The nature of a donkey-cart economy

Jun 15, 2009 Letters

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Dear Editor,

Several opinions have been expressed recently in the letter columns ranging from the appropriateness of the Jagdeo Administration’s economic policy agenda (see Mr. Emile Mervin in SN 29-05-09; Dr. Henry Jeffrey in SN 08-06-09), the contribution of remittances to development (Dr. Prem Misir in SN 02-06-09), and the ethnic conflict logjam (Dr. Henry Jeffrey in SN 08-06-09).

I hope to use this letter to synthesize this discussion and situate it within the framework of a possible economic policy agenda for Guyana. I have recently argued that Guyana is jammed in a low-level developmental trap that I have labelled as a donkey-cart economy (SN 25-03-09). In this letter, I wish to formalize the definition of the donkey-cart economy and then briefly propose the policy tool kit that is necessary to get Guyana out from this perpetual low economic status. The letter concludes that the ethnic conflict within the context of a bi-communal society is the primary binding constraint preventing Guyana from progressing from the status of a donkey-cart economy to a corolla economy, to a Camry economy, to an Avalon economy, and finally to the Lexus economy.

The donkey-cart economy has the following characteristics:

1. The production of goods that are at the low end of the global hierarchy of products. In other words, we produce things that people really can do without. Our products are not as special as we would like to believe; not even in CARICOM, let alone the world.

2. Given number 1, it means the income elasticity of demand for the country’s primary exports is small. Meaning as world income (and CARICOM’s income) increases the demand for the country’s products will not rise accordingly. Sugar, for example, is clearly a product that fits the production profile of donkey-cart cart economy. Let’s face it, there is a finite amount of sugar the rich can consume (as a matter of fact, the rich might consume less sugar and sugar-related products as it is one way to stay slim). On the other hand, as the world gets richer we all consume more energy. Therefore, a superior strategy to save the Demerara estates would be ethanol and of course the bi-product of baggasse.

Furthermore, the Jagdeo Administration’s REDD strategy and low carbon development strategy are too narrow and are not likely to impact directly on job creation and industrial development. In addition to the REDD, what the country needs is to develop a bio-energy industrial base with cane sugar as a feedstock for this industrialization. However, the low carbon development strategy should be seen as only one policy measure in a portfolio of industrial policies necessary to raise the welfare of the masses.

3. The production structure of the donkey-cart economy is mainly in the form of low productivity goods and petty services. For instance, immediately after Mr. Hoyte’s ERP the country

stopped producing soaps, toothpaste and similar small consumer items and left it to the local importer in the name of liberalization. The country also destroyed its local plywood making firm and replaced it with a foreign multinational. In a donkey-cart economy it is never a good idea to destroy your manufacturing base no matter how inefficient and trivial it might seem. You have to work with the capitalist class in a industrial policy framework to make the manufacturing base superior.

4. The production structure is made up of products that allow little room for learning by doing, innovation and technological change – the critical ingredients for long-term growth in per capita GDP and higher living standards.

5. Remittances prop up private consumption and create a false sense of success among government officials and the masses.

6. Remittances and underground economic activities indirectly feed foreign exchange into the domestic foreign exchange market from which the central bank (BOG) buys to accumulate foreign reserves (a required target under the IMF’s financial programming). Thus, remittances help to maintain the IMF/WB’s much touted macroeconomic stability (there have been several pro-government letter writers promoting macroeconomic stability as a great achievement). Therefore, a donkey-cart economy can be stable with relatively low inflation (owing to exchange rate stability) as is the case with Guyana. But this notion of macroeconomic stability is narrow, short-term in focus, and does not imply a success on the production/supply side of the economy. This point will take a full academic paper to explicate.

7. The donkey-cart economy imports most of what it consumes. Thus remittances are mobilized by economic actors and are used to make payments for imports of even basic consumer items (some of which we stop producing after the ERP). Therefore, unlike what some IMF/WB literature have argued and have been cited in the local media (see Dr. Prem Misir in SN 02-06-09), remittances are highly unlikely to lead to productive domestic investments in the Guyana context.

8. The donkey-cart economy exports most of its skilled and educated workforce. According to the OECD, Guyana exports 83% of its skilled population (the highest percentage among developing economies). Hence, there is the depreciation of the human capital base, which is a critical ingredient for long-term growth and development. Furthermore, the depreciation of the human capital base also involves the downgrading of the entrepreneurial and risk taking base. Of course, the contribution of human capital to growth (of high quality) is well explicated by endogenous growth theory. Moreover, Guyana is not India and is unlikely to earn the touted brain gain (as Dr. Misir has assumed) as in the Indian case.

9. The government significantly depends on foreign aid and finance from IMF/WB/IDB and bi-lateral aid donors. Even small projects depend on these sources of financing. For instance, the CARICOM building and the Convention Centre were built by grants (with aid-tying I am sure).

10. The government depends on IMF/WB for policy advice and analysis.

Since 1988 – in collaboration with the IMF – the Guyana government has focused primarily on the short-term concept of macroeconomic stability. There has been success on some aspects, however. In addition to price stability, several structural and institutional reforms have been put in place such as financial sector liberalization, the VAT, and several legal reforms to facilitate business activities to name a few. These are the standard policy recommendations from the International Financial Institutions. Implicitly, they are premised on the notion that once the structural and institutional reforms are put in place – along with price stability – the markets and private sector will do the rest on the production/supply side. However, that’s a problematic view and the evidence would suggest that the production structure has not changed since 1988.

Therefore, what is required is a holistic industrial policy framework as outlined by economists like Ha-Joon Chang and Dani Rodrik. It is here where I disagree with Mr. Jeffrey that policy does not matter in the Guyana context (see Jeffrey in SN 08-06-09). An industrial policy framework is fundamentally different from central planning under the Burnham era. It is different from the very general National Development Strategy and certainly different from palliative set of anti-poverty strategies embedded in the Poverty Reduction Strategy Paper. It is very different from Mr. Hoyte’s ERP, which really were standard neo-liberal policies that contributed to the evaporation of the nascent manufacturing enterprises. To outline an industrial policy applicable to Guyana will take an entire research paper.

On the other hand, I agree with Jeffrey that the binding constraint facing Guyana is ethnic politics in a bi-communal setting (Mr. Ravi Dev has explained over the years that there are two ethnic security dilemmas in a bi-communal society like Guyana – the African and the Indian ethnic security dilemmas). While industrial policy is necessary, along with macroeconomic stability, to push Guyana forward and upgrade its production structure, this very policy toolkit will be impeded by the non-cooperative outcomes engendered by the titivated 1980 Burnham Constitution, the PPP’s democratic centralism, and the ethnic security dilemmas in a bi-communal setting. Why? Because industrial policies, which typically involve unconventional measures, will need the support and involvement of all ethnic groups. Therefore, unless this binding constraint is reversed, industrial policy is not likely to succeed, and the status of a donkey-cart economy is likely to linger indefinitely.

Is there a great leader who can pull the country together under a holistic and comprehensive industrial policy framework addressed at reversing the 10 characteristics of a donkey-cart economy so that the Guyanese people can obtain some dignity after all the years since May 26, 1966?

Tarron Khemraj

 

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