This is the third issue of Stabroek Business, a monthly publication dedicated to the examination of business issues.

The idea is to give our readers some idea of what is going on in the world of business in Guyana and also to help inculcate that attitude of 'can do' or entrepreneurial flair so essential to a successful business culture. With that in mind we are asking business leaders to express their views (see Mr Yesu Persaud on this page) and we are profiling successful and innovative businessmen (see Mr Bruce Vieira on page 10B).

Guyanese have the ability and are willing to do the hard work. What they have never had is a supporting business environment. Indeed, during the period of the socialist experiment, the old business class was miniaturised, and many of them emigrated.

We have to learn to 'think business', to see and exploit the many opportunities that exist, to save and invest. The Institute for Private Enterprise Development has shown the way for small businesses. There is so much more that can be done with imagination and the right attitudes. The Private Sector Commission and other private sector entities in addition to their normal duties must try to push the idea of starting new businesses and offer guidance on how this can be done.

All the political parties agree that the private sector is to be the main engine of growth. The National Development Strategy has outlined the many areas in which opportunities exist. All that is lacking now is the catalyst of business people with energy and vision.

"Who wants to be a Canadian resident?"

A consistent observation by all overseas donor agencies is that Guyana has long been suffering from a chronic brain drain. At the same time Canada's immigration policy offers qualified Guy-anese a chance to emigrate. This is affecting local businesses already struggling to fill middle management pos-itions.

In a document called the Canadian Guide for Inde-pendent Applicants for Permanent Residence, Ca-nada invites individuals to emigrate based on their "potential to establish successfully and their ability to contribute to Canada's soc-ial and economic well be-ing."

Applicants are advised to assess their chances of qualifying for residency using a set of nine criteria the most important of which is one's intended occupation .If an applicant has not already arranged a job his occupation must be listed on the General Occupations List. This shows the list of occupations that are in demand in Canada and can absorb newcomers.

The self assessment sheet helps applicants discover if they will qualify. Points are awarded based on:

1. Age - with optimum points for being 21-44.
2. Education- university degree in a program that requires at least three years study scores highest;
3. An Education Training Factor which refers to the length of training or education or apprenticeship one's occupation requires in Canada.
4 Occupation; high points for certain professions or for a job offer from a member of a close family:
5. Arranged employment- a guaranteed job offer from a Canadian employer that has been validated by a Hu-man Resources Canada Centre certifying that no suitable ably qualified Canadian is available to fill the position.
6. Work experience - at least one year's experience with four years and more gaining most points.
7. Language ability - extra for speaking fluent French
8. A demographic factor awarded automatically to Guyanese
9. Maximum five bonus points for having a relative already in Canada.
To find out how many points your occupation re-ceives under the Occupation and ETF categories you search the General Oc-cupations Listing on the internet. For example an Electrical Engineer receives 15 points under ETF; a computer hardware engineer 5 for occupation and 17 for ETF; computer programmer 10 for occupation and 15 for ETF; court recorders 3 for occupation 15 for ETF. Journalists 15 for ETF; statisticians 18 for ETF. And so on.

So a 28 year old (10) computer engineer (23) with a university degree (5) and work experience of over 4 years (8), fluent in English (9) and with a close relative in Canada (5) plus bonus points of 8 will receive a total of 78 points. Enough to qualify for the interview stage where he can receive even more points for showing "adaptability motivation, resourcefulness and initiative."

It sounds a lot like an American game show: "Who wants to be a Can-adian resident?" and this would be funny if it were not for the emphasis on attracting the cream of the working age 22-44 generation. The effect on Guyanese businesses is obvious.

One director of a large local company recalled that four of his midlevel managers had migrated under the scheme and another six had applied and were at various levels of correspondence. This was 10% of his skilled staff all of whom had received extensive and costly training with the company. He noted that it was impossible to compete with North American wages and the opportunities that await successful applicants. He has had to double his recruitment from the Uni-versity of Guyana fully ex-pecting to lose personnel along the way. The difficulty in finding a qualified business development manager has directly limited the company's expansion plans.

Many other businesses are similarly finding it increasingly hard to attract suitable midlevel managers and technical employees and are having to increase their salaries to keep the few that are still here . As such their labour costs increase and their capacity to expand becomes limited. This ultimately means less employment opportunities for the most poorly qualified people with the obvious economic and social ramifications.

