A low-tax plan
It was recently reported in the Stabroek News that the President of the Georgetown Chamber of Commerce and Industry (GCCI) expressed the view that modifying the personal and corporate tax rates would be a good thing for the Guyana economy. The private sector considers this issue so important that it is willing to undertake the exercise on its own after realizing that the President’s initiative on this matter might have failed. The private sector feels that lower taxes will help stimulate economic growth. The anticipated outcome of the private sector tax reform exercise is based on the premise that by leaving more disposable income in the hands of consumers and businesses, people would be able to spend more, businesses would invest more and the economy would expand. Tackling economic growth from that angle ignores one thing: the structural rigidities of the economy as reflected in the lack of competition in large chunks of it. The lack of action to increase competition in some of these markets undermines employment growth and hence the injection of additional income into the economy on a much broader scale. Also, lowering taxes does not necessarily promote new investments, since any investment is risky and the already established companies want a sure income from a customer base newly flush with cash. In other words, the psychology of the business community might not match that of the consumers.
Consumer spending
The Lucas Stock Index (LSI) declined by 1.01 per cent in the second week of trading in the month of December 2012. The decline in the index stemmed from the 8.08 per cent drop in the value of the stocks of Guyana Bank for Trade and Industry (BTI) which outweighed the gain of 1.82 and 0.79 per cent by Banks DIH (DIH) and Demerara Distillers Limited (DDL) respectively. As a result, the LSI remained below the 40 percentage point advantage that it enjoyed over the yield of the 364-day Treasury Bills.
Consumer spending in Guyana accounts for about 70 per cent of gross domestic product (GDP) and makes it a very important variable in the macroeconomic equation. Indeed, as observed by the President of the GCCI, additional income in the hands of consumers would help to spur the economy. The size of the impact depends on the rate at which Guyanese spend their disposable income. Some work would have to be done to calculate that rate of expenditure typically referred to as the marginal propensity to consume or MPC. To get a sense of what would happen, it would be necessary to take a look at a hypothetical situation. If the MPC was 70 per cent, then one could expect Guyanese consumers to spend 70 cents of each additional dollar that they receive from a lower marginal tax rate. That also implies that they would save about 30 cents of the additional income. That behaviour further implies any amount of revenue generated from the lower marginal tax rate would help to increase total income in the economy by $3.33 for every dollar spent. It should be kept in mind that the consumption rate could be even higher with the result that the income effect could be even greater.
The economy’s actual structure
But, there is a larger issue with greater implications for the welfare of Guyanese that will not be resolved by a study of tax reform. The Guyana economy is suffering from some serious structural problems that are restraining its growth. One of those restraining factors is imperfect competition, particularly among industries with significant weight in the economy. Competition, it is agreed, is very important to the efficient functioning of a market economy. It is generally accepted that perfect competition or near perfect competition optimizes consumers’ benefits or brings consumers close to the maximum benefits that they could enjoy from participating in the market. As economists explain, the sum total of economic and social benefits that accrue to consumers and producers gives Guyana, as a nation, the maximum value that it could generate from the resources used in the production process and the products derived there from.
Pledges of reform
The administration recognizes that competition is useful and essential for expanding the possibilities and opportunities for consumers and producers in Guyana. This reality prompted it to launch a competitiveness programme about six years ago where it acknowledged that competition was essential for broadening the economic base of the country and for lifting Guyanese out of poverty. At that time too, the private sector was cited as being in support of the competitiveness initiative and is regarded in an online document on competitiveness as recognizing the need to build up competitive advantage. There was an expectation that with the aim of competing in the global marketplace, Guyana would not only improve its value-added exports, but it would also seek to expand efficiencies through competition in its own private sector.
Where competition already exists
No one would dispute that much competition exists in the retail trade industry as evidenced by the large number of buyers, vendors and hucksters found in and around the municipal and village markets, on pavements, as well as in the stores and shops in the principal shopping districts of Georgetown. But, that was the case for a very long time. The grocery stores, the variety stores, rum shops or beer gardens, and the taxi and minibus services also exhibit characteristics of highly competitive markets. The top-up market in the telecommunications industry could be added to the list. The essential characteristic among these economic agents is that none can seriously influence prices. According to the 2012 Half Year Report of the Bank of Guyana, the retail and transportation industries recorded growth rates of 11.6 and 20.2 per cent respectively, suggesting that they provided net benefits to Guyanese faster than most other sectors or industries during the first half of the year. The economic value of the market is seen principally in its efficient allocation of resources and the relatively stable prices for the services and products traded.
Monopoly advantages
It is not clear that one can make a similar observation about some of the other industries in Guyana. Despite a public declaration about the need to improve competition in the Guyana economy, a review of the strategy document reveals that the competitiveness strategy never intended to deal with some of the monopolies that exist in the country. Consequently, large chunks of the economy remain in the control of a few hands and that situation was not likely to change anytime soon. So, despite recognizing the need to increase competition, the strategy never contained any measures to expand competition in the market of some of the most prominent industries in Guyana. It remains therefore that just one company manufactures sugar and no attempt is being made to change that situation, even though the market conditions have changed radically for that company. Other industries that come to mind with monopolies in them include bauxite, cement, cardboard, cooking gas, electricity, pharmaceuticals, telecommunications, airline services, legal services, alcohol and flour. These and other industries have a big impact on the national economy and on the way Guyana allocates productive resources. Companies in these industries may want privatization, but at the same time, they want to maintain their monopoly advantages.
Being aware of that, representatives of the private sector must know that with so many industries operating under monopoly market conditions that Guyanese are not enjoying as many benefits as they could. The opportunity to expand employment and household income is being lost as long as the focus on competition remains as narrow as it is. What happens under monopolies is never good for a country. The most prevalent disposition of a monopoly is to maximize profits at a point below the selling price. This temperament results in output being lower than it ought to be. The market imperfections that accompany monopolies lead to an inefficient allocation of resources and rob Guyanese of benefits that they would have otherwise enjoyed under more competitive conditions.
One attempt at change
An attempt is being made to liberalize the telecommunication industry. While that should lead to lower prices for certain services, maximum benefits would never be achieved if the industry continues to be dominated by the two big firms. Telecommunications should not be the only industry to benefit from liberalization. An effort should be made to open up competition in other industries so as to increase employment opportunities and expand consumer spending. One can only hope that that is also part of the goal of the GCCI and its allies.
