Introduction
Last week’s column indicated that, during the coming weeks, I would be assessing the present state of the global crisis, which began in 2008. In that column I also sought to briefly identify the core elements of the global crisis. Additionally I sought to establish that the present crisis could only be properly assessed after taking into account the negative effects of its immediate precursor that is, the highly inflationary food and fuel price-induced crisis of 2007-2008. That precursor crisis had several negative impacts, particularly in poor developing countries where explosive social and political eruptions took place. These events dramatized the highly destructive and rapid transmission of the negative effects of high food and fuel prices across the world, especially in the main the developing areas.
The global crisis that emerged in 2008 had multiple transmission channels, which produced even greater hardship than that which occurred during 2007-2008. It would be useful therefore, in this week’s column to observe each of these transmission channels before proceeding to evaluate the current state of the global crisis.
Transmission channels
In a recent study, entitled Global Economic Crisis: CARICOM Impacts and Responses, published in the Caribbean Development Report Vol. 2, I had urged that the negative impacts of the global economic crisis has been transmitted to Guyana and the wider Caricom sub-region through ten major channels. Although I had identified these channels separately, it remains the case that in practice they interact continuously and indeed the incidence of their impacts through these multiple channels also varies.
The first channel has been the sector exporting goods and services. In Guyana this would have negatively impacted our mineral exports (mainly bauxite), our agriculture exports (sugar, rice and other non-traditional crops) and our forestry exports. In the services sector our fledging eco-tourism industry would have also suffered.
Secondly, our corresponding import sector was another important channel. Fluctuations as well as inflationary increases in the imported prices for food, fuel, intermediate and capital goods imports affected the functioning of the economy mainly through their direct effects on costs of production and the levels of living of consumers.
Thirdly, the terms of trade, or the ratio of export to import prices, also became an important transmission channel. In general what did occur was that the prices of exported commodities tended to fall, as the global economic recession reduced global demand. Similarly, despite the food and fuel price inflation of 2007-2008, these price increases were somewhat abated, as with reduced demand occasioned by the economic recession, import price rises were either contained or reduced. As a rule however the prices of exports tended to fall more than the comparable fall in import prices. The terms of trade did not favour us. While as a net food exporter Guyana would have gained, as a net fuel importer Guyana would not have benefited.
Fourthly, although Guyana practises a fixed exchange rate regime linked to the United States dollar, the global crisis led to significant exchange rate variations between the United States dollar and other currencies important to our trade. These include the euro, pound sterling, Japanese yen, Chinese yuan, and Canadian dollar. In practice, therefore, we can fairly say these changes to the exchange rate relations with other currencies did not reflect changes in either Guyana’s macro economy or its preferred import/export trade strategy. Indeed they reflected solely the status of the United States dollar on world financial markets.
Fifthly, the financial crisis and credit squeeze have posed considerable difficulties for those larger exporting firms that depended on off-shore financial operations. In addition, wealthy individuals with holdings in external financial markets as well as locally-based and owned financial firms were also negatively impacted by the overseas financial turmoil.
Sixthly, the global crisis has also produced severe budgetary pressures in the rich nations and institutions from which we receive most of our official development assistance (ODA). This has led to a re-prioritization of their development assistance as well as overall reductions in its size, thereby affecting official external financial capital flows to Guyana. In an effort to cope with reductions in their budgetary support (because of diversion of funds to their stimulus packages) governments of the rich nations have pushed for more private investment flows and the re-capitalisation of crucial financial institutions like the IMF, World Bank and Inter-American Development Bank (IDB) in order to assist poor developing countries like Guyana.
Seventh, another important transmission channel has been “worker remittances” sent back by Guyanese living abroad to their families and friends living in Guyana, Previously, these remittances had averaged about 20-25 per cent of Guyana’s GDP during the five years (2003-2007) immediately preceding the eruption of the global crisis in 2008. IDB and IMF data suggest a decline in this ratio in 2009 as well as a decline in the absolute value of worker remittances.
Eighth, a relatively underappreciated transmission mechanism has been the impact of the global crisis on the temporary movement of Guyanese workers who travel informally to find short-term employment in neighbouring countries, particularly, Barbados, Suriname and Trinidad & Tobago. From anecdotal accounts these temporary migrant workers have found it harder to find work as the receiving countries fell on hard times.
Next week I shall wrap up this discussion of the main transmission channels of the global crisis to Guyana by illustrating the two remaining ones, namely, financial contagion and the irregular or underground economy, before proceeding to look at where the global crisis stands today.
