For an industrial policy

Feb 15, 2009 Features / Columnists, Ravi Dev

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President Obama finally got a stimulus plan through Congress last Friday. It is not the precise one he wanted and it has been criticised from the left for not spending enough and from the right for spending too much.

But, as he promised the electorate during the campaign – and is expected of governments everywhere, he presented a plan for jumpstarting the US economy that has been in a recession for a year now.

Minister of Finance, Dr. Ashni Singh presented the 2009 Budget for our country last Monday and many had expected that it would also focus on offering a fillip to our economy. While the latter might not be technically in a recession – since according to the figures it has actually grown 3.7% last year and the Minister predicts that it will continue to do so this year – we are starting from such a low base that even if the gains were not eaten away by inflation, they really do little to make a significant improvement in our standard of living. Then, of course, there is the spreading global recession which, as the Minister concedes, will certainly not leave us unscathed.

The problem for the Minister is that given the overarching economic model that he is forced to operate within, there is very little room for him to make a significant impact on that anaemic growth rate.

In his model, the core tools available are monetary, fiscal and exchange rate instruments – but they can only be used to satisfy some arbitrary “macroeconomic fundamentals”. With the first option, the central bank could lower interest rates on its T-bills and also reduce the statutory reserve requirements in order to encourage banks to up their lending. Increased money in the hands of businesses and consumers would then spur spending and demand and ultimately, growth.

In Guyana, the monetary policy tools are technically in the hands of the Bank of Guyana (BoG). However, even though the BoG has reduced its T-Bills rates, it has not gone all the way to zero as in the US, because the model warns that this action will be “inflationary”. So we have a situation in which the commercial banks are awash in liquidity even as consumers and businesses are starving.

And the economy stagnates. We have long pointed out that in an underdeveloped economy such as ours, inflation rates even in the mid-teens range would not be dangerous – once the easier credits are directed towards businesses that invest in productive sectors that generate exports and foreign exchange.

But this means, of course, that the government would have to craft and deploy an industrial policy extracted from the insights of, say, the National Development Strategy. Instead, we remain yoked to an aptly named “Poverty Reduction Strategy Program” in which our goal is merely to “reduce poverty” not generate growth. We can achieve only that which we conceive.

Right after the Budget presentation, we had a report of the Minister of Agriculture interacting with the Guyanese Manufacturers’ Association. He was informed of the depression in the forestry sector, occasioned not only by the drying up of new business but by the cancellation of existing orders – all outgrowths of the global recession. We offer a proposal we first put out a decade ago.

If we do not have the wherewithal to execute a full-blown industrial policy, now is the time to seize the opportunity available in our forestry sector. Yes, opportunity: the term “counter-cyclical” is now the buzzword for very good reason – all the inputs are cheapest now for a start-up venture. We all know that the real money from forestry comes from the high-value added products such as high-end, specialty furniture – not even the kiln dried lumber that are being cancelled.

The President is doing a commendable job of highlighting Guyana as a “green” nation in the forefront of forestry conservation and we can piggyback on that initiative that is sure to continue to rise in global consciousness – especially once the present recession is over. We should create an industrial cluster that specialises in the manufacturing of “green” furniture that would distinguish itself from the mass-produced offerings that have flooded the markets everywhere.

Such a cluster would have manufacturers, timber suppliers, kilns, design and market-research companies, craftsmen, designers, exporters, shippers etc. all in one location to benefit from the synergies of propinquity. This is simply an example of one strategic opportunity in an industrial policy.

However, we have to be realistic in accepting that such ventures will never become reality – even if our present players in forestry value-added or other products were offered cheap money. They are simply too parochial and inbred.

The Government has to throw off the yoke of the IFI’s dogmas and become directly involved in public-private ventures. This is the way Japan with MITI and South Korea etc. identified strategic opportunities and exploited them in the early days. After the ventures become established the government can decide as to the level or nature of its involvement.

In the exercise of its fiscal prerogative, the state can reduce taxes while increasing governmental spending – while, of course, always running the risk of increasing the fiscal deficit. The first exercise would place more money into the hands of consumers and businesses and theoretically increase spending in the economy.

But experience has shown that lump sum disbursements are more effective in fostering economic growth than the small increases in income consequent to tax cuts. The latter has a psychological impact, however, which cannot be ignored – and so maybe a nominal decrease in the VAT may be helpful.

Over the last two decades, government spending on infrastructure and social services have been the major investments in the economy – and creating deficits. While necessary, we know that the strategy has not delivered growth and it is for this reason that we are proposing an industrial policy-driven model.

The governmental spending in that vehicle will create a greater number of jobs and create a virtuous cycle in generating increased jobs, taxes and foreign exchange. Fiscal policy, therefore, must follow monetary policy, in being directed towards an industrial policy to be of any help.

Finally, the foreign-exchange rate policy option did not offer the Minister any help in stimulating the economy. Typically, to stimulate growth, a government would not want its currency to be too strong so that its products would be cheaper in foreign markets.

It is for this reason that President Obama’s Treasury Secretary has (alarmingly) accused China of deliberately intervening to keep its currency undervalued. Our major products – rice, sugar and gold are all bullish and bauxite’s fall is demand, not price, driven. No stimulus opportunity here.

We commend, therefore, the urgent adoption of an industrial by our government. We need not just a stimulus, but an engine of growth.

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