Dear Editor
Dr Ramesh Gampat’s letter ‘Investment is not a major driver of economic growth in Guyana’ (SN, September 15) has given much food for thought, and further complements the discussions on economic growth in Guyana. Dr Gampat pointed out that in the last forty-five years (1960-2014) Guyana’s average annual investment at 26.7 per cent of its GDP compared favourably to Trinidad (23 per cent) Latin America and the Caribbean (21 per cent) and Developing East Asia and the Pacific (33.2 per cent). However, he argued that “despite this high level of investment Guyana’s economy grew by a pathetic 1.9 per cent during the forty-five year period.” He further pointed out that a “regression analysis showed that a 10 per cent increase in investment causes growth to rise by 0.5 in Guyana,” which is low by any standard. Dr Gampat identified a number of reasons for the low return on investment in Guyana among them the topography of the land.
Multilateral development banks like the World Bank, IDB and CDB found out that it is far more expensive to finance infrastructure projects in Guyana owing to the low density of the population especially in the outlying Amerindian villages and the vast size of the geography compared to Britain.
Further, Guyana is below sea level and the rehabilitation and upkeep of sea defence is very expensive, even more so presently with global warming and the threat of a rising sea level. Therefore, the cost of sea defence alone and other hinterland projects can be considered non-feasible economically, but are they practical? Let me state that I agree with Dr Gampat that poor construction, poor maintenance and corruption are reasons which are responsible for the low return on these investments; however, these are only part of the problem.
Dr Gampat concluded that “in-vestment is a major driver of economic growth.” Early economic growth models like the Harrod-Domar model identified investment as a major variable in economic growth, but this has been successfully challenged by more recent research identifying endogenous growth, that factored in skills and the search for new ideas. Further, higher investment can only sustain economic growth to the steady state level, after which growth begins to moderate. The main reason for the dismal growth performance of Guyana since independence is that Total Factor Productivity (TFP) has been marginal or negative most of the time. It is also possible for economic growth to be negative despite high investment due to negative TFP impact.
Nobel Laureate Robert Solow’s ground-breaking article ‘A Contribu-tion to the Theory of Economic Growth’ (1956), showed how technological progress rather than capital accumulation was the main driver of long-term economic growth. The higher level of growth experienced by the fastest growing economies is due not so much to a high level of investment but to technology with a high level of human capital. While investment in physical capital exhibits constant returns to scale, human capital contributes to increasing returns to scale in the production process. Researches by Barro and Lee showed how every level of education raised the return on investment with a higher return to a broad class of physical and human capital which is non-diminishing in character.
There have been several empirical studies on economic growth in Guyana. However, Staritz Atoyon and Gold (2007) in a paper entitled ‘Guyana: Why has Growth Stopp-ed?’ represents an important point of departure in the analysis since it modelled the impact of labour productivity on Guyana’s economic performance. This study found that in the period of the nineties Guyana’s high growth rate of around 7 to 8 per cent was driven mainly by high Total Factor Productivity (TFP) with the highest TFP being in 1994. Guyana’s economy began a downward slide after 1998 as TFP once again became negative.
Further, factor accumulation as a driver of economic growth will experience diminishing returns. However, human capital is the factor of production that exhibits an increasing return to scale in that doubling input will more than double output. Higher TFP will increase and sustain higher per capita income; this is the means by which living standards improve without putting pressure on prices and balance of payments.
Lora and Pages’ (2011) article in Finance and Development pointed out that it is not the lack of investment but inefficient production that holds back Latin America. They further argued that had TFP grown at the same rate as it did in the US since 1960, per capita income in Latin America today would have been 54 per cent higher. It is for this reason that eminent economist and Nobel Laureate Robert Lucas argued that countries which are poor will remain so unless TFP improves. History has shown that countries with a high level of human capital can double their economic size in less than 25 years. The major challenge is for appropriate policies and instruments to address the major constraints to economic growth. True, Guy-ana will not be able to address all its constraints at one stroke, but as Danni Rodrik argued, it is necessary to identify and address the binding constraints to jump start economic growth. Guyana needs to grow by 7-8 per cent for more than 20 years for it to catch up with its peers in the region.
Yours faithfully,
Rajendra Rampersaud