What is so ironic is that the Canadian International Development Agency like all other NGO's, stresses in its projects the importance of capacity building to the long term development of a country.

Why then is Canada inviting the world's most talented persons from developing countries to come live within its borders? Simply because the developed na-tions in general are beginning to suffer from a dearth of persons of working age as the baby boomers head for retirement and recent birth rates remain low . By 2020 it is estimated that Germany will have to import 1M im-migrants of working age each year simply to maintain its workforce.

Canada which has accepted 7.8m immigrants since World War II continues to take in 230,000 per year so that roughly 4.5 million people, some 16% of its population of 29 million, are foreign-born.

G.C.J. Van Kessel, Direc-tor General of the Refugees Branch of the Canadian im-migration system noted in a 1998 speech: "A major tenet of our immigration policy is to the selection of immigrants who will benefit Canada economically be-cause of their skills and abilities, including those who can fill Canada's immediate labour market needs. Inc-reasingly, these needs reflect Canada's move to a knowledge-based economy.

We select these immigrants on the basis of their ability to meet defined selection criteria which have as their purpose providing Canada with an adaptable, educated and professionally experienced work force... Within the economic group of im-migrants, Canada has an active program to attract entrepreneurs and investors who can establish or contribute to new and existing businesses and create job opportunities for Canadians. These immigrants enhance Canada's ability to expand global markets and to build trade links throughout the world."

And Canada is not alone in its policy of attracting qualified immigrants. The 2001 United Nations Deve-lopment Program's (UNDP) report estimates that India loses $2 billion a year in resources because of the emigration of computer professionals to the U.S. alone. About 100,000 Indians are expected to emigrate each year to the U.S. under the H-1B programme with the average total cost to India of educating each one of them between $15,000 and $20,000.

A private recruitment agency from the United Kingdom was in Guyana last year interviewing nurses and the response was overwhelming. Which comes to the larger question of what a country such as Guyana should do about this brain drain .The country has for many decades been in an emigration spiral where the lack of qualified workers makes conditions worse for those left and thus encourages more emigration. But it is highly undesirable to refuse permission for people to emigrate. More practically remittances from overseas make a huge contribution to the country's GDP.

The only solution is what has always been best for the country; to create a society where citizens feel comfortable and safe and where private businesses are free to prosper.

Top Ten Busiest Airports

The world's busiest three airports are all in the United States with a combined passenger count for 2000 of 220m passengers. Atlanta processes a staggering 1.53m passengers a week or 9157 every hour. To get an idea of how large this might be the equivalent of the whole population of Guyana every man, woman and child passes through the airport every three days.

The world's busiest airports by passenger (2000)

total passengers 2000

1. Atlanta, USA 80,171,036

2. Chicago, USA 72,135,887

3. Los Angeles, USA 68,477,689

4. London, UK 64,607,185

5. Dallas/Ft Worth Airport, USA 60,687,122

6. Tokyo, Japan 56,402,206

7. Frankfurt, Germany 49,360,620

8. Paris, France 48,240,137

9. San Francisco, USA 41,173,983

10. Amsterdam, Netherlands 39,604,589

Government has to work with Private Sector to transform economy

Mr Yesu Persaud, Executive Chairman of Demerara Distillers Limited continues the series of comments of selected business leaders started in our previous issue.

Guyana's economic life is subject to assault by a plethora of negative factors which could often cause business folk to throw up their hands in despair. Yet, when one studies our economic trends and possibilities, it is clear that the country could emerge out of the negativities and once more move into prosperity and growth. But prosperity and development is not achieved by fashionable pessimistic talk, it is achieved by planning, hard work, putting our own house in order and trying to discover the positives which always exist in any despairing situation.

Globalisation is fast app-roaching ,but our country is not ready for Free Trade as itis a producer of commod-ities. the prices of which fl-uctuate yoyo-like and production itself varies with the weather. The European Union (EU) has granted a waiver for special preferential treatment for ACP countries, including sugar, to the end of 2008. Most ACP countries including Guyana will not be ready to meet the onslaught of global competition by 2008. And then there is the Free Trade Area of the Americas, expected to come into force in 2005 or maybe, a little later. To get out of this commodity trap, it is absolutely essential that our political leaders act with maturity and create political stability, the key to attracting investments.

