Liberalisation: policies in support of globalisation Guyana and the wider world by Dr Clive Thomas Stabroek News September 24, 2000 Liberalisation refers to those economic policies that support or encourage the spread of globalisation. Such policies are practised worldwide. And, as a matter of fact, globalisation would not have advanced nearly as far as it has, if it were not for these policies. Policies of liberalisation are sometimes called neo-liberal economic policies. It is important that we enquire into the nature of these policies and their underlying economic rationale. This week and the next, the series will treat with these matters. Neo-liberal policies As a rule among developing countries, the intellectual authorship and pressures to pursue neo-liberal policies emanate from the IMF and the World Bank. Much of this came about as a result of the conditions laid down by these institutions and the major donor countries in exchange for their support of economic recovery. Here in Guyana we are very familiar with this. Since the ERP was introduced in 1989, at the behest of these institutions, we have pursued liberalisation unabashedly. Indeed, in the debates about the practice of neo-liberal policies in developing countries, Guyana, along with Ghana, are held up as "models" of the successful practice of these policies. In today's article we shall examine these policies as they apply to trade, financial transactions, and government operations. Trade In the area of trade, the objective of liberalisation is the removal of all restrictions and controls that prevent the free movement of goods and services into and out of a country. Typically, this is first approached by converting all import licences, quotas, and other such prohibitions, into their tariff-equivalent. The only exceptions permitted are technical barriers based on concerns like health and environmental protection. The idea behind this policy is that tariffs are price-barriers to trade. And, as such, they can be surmounted through lower prices and/or consumers' willingness to pay. Tariffs are therefore "market-friendly". Barriers like quotas, which cannot be surmounted through lower prices, are not market friendly. The objective however, is not only to replace non-market restrictions on trade with tariffs, but that tariffs themselves should be progressively reduced. Thus Guyana, along with other Caricom members are bound to a path of tariff reduction. This is supervised through our membership of the World Trade Organization (WTO). One significant potential source of non-market restrictions on trade is "state-trading" enterprises. Neo-liberal policies require that these should be dismantled, as was the case with our former External Trade Bureau (ETB). The economic rationale behind these trade policies is to expose domestic producers to competition from abroad. This competition is expected to provide an impetus towards their improved efficiency, and the production of better quality products at lower prices. If this does not occur, then the particular industry will disappear and its supply replaced with imports. Such an occurrence is treated as a gain for the country and for consumers of the product. The gain for the country is that resources tied up in inefficient production behind non-market barriers will move into new activities for which they are better suited. The gain to consumers is better quality products at lower prices. Finance Policies for finance move in the same direction of expanding the scope for market forces. Thus restrictions on the holding of foreign currency are removed. Foreign banks are free to operate in the country, subject only to their meeting the same laws that apply to domestic banks. Government restrictions on the credit operations of the commercial banks are prohibited. Domestic residents are also permitted to hold bank accounts, either locally and overseas. In several countries of the Caribbean, domestic residents are even permitted to open with the local banks either local currency or foreign currency accounts. Local firms are also free to obtain their financing needs as these see fit, either locally (in local currency) or abroad (in foreign exchange). Perhaps the best symbol of this is the growth and spread of cambios worldwide. An important aspect of financial liberalisation is the removal of restrictions on capital flows into and out of the country. This is expected to encourage private foreign direct investment into developing economies. And, indeed it is one of the major factors behind the rapid growth of international production. At the same time, the ability to move capital freely out of the country is expected to encourage domestic investors to think globally, before they act locally. All of us are aware of how many of our leading local businesses are building commercial connections and arrangements overseas. These are at present heavily concentrated in the Caribbean, United States and Canada. Government operations A similar approach is adopted with regard to government operations. The government is expected to eliminate deficit financing and to live within its means. A halt is called to its incurring domestic or foreign debt. The focus is on spending only what is generated from revenue. To achieve this the government should pursue three basic things. These are cuts in its expenditures; tax reform; and sell state enterprises to generate revenue windfalls. Cuts in expenditure usually mean the removal of subsidies, reducing staffing, a strong containment of public sector wage increases, and reduced undertakings by the government. The reform of taxes usually takes the form of a shift away from progressive income taxes to consumption-based taxes. This opens the way for "user-fees" for services provided by the government. Taxes on income, are usually proportional. That is, all persons pay the same proportion of their income in taxes. With progressive taxation, the rich pay a higher proportion of their income in taxes (because it is assumed they can afford it) than the poor. With limits to government borrowing in place, the domestic and external public debt is restructured and re-scheduled. Conclusion In practice these policies have never been as smoothly implemented as is the intention behind them. In the course of these series we shall see many examples of this, right here in Guyana. What, however, can be said with certainty is that the basic aim of these policies is to pave the way for private markets, not governments, to be the main instrument for allocating resources and rewarding economic activities. In such a context the private sector will emerge as the unchallenged engine of growth. Fundamentally, therefore, we may conclude that neo-liberal policies are market-driven policies. The question we should ask next is why is this considered to be essential for globalisation. Next week we shall deal with this question. Follow the goings-on in Guyana in Guyana Today