Using foreign trade to forge economic security (Part 1)

On the 26th of May 2015, President David Granger said “Our diplomats must open more markets”. This remark was a clear indication that he wanted to use trade as a driver of economic growth and development in Guyana. Like previous presidents of Guyana, his intention is to use his foreign representatives to assist local businesses to gain greater access to, and penetration of, foreign markets for their products. After nearly 50 years of Independence, Guyana’s major exports remain the six products of gold, rice, sugar, bauxite, timber and fisheries. The President undoubtedly was prompted to make this demand of his foreign service by the very limited range of products that Guyana still depends on and the very small number of markets to which they are sold. It would appear that he sees economic security as fundamental to the success of his overall foreign policy.

Guyana does not have a very large foreign service and so the implementation of his initiative would require acquisition of capacity. The Ministry of Foreign Affairs would have to take the initiative of examining how the economic security interests of Guyana could be implemented. This is not an inexpensive venture. As such, it is still to be seen how far the President is prepared to go to meet the country’s security interests. This article explores this Presidential initiative towards Guyana’s economic development. Since one is in essence looking at international relations and its likely institutional effect, the examination will be done through the structural prism. It will be presented in two parts.

Structural analysis

Clearly, the President concurs with the view that trade and investment are the best ways to produce value and wealth, and to increase economic security. The trade and investment promotion work to be done is at the global and domestic levels, but Foreign Affairs would have to focus more of its energy at the global level and as such the primary thrust of this examination will be at the international level. Analysis of global activities relies on four structural frameworks for determining the conduct of relations with other countries and markets. These are the security, production, finance and knowledge structures. The structural view acknowledges that business is conducted in a framework of bargains and networks. At the international level, the structural outlook is governed by the behaviour of states and markets and the network of relationships that can be developed between them. Power is a major factor in sorting out the set of bargains that are arrived at from negotiations under the various structures.

In an era of globalization, trading relations among states have evolved from the mercantilist orientation to a more liberalist emphasis. Governments, therefore, are expected to play limited roles in international trade and their trade and financial policies are expected to be unrestrictive. With an open market philosophy, competition for markets and foreign investment has become even more intense as countries jostle each other for global market share.

The global structure is full of such negotiations and small states find themselves negotiating with large states in an environment of unequal power reflected in weak exchange rate regimes, volatile product prices, limited market size and low levels of efficiency. However, the change in philosophy has not led to a diminution of governments’ role in the expansion of international trade. Governments still lead the way in forging bilateral and regional agreements, in searching for investors and in finding finances and the right environment to support the production structures of the country. These intergovernmental efforts are still dominated by exchanges and bargains between developed and developing countries.

Production structure

It is in such an environment of inequity that Guyanese products are expected to compete. The production structure of Guyana is based on the set of bargains and agreements that take place among business entities in the domestic and international markets. The production structure is made up of the activities of small businesses, large businesses and government enterprises. The distribution of the productive capacity among these three producer groups is very important in determining availability of supplies and the country’s readiness to compete internationally. Stock index data produced by this writer and government reports indicate that nine companies on the stock exchange and the several government enterprises operating in the productive sector account for about 57 per cent of the nominal value of output of Guyana. This means that the rest, including privately-held companies and small businesses, accounts for 43 per cent of output. A substantial part of the economy is underperforming and suggests that Guyana’s export readiness must start at the domestic level. Trade is important too and analyzing the external sector is critical to the design of a useful trade and investment strategy.

A legitimate concern is that of production levels. Guyana has had a habit of starting things that it is unable or unwilling to sustain. This behaviour has given it a reputation as an unreliable supplier. The country exports many non-traditional products, but never seems able to ramp up production to meet stable or even a growing demand when the time comes. Even when it has the capacity to meet market demand, Guyana sometimes turns its back on stable long-term markets for a temporary benefit in price. This has happened in the Caricom market with the consequence that the country has lost its priority place in this market.

Interventionist approach

Linked to the question of level of output is that of efficiency. Something has got to be woefully wrong when the majority of the private sector produces less than half of the country’s output. One cause could be that too many Guyanese entrepreneurs take an interventionist approach to business. They lack sustainability. They see an opportunity and take it without being fully prepared for all the factors involved in the transaction. When they are confronted with the unforeseen, they tend to lose heart and withdraw from business only to reappear again when they think that the time is right.

Connected to the interventionist approach is the habit of starting the business with insufficient capital. As a result, Guyanese find it difficult to sustain production when the cash flow from the business becomes sporadic or uneven. Another cause could be an improper alignment of the supply chain stemming from inadequate storage capacity that prevents some businesses from taking advantage of economies of scale. These are issues that should be of concern to all stakeholders. However, it is something that the subject ministry and industry bodies should be examining with a view to ensuring that attempts at expanding trade do not result in embarrassing failure. In other words, Guyana must have the ability to produce the products that it wants to sell.

Small businesses

A closer look at the participants in the external trade sector reveals that small businesses are marginal participants. Though a thorough analysis of the type and quantity of products that they export is still to be done, their contribution is estimated to be around six per cent of total exports. This demonstrates that there is significant potential for small and large enterprises to increase their trade revenues. However, small businesses would need considerable support in the export drive if they are to be a meaningful part of the initiative. The government must be prepared to support small businesses if it wants the export drive to succeed.

Trade

Guyana, like several other countries, runs a constant trade deficit. The simple reason is that Guyana imports more than it exports. The imbalance in trade gives rise to the need for the country to make up the difference between the revenue it receives for its exports and the payments that it must make for its imports. Guyana also experiences a deficit in the services that are linked to international trade. From 1992 to 2004, the gap between exports and imports was relatively small. It averaged about US$55 million or G$9.2 billion per year. At that time, Guyana relied on six major commodities. These were gold, rice, sugar, timber, fisheries and bauxite. Trade during this period represented 73 per cent of GDP, a high proportion of Guyana’s output. This evidence reflected the heavy dependence of Guyana on the external sector and meant that the Guyana economy could easily be disturbed by adverse events occurring in the external environment.

Since the rebasing of the economy, it appears as if Guyana is less dependent on the external sector. The economy does not appear as open as before since trade as a share of nominal GDP has dropped about 33 percentage points to 41 per cent of nominal GDP during the period 2005 to 2014 as noted in a previous article. Looked at from that perspective, one gets the impression that the importance of trade to the Guyana economy has declined.   However, the relative share of exports and imports and the gap between them reveal a different story. Guyana continues to rely on the same six commodities for export revenues. Exports make up 42 per cent of GDP while imports make up 63 per cent of output. Further, the gap between exports and imports has widened substantially from 2005 to 2014 with imports assuming greater prominence in the economy of Guyana at nine times the value that they were from 1992 to 2004.

(To be continued)