Entrepreneurship should be further encouraged and developed if the examples of successful businessmen and women are eulogized and honoured in the school system and in the community at large. Those who meaningfully contribute to the economic well-being and happiness of the nation are as much national heroes as those whose contributions are in the political and other such fields, and could be useful role models. The President is on record, both at home and abroad, as saying that his government is building a capitalist econ-omy for he must be applauded and I would like to suggest that he should introduce a major awards ceremony to be held annually to recognize the achievements of business managers as well as industries which have excelled and which could provide inspiration for others.

In retrospect, we may remind ourselves that less than 12 years ago, the state sector was the dominant sector of the economy and it turned out to be a colossal failure since all the state corporations made huge losses and the government had to seek recourse to printing money which was one of the major reasons for the de-cline of the Guyana dollar a-gainst the US dollar. The private sector culture was al-most destroyed in the eighties and was rekindled by the few who stayed on during those difficult years. Recog-nition must be given to those who have excelled, providing an inspiration to others to achieve greater heights, especially now that free trade and the global village are a reality.

I would now like to briefly touch on four case studies of small countries, which, like Guyana, were once sunk in the morass of economic difficulty but which, with private investment, stability and good governance emerged in a fairly short time as comparatively wealthy countries. These countries could provide examples and an inspiration to Guyana in its quest for a better life for its citizens.

Singapore is our first case. It's a small island in the Indian Ocean with a population of 2.5 million consisting of Chinese, Malaya and Indians. It was once used as a coaling station by the British Navy which provided most of the colony's employment. At independence, British officials expressed the view that the small ex-colony would sink into oblivion.

Just about this time, a Cambrige-educated Singaporean lawyer. Lee Kuan Yew, returned from Britain, entered politics and became Prime Minister. Lee Kuan Yew's vision was to transform his island into a developed country within the shortest possible time. He introduced liberal laws to attract investments which poured in from North America, Europe and Asia. At the same time, he implemented a massive education programme using the Confucian Model of Excellence and in a short time, Singapore had the most educated and technically skilled population in the Far East which provided the work-force for the new industries. Singapore, from being a Third World backwater country is now a First World country with a per capita income of over US$30,000, a higher per capita than its former colonial power, Britain.

Mauritius is our second case. It is a small island of 1.4 million people in the Indian Ocean. A former sugar colony of Britain, Mauritius has a very mixed population, Indians, Africans, Chinese, Arabs and Europeans, all of whom with the exception of the Europeans were brought to the island to labour on the Sugar Plantations. When the population started to increase in the late fifties, the British authorities advised Mauritians to migrate as the island could not sustain the population.

After independence there were a few difficult years but in the late sixties the Government of the late Prime Minister Ramgulam mapped out its vision to transform Mauritius into a diversified economy. Attractive incentives and tax free holidays were offered to light industry, banking and insurance and tourism sectors. The mainstay of the economy at that time was still sugar. Mauritius had the good sense to negotiate with the Lome, the highest quota for its sugar industry. The difference between Preferential price and the world price was used to set the development plan into full gear. The diversification process was an outstanding success and Mauritius has a booming light industrial sector, banking and insurance, tourism and software industries. The island today is short of skills and professionals, and has been importing people from Europe, India and the Far East. A classic case of another island state being able to transform its economy from poverty to a high standard of living. The per capita in-come is now in excess of US $l0,000. The EU is using Mauritius as a success story in in the ACP group'.

The third case is Barbados, a lovely island with a population of a quarter of a million. It was once a sugar island existing in the Caribbean syndrome of unemployment, low standard of living and poverty, With good governance, stability, constructive diversification of the economy, commitment to excellence in education and with a free market and private enterprise vision, Barbados has today emerged as the most successful economy and state in the CARICOM. Its per capita income is now US$8.660.

The final success story is a European one. The Irish Republic was the poorest country in the EU. Its economy was their agriculturally based and Irish people left in thousands for North America and Australia to start life in strange lands. Less than 15 years ago the Irish Government's vision was to transform Ireland into an investor's paradise. The Development Plan included liberal incentives and a tax rate of 12%. The plan was put into action and the Irish Investment Agency went on a investment marketing tour of North America, Europe and Asia selling the advantages of investing in the Irish Repub-lic. Companies started flocking to invest in Ireland in almost all areas of business activities.

