BEEN THERE, DONE THAT… NEVER AGAIN!!!

Jun 26, 2011 Features / Columnists, Peeping Tom

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Presently, the price of imported broccoli on the local market is $800 per lb. But you can obtain callalu for far less. Therefore once the two products are substitutable, consumers may be tempted to switch to the local product over the foreign one. This is an example of how import substitution can be induced without having to impose import bans and restrictions.
This article challenges two related economic contentions recently misguidedly made. Firstly, it contests the idea that cambios are a valuable legacy of the PNC which has been continued by the PPP. Secondly, it opposes the position that an import-substitution policy will disrupt the local foreign exchange markets.
The introduction of the cambios to Guyana was never a positive development. The cambios were first introduced in order to bridge the divide between the runaway underground exchange rate and the then prevailing official rate. Cambios were introduced as a means of incorporating the informal and thriving foreign exchange market into the formal economy.
The effects of that process are well known. It subjected foreign exchange markets to volatile fluctuations that undermined the business confidence and hurt consumers through higher prices. The introduction of cambios effectively amounted to a sustained process of devaluing the Guyanese dollar relative to the US currency, a process that saw the local dollar continue its downward spiral to the point where from US$1- G$47 to one, the exchange rate rapidly dived to US$1= G$126 by the time the PPP settled into office in 1992.
Apart from one major spike caused by a run on the currency and the effects of the Asian financial crisis in the latter part of the 1990s, Guyana’s exchange rate has remained relatively stable under the governments of the PPP, unlike what happened under the previous administration, where there was a rapid decline in the value of the currency from US$1= G$4 at one stage to eventually being traded at US$1 to G$126 in a short period of time
The effects of these “devaluations” were extremely difficult for the business community who lived in constant trepidation of the next devaluation, even though the government had tied the exchange rate to market mechanisms.
In spite of doing this, the policy of introducing cambios did not allow for ready access of foreign exchange by the business community. In fact, even though foreign currency could have been bought and sold at the cambios, permission was still required under the Exchange Control Act for the movement of currency overseas. As such, the cambios did not necessarily make it easier to obtain currency. In fact, some big corporate interests gobbled up most of the currency sold to the limited number of cambios, and of course, this placed extreme pressure on the exchange rate, thereby leading to hardships for consumers who were forced to pay more for imported commodities.
The PPP when it took office recognized that what was needed was not to have the official rate constantly chasing the underground rate, and so they implemented policies aimed at creating a unified exchange rate and to convert the cambios into financial institutions dealing with currency transactions rather than, as previously existed, being a mere mechanism for integrating the informal exchange rate with the official exchange rate.
The process was not without its problems, but by abolishing the Exchange Control Act, the PPP ensured that restrictions on the movement of currency were removed off the law books. To therefore compare the system that existed under the PNC to that which we have to today is a total mismatch.
The second contention being challenged is the idea that import substitution could disrupt the foreign exchange markets. The policy of import substitution does not necessarily have to involve any disruption of exchange markets.
It is however understandable that persons would associate import substitution with exchange controls. This is what happened under the PNC when Guyana ran into early problems after independence because of mismanagement of the economy, and Burnham was forced to institute measures to prevent a run on the currency. Burnham’s advisers panicked and prescribed to him the wrong medicine after the oil crisis. These prescriptions were based on reducing consumption rather than expanding production, and it was determined that the best way to constrain consumption was to erect exchange control and tariff barriers. In the process, import substitution got a bad name.
But import substitution could have been pursued without all the bans and without limiting access to foreign exchange, measures which only forced the growth of a parallel exchange rate and affected the real cost of imported goods to consumers while driving fear into business owners who expatriated their assets overseas, thereby further pushing the exchange rate upwards.
The fear that import substitution will undermine the currency markets is misplaced. For one, import bans and quotas cannot be implemented any more, since these are outlawed under international trade rules. Secondly, there have always been other market mechanisms to encourage the use of local products over imported goods. Thus, there is no need for any exchange control regulations to be implemented.
Guyanese, therefore, do not have to fear a return to the days when you had to line up at the Bank of Guyana just to get a US$40 to go overseas or to find foreign exchange to pay for your child’s exam fees. Those days will not return, even if import substitution is pursued.
Guyanese do not have to fear lining up for scarce imported goods because of import restrictions on the business community. Those restrictions will not return and import substitution does not have to involve these measures. And businesses do not have to fear that they may not be able to get foreign exchange when needed
The bogey of foreign exchange problems has long been buried by the PPP administration. It cannot be resurrected.

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