DEBUNKING THE MYTH OF ECONOMIC PROGRESS

Aug 07, 2011 AFC Column, Features / Columnists

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By Dr. Tarron Khemraj

We have noted Finance Minister’s Ashni Singh’s glowing review of the country’s economic performance over the past five years. The Minister asserted that there has been five successive years of economic growth in Guyana in spite of the global economic downturn. He also stated that the economy grew at an average of “at least” four per cent over the past five years.
According to the Minister, driving this success is the housing sector. As usual the government tells us the “cheque is in the mail” (even though we have waited nineteen years) and we are given great promises of technologies and transformation to come. The Minister even reminded us about the “much-touted” Marriott project which is seen as transformative.
There are many problems with Minister Singh’s assertions. We would like to bring to the Guyanese people some of the obvious problems of the Minister’s view, which echo President Jagdeo’s.
GDP GROWTH
Although growing at a low positive rate, we have no reason to believe the present lukewarm GDP growth is sustainable, because it is premised on sectors that are susceptible to external shocks and price uncertainty. Essentially, this growth is based on selling Guyana’s primary resources without any major value adding taking place at home.
The present tepid growth rate could have been much better if the PPP government got the Skeldon factory right, including planting the adequate amount of canes. Furthermore, an average growth rate of just under 4% is far below the minimum target of 7% of the AFC, which has outlined a plan to meet that growth target.
We have missed the sugar price boom that will not continue indefinitely. In addition, we are benefitting from very high gold prices, but actual production of value added gold jewelry continues to lag price. We missed the great economic boom of the 1990s and also the early 2000s.
STRUCTURAL CHANGE & HOUSING?
According to the Minister, structural change of the economy’s production for the PPP comes from housing development. Indeed, housing has been the main pillar of PPP’s economic policy since 1992. While we support housing for the masses, we believe the Minister is mistaken to believe this sector can sustain long-term growth in the Guyanese economy.
First, housing creates short-term jobs during the period when construction occurs. Second, there is no major industrial or service sector emerging that will produce the kind of income to pay off the housing loans. Third, we believe the PPP is setting up the banking sector for our own subprime-type housing financial crisis. Fourth, most house building materials are imported, thus the housing programme is not contributing to the kind of industry linkages the AFC envisages.
The economy is yet to undergo significant structural change, especially with new emerging tradable sectors that can break new foreign markets. Housing is a non-tradable sector where a house is not something one can export. However, the AFC vision for housing would be to link the construction of houses to locally made components that could eventually be exported – thus adding a tradable component to housing. This will be true production transformation. We cannot wait another nineteen years to see the realization of these obvious economic activities.
DECLINE IN PRIVATE INVESTMENTS
We have noted the troubling trend of a decline in the rate of private investment. The ratio of private investment relative to GDP has declined continually since 1992. Meanwhile, the ratio of government investment to GDP has increased since 1992. We therefore have the situation of a negative relationship between private and public investments – or the crowding out of private investments by the government.
This is manifested in the fact that not a single manufacturing enterprise the size of Banks DIH or DDL emerged since 1992. The small and essential mom and pop enterprises are not supported by a core set of new large scale private businesses. A main reason for this crowding out is the political control of business activities during the Jagdeo years.  This is not the economic vision the AFC has for Guyana. We guarantee that the business and economic space would be free of political control and manipulation with an AFC government.
SUB-OPTIMAL INVESTMENTS
Two of the government’s flagship investments: the Marriott and the one laptop per family (OLPF) are not necessarily the best choice of investment projects. They are sub-optimal and they lead to a waste of limited resources, in addition to the dubious process of awarding the contracts.
The Marriott will be subsidized by government. This should not be the case when many Guyanese investors used their own capital and borrowed at market rate to invest in hotels for Cricket World Cup. We also argued that this investment is meant to hurt the Guyana Pegasus. At some point, if the government proceeds with the subsidy, it will have to find a way to make competition fair so the Pegasus is not adversely affected.
One possibility is the Marriott is not transformative but actually crowds out existing hotels, particularly those whose investors had to borrow to finance the project. In this case, the job multiplier effect is negligible or actually negative.
ALTERNATIVES
We have articulated an alternative vision for Guyana. Our economic policies will be financed by a portfolio of inflows ranging from Diaspora investments, foreign direct investments, local investments, a state development bank, and private capital markets. We will also seek multilateral concessional funding from the traditional sources.
We do not place all of Guyana’s financing in one basket as does the Low Carbon Development Strategy (LCDS). We envisage a portfolio of renewable energies – ethanol, bio-diesel from coconut, electricity from bagasse and coconut waste, small and medium scale hydroelectricity and solar energy. We have a comprehensive plan for Region 10 that will see that area become a manufacturing and trading hub. We have the E10 plan to save GuySuco and the West Berbice and Demerara sugar estates.
We believe Guyana faces a classic coordination failure, where weak demand in one sector of the economy (as will be the case with the rising inequality) will curtail production in other sectors. We have to implement businesses so that there will be demand spillover in each segment of the economy regardless of location, ethnicity or class.
If one segment of the economy breaks, then all sectors fail. The AFC’s Action Plan was designed specifically to break this coordination failure and promote demand spillovers among sectors and peoples. We do not see any of this in the PPP’s economic plan, which is meant to keep the masses at subsistence level. Moreover, there can be no development if the masses remain at subsistence.

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