Guyana is between a rock and a hard place

Jul 01, 2008 Peeping Tom

I have always felt that the present economic model and the management of Guyana’s economy could not adequately control inflation.

The government may be able to control the exchange rate and the rate of interest at the commercial banks through market operations and sopping up liquidity, but its boast about being able to manage inflation to the extent that it thinks its is keeping it in check is a delusion.

I remember as the Americans came out of the Great Depression, there were calls for the economy to be primed through excessive public investment and borrowing. The war intervened and forced the priming of the economy along the lines that has been recommended by Keynes.

However, during the war, it was found that this particular solution, the Keynesian model was not adept at dealing with inflation and thus the Americans had to take direct steps, which at times including crowding out the private sector, to control prices. I think given what has happened with VAT in Guyana, it is inconceivable for any government in a time of spiraling oil and food prices, to leave the question of prices to market forces.

I believe that for most food items, the government should have made direct interventions but if it was reluctant to do so it should have ensured stricter monitoring and surveillance of the movement of these prices on the market.

Guyana is going to face a deep crisis if it continues to believe that it can simply cushion the effects of what is taking place globally. We will find ourselves overtaking the already overtaxed population if we believe that our balance of payments will improve without drastic action being taken. Drastic action will however not be taken. I do not believe that the government wants to institute import and price controls.

In any event these have not worked in Guyana and instead of making things better, have done just the opposite. Therefore I believe that both are non-options. There is therefore only one possible vehicle open to the government.

That option is to restrict unnecessary imports. This, however, had tended to rebound against production since what usually suffers are not unnecessary consumption items but rather items needed in the production process. Going to this route is not something one expects from the government since it could lead to constraints on production. And in a crisis what is more urgently needed is for Guyana to grow out of a crisis by increasing production rather that limiting production through measures that affect the production process.

Since the government plays such a major role in priming our economy through public expenditure, there may be no choice open to the government other than to cut certain funded projects for which there are no external resources.

I would certainly hope that if a sufficient number of these are done that it can have an impact on savings, but I am not confident that sufficient programmes can be axed without affecting production within the economy. Guyana is therefore between a rock and hard place. Inflation is going to be difficult to manage in our circumstances unless there are price controls or the government taking a leading role in importing food and selling it below cost. Inflation is not going to be easy to manage without price and import controls.

All of these things however go against the market philosophy shared by the government and therefore it would seem that there are very little options open to the government other than simply trying to compensate workers for increases in inflation.

On this score the government has a dismal record. Last year inflation was 14 per cent, yet all the public workers got was five per cent increase in wages.

Those however earning below $50,000 got a cost of living allowance of $4,000 per month. More could have been done. There is no way with world prices rising the way they are for any government to keep a lid on prices. And especially if as in Guyana, the government is priming the economy with public expenditure, there will be problems with prices because that particular model is not adept at controlling prices.

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Guyana is between a rock and a hard place

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