The manufacturing sector - is there hope?
Business Page
Stabroek News
March 18, 2001
Introduction
When the political dust settles after the elections tomorrow one of
the economic challenges which the new government will have to face is
what to do about the country's manufacturing sector. Every political
manifesto, independent commentator and economist consistently complain
about the over-dependence of the country on a few commodities - rice,
bauxite, sugar, wood, alcohol and gold. Yet, as Guyana becomes more
integrated in the globalised economy the need to develop an efficient
manufacturing sector capable of competing with the best has never been
greater. Prices for the country's traditional products have fallen
dramatically and despite the meltdown on Wall Street and Tokyo no one
is predicting that the new economy in which commodities will face
continuing decline in real prices while technology driven products,
tourism and services expand, is a passing phase.
The manufacturing sector in Guyana
The manufacturing sector in Guyana has always been very small since
as a colony the population made up largely of poor people were
expected to meet its low needs for manufactured goods from the UK. The
mother country in turn never considered it necessary to shift
factories to British Guyana except to do some intermediate processing
of raw materials. Then we inflicted further misery on ourselves. The
harsh years of misguided economic and political experimentation with
its restrictions on imports and availability of foreign exchange did
nothing to help the country or the sector.
So bad things had become that liberalisation did not help and the
performance of the sector at best over the past ten years has been
erratic. Outdated equipment and technology, weak financial structure,
poor economic policies, untrained management and a small domestic
market have all contributed to this situation.
If we exclude sugar production and rice milling the rest of the
manufacturing sector which also includes electricity, gas and water
accounts for less than seven per cent for the years 1996-1999. For the
years 1989 to 1991 prior to the ERP coming on stream, the comparable
average percentage was 7.7 per cent. If we were to go back further we
note that the sector's share of GDP was actually higher between
1950-1975 than it has been in recent years. In other words the
domestic manufacturing sector has not responded to the economic reform
programmes and to several other attempts at assistance.
Manufacturers of course blame everything and everyone but themselves
for the continuation of this state of affairs. They blame taxes, the
bureaucracy, politicians and the banking system. While they deserve
some understanding they have to accept some responsibility for the
plight in which they find themselves. They continue to rely on the
government and the discretionary dispensation of incentives and award
of contracts than to carry out sound financial and operational
management.
The seeds of inefficiency
Even in official circles there is a view that manufacturers are so
inefficient that they could only compete successfully in a highly
protected marketplace. Yet when we look at the environment in which
they have to operate we can understand why so few of them succeed.
Domestic manufacturers are subject to both direct and indirect taxes.
They pay consumption tax on their locally sold output and certain
manufacturers face excise duty as well. Further they are required to
pay import duty on their imported material inputs but are exempted
from consumption tax on directly imported material inputs and all
domestically sourced material inputs. They receive capital allowances
on historical costs and pay corporate income tax at the rate of 35 per
cent.
Like all businesses manufacturers have to meet other compliance costs
associated with several pieces of legislation including the
Consumption Tax Act, the Companies Act 1991, the Occupational Health &
Safety Act, the Termination of Employment and Severance Pay Act and
the National Insurance & Social Security Act. In a small
developing business the financial and non-financial responsibility and
cost can be overwhelming.
In the era of the socialist experiment when Guyana pursued policies
of self-sufficiency, the government sought to compensate for these
shortcomings with various forms of protection including restrictions
on imports and fiscal and other concessions. While many of these
practices have been discontinued, successive governments have still
persisted in using fiscal policies to influence economic decisions.
The catastrophic earlier decline in the performance of the economy
and the standard of living illustrates that efforts to promote
efficient import substitution via the provision of assistance to
domestic manufacturers through tariff protection, duty free access to
raw material inputs and capital items, the availability of subsidised
credit and tax holidays, have been largely unsuccessful. Indeed the
evidence suggests that these efforts have not only failed but have
involved significant costs to the economy.
Nor did the manufacturers take advantage of the protection to
strengthen their operations. With the removal of import and exchange
controls domestic manufacturers found it difficult to compete with
imported goods. At their current level of productivity the evidence
suggests that many manufacturing operations can only survive at their
existing level of productivity if they continue to receive excessive
levels of protection and bank support.
The remedy
Despite this dismal situation, no country can afford to ignore its
manufacturing sector and it must constantly seek out opportunities to
create and support industries and sectors which make a net
contribution to the economy by providing jobs, generating foreign
exchange earnings or providing savings in foreign exchange as a result
of import substitution.
"Manufacturing" is of course a wide term even if rice and
sugar milling was excluded. As defined by the Consumption Tax Act it
means "making goods or applying any process in the course of
making goods". This definition includes agro-processing but also
involves the application of technical knowledge and processing
equipment, in alliance with capital and labour transformation of
locally available or imported raw materials and/or intermediate
inputs, into final or intermediate products. These include
agricultural, industrial and mineral materials.
Given its manifestly rich commercially exploitable natural resources,
Guyana should readily develop the required competitive advantage for
the production and export of manufactured products from these
resources. The sector needs to look beyond history and tradition and
consider the substantial scope for expansion which beckons from
value-adding processes in wood, minerals and fruits and vegetables.
The National Development Strategy
The National Development Strategy (NDS) which has received some
recognition from the major political parties refers to a study of the
cost structure of manufacturing companies in Jamaica, St Lucia,
Grenada, and Guyana which found that Guyana was the least competitive
of the countries despite having the lowest wage rates. In Guyana the
cost of energy and transport was double that of the other countries;
the transaction costs, which include the time spent in consultations
with the Government, were deemed to be the highest; and the technology
that was generally utilised in the manufacturing processes was
considered to be not appropriate.
The NDS recommends that to overcome the limitations of market size,
to take account of economies of scale and to earn vital foreign
exchange, the country has to become an export-oriented economy with
cost and quality that can compete in the international market place.
The NDS recommends that the very top priority must be assigned to
sustaining a policy framework that aids competitiveness. This includes
the further liberalisation of the economy to the point where the
remaining vestiges of protectionism which sheltered and nurtured
policies of import substitution manufacturing are dismantled. The NDS
recognises however that provisions may be necessary for the
stimulation of infant industries and the development of certain
geographical areas of the country.
The National Development Strategy makes some very useful
recommendations for the development of the sector including labour
force training, improved mechanisms for industrial relations, a more
uniform and liberal tax regime, and the maintenance of a stable
exchange rate over time. Other measures recommended include:
* The further reduction of the corporate taxes applicable to
manufacturing enterprises to encouraging more investment in the
sector. Of course this may not find favour with some economists and
the Chambers of Commerce whose members are made up of traders who will
argue that they are making rational decisions involving the optimum
allocation of resources.
* Fiscal incentives for value-added export products to be put in
place by way of an export allowance. One presumes that the idea is to
expand the coverage rather than increase the rates of the allowances
which are now as high as 75 per cent. Business Page is concerned about
tinkering with taxes in the absence of comprehensive tax reform and
would therefore recommend caution.
* There will be accelerated allowances for capital expenditure,
depending on the rate of expenditure incurred.
Conclusion
Business Page generally supports the recommendations contained in the
NDS for the manufacturing sector. However the country needs to look
beyond tax measures to ensure that the environment for manufacturing
and exports positively encourages the sector. Taxation alone can in
fact exacerbate the situation for the country as a whole. There needs
to be greater linkages with other sectors of the economy. Our banking
system with all the technology and privatisation has made little
structural advances, too many of our public servants still do not
understand the role of the public service in the new era and the
politicians still prefer laws which allow them too much discretion and
to dispense favours rather than establish and administer economically
sound, transparent policy regulations.