Recently the Guyana Manufacturing and Services Association (GMSA) expressed strong opposition to the notion of a common external tariff (CET) on refined sugar imported into the Caribbean Community. Proponents note that the proposed tariff of 40% will be beneficial to both GuySuCo and Belizean sugar manufacturers. The GMSA’s disagreement appears to be based on arguments straight out of a second-year college course in international trade theory. They also argue that the quality of the locally made refined sugar would not be up to the standard of the imported ones. This is the first time I am ever hearing that the quality of Guyana’s sugar is not good. It must have been good for far-flung producers in south Florida, Mauritius, India and Malawi to use the term Demerara in their branding.
As it relates to the interpretation of static trade theory ideas, GMSA argues that the tariff or tax will increase the cost of production of manufacturers and cause them to lay off workers. This job-loss argument is being made from all quarters, private and political, these days. However, the labour market statistics are still not good enough to capture the different dimensions of unemployment. But I guess using the term jobs make for reliable political rhetoric.
As we know, in principle, a tax on production will reduce business output and result in loss of employment to the extent that businesses cannot pass on the cost to the consumer in higher prices. Being able to pass the cost on depends on whether the guava jelly is a strong substitute for the imported raspberry jam or the gooseberry jam for strawberry jam, and so on. More importantly it also depends on whether jams, jellies and sweets form a large enough percentage of monthly income for people to care – I doubt it does. And the health-conscious folks might say the sweets are addictive – hence making demand less sensitive to a price increase.
More substantially, the non-sugar and non-rice manufacturing contribution to Guyana’s GDP in 2018 was just about 3%. An even smaller percentage includes the markets of soft drinks, sweets and jellies. Soft drink makers already import sweeteners that are derived from corn. Moreover, soft drinks make up a relatively small percentage of the product output mix of the great Guyanese duopolies – Banks DIH Limited and Demerara Distillers Limited. With no credible threat of contestable entry, these duopolies make supernormal profits that no CET on processed sugar can shake. In other words, there will be no job losses.
Now that we have established that the perceived negative impact of a CET is non-existent or very minor in the worst case, what about the benefits associated with saving the sugar industry in Guyana and the wider Caribbean? In the case of Guyana, the sugar industry is intertwined with the ecological system in which at least 80% of the population lives. This is not the case in Belize, Barbados or any other Caribbean country.
This means that the state-owned sugar industry in Guyana provided a public good for which it was never paid. Prior to the formation of a government-owned sugar industry, drainage was treated as a private good provided by the plantation for the plantation in colonial times. This is why there are today back dams, side line dams and sea dams on the periphery of each plantation, as well as the accompanying canals and kokers. This system still survives in the modern coastal villages – at least in the ones where canals are not yet filled up to make more lands. The latter is another matter for another column focusing on the looming drainage crisis in places like Houston, East Bank Demerara, where a few more canals were recently covered for making extra land to sell to the new oil capitalists.
The reason for this drainage system has to do with low-lying coastal plain. This is what I called a geographic constraint in my paper “Colonial origins of Guyana’s underdevelopment.” I argued that the drainage system imposes a high cost of production and a high cost of building infrastructure, such as the road networks for a small dispersed population. Other researchers have noted – as early as 1945 by Sir Eric Williams – that this man-made system of drainage possibly contributed to the uncompetitive cost of the sugar industry. In spite of the high cost, the soil type still provides opportunity for niche sugar and other unique products and industries.
One way this constraint was circumvented until the Lome was negated in 2000 was to have large-scale production under a state-run corporation – GuySuCo. This allowed for economies of scale and other benefits associated with large scale. It was recognised that GuySuCo produced sugar, but never recognised the government corporation also produced drainage – a public good. This added an extra layer of cost for the corporation that provided significant societal benefits associated with not being flooded out.
GuySuCo’s drainage also provided implicit spill over health benefits as the running canals prevented the build-up of stagnant waters. No one has ever bothered to quantify the spill over benefits of the financial cost GuySuCo bears for drainage – not even our chest-beating patriot who never published a paper on wealth and income distribution, but is convinced we can estimate them by ethnicity overnight and that East Indians own over 95% of the economy.
As we learned in economics, if an activity produces positive spill overs, we should subsidise its production. This is the case with primary and secondary education – hence we make them as cheap and free as possible. However, this principle was not applied to GuySuCo. Instead of receiving a Pigouvian subsidy for the positive societal spill overs from drainage and maintaining public play grounds, etc., a sugar tax was levied by the PNC on the industry from 1974. This obviously took away a lot of capital which the industry no longer had for diversifying before the replacement of Lome. Of course, Mr. Jagdeo’s problematic industry policy made the situation worse.
Preserving the sugarcane growing heritage has other benefits. It lends itself for large-scale economic undertakings – including diversification into large-scale agro-processing and renewable energy. Village economies have to be tied to a few large economic centres for them to generate the incomes necessary to save and consume out of the ground provisions, crafts and other enterprises. Village economies by themselves cannot succeed as we have already seen from 1839 to 1920. Village economies also benefit indirectly from the drainage created by a giant state-run corporation.
Without GuySuCo more drainage responsibility will be shifted to the local authorities, who already have slim taxing capacity. This means, ultimately, central government will have to take over the responsibility. The difference, however, is despite the high average cost of production – partly due to its drainage responsibility – GuySuCo generates gross revenues by selling private goods, such as bulk sugar and molasses, which it uses to subsidise its provision of the aforementioned public good. Central government can only provide the public good by first taxing the citizens, not through the generation of gross revenues. Therefore, allowing the industry to completely wither away will be a net welfare loss – even though there is a high average cost of producing sugar.
The alternative, as many have recognised, is to keep diversifying the products that can come from sugarcane and even look for other possibilities – perhaps coconut plantations and antidesma. Finally, maintaining the polder system of canals, dams and kokers in pristine shape opens up the possibility for heritage-based tourism, bird watching and fresh-water fishing – all coupled with craft rums, craft cocktails and organic food. I would argue that there are as many unique things to showcase from the coastal region as the hinterland. The ethnic and religious diversity evident on coastal plain is another great strength. Of course, fixing (enforcing) the building code and architectural style to optimise the Atlantic breeze will be a necessity so that there are not too many repetitions of that new monstrosity on Lamaha Street.
Comments can be sent to tkhemraj@ncf.edu.
