in the form of taxes) burdens the non-government sector. High taxation is the primary foundation on which huge government activity is built in Guyana. High taxes on income combined with a punitive and regressive VAT tax form the main source of financing government expenditures.
Consequences
This high level of taxation has two direct consequences. First, the payment of high levels of taxation disincentivises worker effort and productivity as well as entrepreneurial effort. Second, high levels of taxation encourage systematic tax evasion. This in turn becomes the main driver of the phantom/underground economy, which as I have shown in previous columns remains well entrenched in our society.
However, extensive tax evasion is not only a driver of the underground economy, but the consequences of such systematic tax evasion is that the main burden of taxation falls on captive tax-payers, like employees in the public sector and large firms who cannot evade these taxes.
Sixth, lacking competitive pressures, government activities in Guyana, as elsewhere are well-known for their low rates of innovation, adaptation and introduction of new technologies. This is indeed a matter of great regret, as models of economic growth point out that improvements in productivity is the most crucial contributor to growth. If the processes of technological enhancement are impeded by huge government activities in the economy, the overall performance of the economy and society’s advancement will falter.
Finally, as we are all aware from continuous media exposure, the Government of Guyana is very non-transparent and un-forthcoming in providing details of its economic activities.
This creates an informational deficit, in which persons who have access to detailed economic information can reap economic rents from its sale. This, of course, undermines economic progress.
