Interventionist Industrial policy

Jan 27, 2013 Features / Columnists, Ravi Dev

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The Minister of Finance and his Budget team are putting the finishing touches on this year’s budget as they take on board suggestions from the Opposition and other stakeholders.
Quite commendably, the government has been able to buck the regional tide and generate a positive growth rate – promised next year to be around 4%.
But the government would concede that since we were starting from such a low base, occasioned by the destruction of the economy in the 1980s, we need double-digit growth rates to catapult us up to the living standards enjoyed by, say T&T, within the next decade.
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 that dramatic impact on our 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 (and profits) even as consumers and businesses are starving. And the economy trundles along.
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 (IP) extracted from the insights of, say, the National Development Strategy and the LCDS.
Unlike the present laissez faire approach, in which the government creates an ‘enabling environment’ through broad macroeconomic policies that is supposed to attract investment, we advocate very interventionist sector-specific industrial policies.
However, we have to be realistic to accept that even if our banks, through some miracle, offered cheap money, our local business community is to too parochial and risk adverse.
The recent announcement by expat Bai Shan Lin is very encouraging, but we will have to see how it pans out.
Over the last two decades, government spending on infrastructure and social services have been the major investment in the economy – and creating deficits.
While necessary, we know that the strategy has not delivered the requisite double-digit growth and it is for this reason that we are proposing the IP-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.
Furthermore, in our view, the Government has to throw off the yoke of the IFIs’ 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. China is doing it now.
After the ventures become established, the government can decide as to the level or nature of its involvement.
We appreciate that there will have to be cooperation across the aisles to dampen accusations of ‘favouritism”.
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.
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 policy by our government. We need not just a stimulus, but an engine of growth.

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