Reducing energy costs will encourage greater value added production

Aug 13, 2014 Features / Columnists, Peeping Tom

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The argument that Guyana should be seeking investments that promote value added as against the extraction and export of primary commodities, is based on an assumption that it is more profitable for countries to produce and export manufactured goods than primary commodities.
What happens however, when the price of manufactured goods is decreasing in world markets? Should a country continue to export manufactured goods when it can devote and divert resources to primary resource extraction whose prices are rising rapidly?
What happens, also, if in the face of declining manufacturing prices, a particular local economy does not have manufacturing competitiveness? Should it still abstain from exporting primary commodities and concentrate instead on the export of uncompetitive manufactured goods? Or should it indulge in the economic boom that it can enjoy as a result of rising primary commodity prices while at the same time, giving itself space to improve its manufacturing competitiveness?
These questions are really at the heart of the global debate that is taking place as to the best model of economic development to pursue in light of the rising demand for commodities
There are many critics who feel that Guyana should not be exporting logs. They base their argument on the assumption that a country loses when it exports primary commodities as against manufactured products.
How does the country lose?
Well according to this argument, it loses because it did not benefit from higher priced manufacturing? This, of course, assumes that the demand for manufactured goods is elastic. In reality it is not. A country like Guyana cannot simply improve its exports of manufactured goods by increasing resource extraction.
This argument also overlooks the scenario that a fall in the price of manufacturing can actually shift investments to non-manufacturing activities.
The price of manufactured goods has declined internationally. On the other hand, the cost of primary commodities has increased many-fold. This has created greater incentives for investors to move into the resource extractive sector.
It is for this reason that many local investors have moved into the mining sector in Guyana. The rise in the price of gold internationally has led to an increase in mining in Guyana.
At the same time, the increase in the prices obtained from Venezuela for rice, has led many farmers to increase acreages under cultivation and caused many to return to their abandoned rice lands.
When it comes to labour, those favouring value added production contend that it is best to encourage manufacturing, since the compensation for labour in this sector is higher than in the non-manufacturing sector.
Again, it does not always hold true. We have seen, for example, how the operators of heavy duty machinery have shifted their labour away from manufacturing and moved into the higher paying mining sector. In other words, the rise in primary commodity prices has forced a massive increase in the returns to labour in the natural resource.
You have labourers in the gold fields who overnight have become millionaires and this is because the increase in primary commodity prices has meant improvement in their pay packet. This debunks the traditional argument that in all conditions the returns for labour favour those employed in the manufacturing sector.
Guyana has to ask itself a number of questions. Firstly, how much has exports of manufactured products shrunk as a result of the rise in primary commodity prices.
The evidence I suggest would indicate that the manufacturing sector in Guyana, particularly exports, has not been directly affected by the increase in the rate of natural resource extraction locally. Indeed, the rise in primary commodity prices has led to increased business for the trading and service sectors.
Not many examples can also be found of manufacturers being forced to close their doors because of the movement of resources from the manufacturing sector to either the agriculture or mining sector. Any closure would have been a conscious decision by an investor to seek higher returns in the forestry, agriculture and mining sectors.
Guyana does not have a competitive advantage in the manufacture of items utilizing its natural resources. The main reason for this lack of competitiveness in manufacturing in general is the high cost of energy. If the cost of energy can be reduced, Guyana would be in a stronger position to press for greater value added activities.
This brings us to the issue of Chinese loggers. The reason why Chinese loggers are exporting logs and not sawn lumber is because it is more economical for them to do so. And until such time as it would be more profitable for foreign investors to export lumber rather than logs, you are not going to have many foreign investors coming here to invest in the forestry sector.
In other words, if Guyana wants to strengthen its hand in negotiating with foreign investors in the logging sector, it has to secure a cheap and reliable source of energy. Unless this can be had, not many foreign investors would want to establish sawmilling facilities. It makes no economic sense for them to do so.
This however, does not mean that simply because there may be economic merit in exporting raw materials that a country should simply roll over and allow it. Other considerations have to be taken on board, one of which is sustainable exploitation.
Another is ensuring that Guyanese benefit from the extraction of these resources rather them being plundered by foreign multinationals, whether in the mining, forestry or agricultural sectors.
(TO BE CONTINUED)

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