Then and now
Sadly, as we approach Republic Day 2015, and after about half a century of independence, the classic description of the Guyana colonial economy as very small (even micro by global standards), poor, highly open, and exceptionally dependent on trade in primary commodities remains as broadly accurate today as it was back then. Consider the following enduring economic features. In terms of size, Guyana’s GDP today, at current basic prices, is about US$ 2.6 billion. This constitutes a truly micro market when compared to an estimated global nominal GDP of about US$100 trillion or thousand billion. Its present population is about 0.75 million persons as compared to 7.1 billion worldwide. In terms of level of living, its present per capita GDP is approximately US$3500.This is less than one-half the global average; the second lowest in Caricom; one-quarter or less that of The Bahamas, Trinidad and Tobago and Antigua-Barbuda; and only about eight per cent that of the OECD countries. In terms of openness, current trade (exports plus imports) totals US$ 3.2 billion, which is nearly 125 per cent of its GDP! Furthermore, foreign savings also accounted for about two-thirds of total investment in the economy over the years 2012-2013.
With total exports presently valued at about US$1.4 billion, almost this entire amount is currently earned from the export sale of primary commodities, principally, gold, rice, bauxite, sugar, and forest products (mainly logs) plus a miscellany of “other” commodities (including fish, sand and fruits). Today’s profile is similar to what it was five decades ago, except that the relative contributions of commodities to the total would have changed.
Furthermore, while the country’s export earnings are used to finance a wide range of consumption, intermediate, capital equipment and machinery imports, which Guyana cannot produce domestically, its import of fuel and lubricants plus food for intermediate use (processing) at US$ 0.65 billion is relatively large, presently accounting for about 36 per cent of total imports of US$1.8 billion and about one-quarter of Guyana’s GDP.
Commodity super cycles
Readers knowledgeable about Guyana are no doubt well aware that, ever so often, commodities traded in global commodity markets go through periodic episodes or cycles of rising and then falling prices. These are usually quite pronounced and when the commodities affected are those Guyana exports or imports the country invariably feels the consequences of these cycles directly on incomes, jobs and more generally, livelihoods. To these easily recognized features of cycles in global commodity markets some economists have in recent years controversially identified what they label as commodity super cycles. I describe this notion briefly below before proceeding further.
As readers know whenever Guyana exports a commodity this usually generates employment, incomes, consumption, and revenues for the government, as well as foreign exchange with which to import wanted products that are not available locally. All these are crucial to the economic growth and performance of the economy. Because, as we also know from experience, commodity prices are volatile in global markets, as would be expected therefore this feature makes regulation and management of commodity dependent economies very difficult. Commodity super cycle theorists however make the claim that, if one were to take a very long term view (centuries long) of the global economy and commodity markets, one would find that over long periods of more or less four decades, commodity prices rise for about half that time only to peak and decline and return to where they were. This would therefore be the time span of a complete commodity super cycle.
The driving force in the upswing phase of rising commodity prices is growth in demand for commodities induced by rising GDP, incomes, employment and urbanization. However, during the downturn phase of falling commodity prices, technological improvements and investment-driven expansion of commodity output takes place, thereby leading to oversupply.
However, this formulation has had to face two enormous methodological obstacles, thereby leading to great scepticism about its usefulness. First, the data required to support this theory would have to go back centuries, indeed to times when these were not collected for purposes of economic analysis as they would be routinely done today. Second, the available statistical techniques could not have been safely applied to such weak data.
The United Nations Division of Economic and Social Affairs (DESA) in a 2012 breakthrough publication was able to overcome these obstacles (Super-cycles of Commodities Prices since the mid-nineteenth Century by B Erten and J A Ocampo). This achievement rested on the statistical technique borrowed from engineering and known as the ‘band-pass filter’. Obviously I cannot address this in an SN column except perhaps to observe here that the filter offers a method to extract a statistical cycle within a range of specified periodicities.
Empirical researches thus far seem to have produced consensus around three completed non-oil commodity super cycles since the late 19th century. First there is the period from 1894 to 1932. The peak of that cycle was identified as occurring in 1917 around World War I. As we shall have cause to point out later, World War I produced massive disruptions to the functioning of the global economy both through the devastation of war itself and the consequences of its peace settlements. The second super cycle identified is from 1932 to 1971. The peak has been identified as 1951. This period also embraced the devastation of war (World War II). This time however the peace produced a massive postwar reconstruction of Europe, largely financed through the US Marshall Plan, which coincided with the peak of the super cycle.
The third super cycle has been identified as covering the period from 1971 to 1999. Currently there is a super cycle that commenced in 2000. This overlaps with the global ‘war on terror’ so that one notes the periods identified as super cycles have witnessed severe exogenous shocks to the global economy, including wars and conflicts. The question therefore arises do super cycles hinge on these?
Next week I shall continue this discussion.