The concept of the Irish Republic as an investor's paradise is now a reality. The Go-vernment then formed a social contract with private enterprise, the Trade Union Council and other social partners. A part of the agreement dealt with labour relations and the need for a peaceful industrial climate.

Today, the Irish Republic is a booming economy, house prices in Dublin and other towns have zoomed upwards, not only be-cause of the influx of investors but moreso the return of large numbers of Irish people who were living abroad, many of several generations. To help propel and maintain the Irish Republic's premier investment climate. The Irish Republic recently imported over 50,000 workers from North Wales. It has been reported that the GDP per head of population in the Irish Republic is higher than that of its former master, Britain. What a turn around! Another case of vision and execution of a plan to achieve the desired objection.

A salutary lesson could be learnt from Trinidad & Tobago. Despite a tie at the polls there is relative calm in the country and people are going about their business normally.

Having established political stability there is absolute need for Rule of Law and the lawlessness that now prevails must be brought to an end by the intensification of law enforcement activity and imposition of heavy penalties. The banditry and wanton shooting of businessmen must be seriously investigated and the criminals be urgently brought to justice. People must be able to pursue their business without fear and citizens as a whole must feel safe in their homes.

Political stability, the Rule of the Law and good governance are indispensable to create the right climate for investment in Guyana. Investments are necessary to create wealth and jobs and the word "Profit" once declared an unmentionable word in the nineteen eighties should once again become a guiding inspiration with every business aspiring to make bigger profits. Without profits government will collect very littte revenue from import duties, income and corporation taxes from businesses and even less in PAYE since employment will also be declining. How-ever, if the conditions are right and bus-inesses are booming government will be able to garner a surfeit of revenue and will be more than able to carry out its economic and social programmes.

There is an absolute need to simplify the country's tax system, two important elements of which would be to reduce Con-sumption Tax and introduce a VAT. I for one believe that low taxes not only act as an economic stimulus but will also bring in greater revenues to Government.

Guyana is a country richly endowed with resources but resources do not develop themselves. It takes enterprise, money and specialist skills to develop resources into quality products and services which can be sold in the Global Economy at a competitive price. It is apposite to quote from the US Ambassador, Mr. Ronald Godard's address at the last Annual General Meeting of the Institute of Private Enterprise Development "Money is a coward and will go where it is absolutely safe to earn good profits." This statement applies to both local as well as foreign investors. The ambience must be created to attract investment and skills and this is not an insuperable task.

Finally Guyana has to shift gears away from commodities which are dependent on weather and world market prices. The rice sector is a classic case. One of the largest employers of labour directly and indirectly, it is in parlous economic and financial plight. The price of rice has moved from a high of US$450 per ton to US$210 per ton less than the cost of production forcing many farmers and millers into insolvency. This has affected the circulation of money in the economy, affecting consumer spending on capital and consumer goods. The banking sector is affected in no small measure by the problems in the rice sector.

In a Private Sector Economy, the government is the facilitator, motivator and regul-ator and there are times when the government has to step in to save viable entities or provide the vehicle to save an industry. The US Government has done this on numerous occasions as for example, its involvement in the Savings and Loans Crisis, the Trans-portation and Airline Crisis, the Chrysler Crisis and several others. The reason for such governmental involvement was quite simply to prevent the economy from going into recession and to restore consumer confidence.

For this Nation to succeed it will have to produce quality products at competitive prices and deliver them how and where they are wanted. The government is a major and critical partner to transform this economy into one where our young people will want to stay in the country and help in the challenges ahead instead of wanting to go and live abroad. A buoyant economy will send messages to overseas Guyanese that Guyana is on the move and opportunities are manifold in every area of human endeavour as has been the case in Ireland, once a poor country but now booming. We must bear in mind that the human capital is now considered to be more precious than cash. It is the human capital that has transformed tele-communications, the computer and software industries worldwide to the point where software engineers and programmers are in high demand and are now the most mobile people in the world. Though Guyana has the talent and capability to create a software computer industry, it is precluded from so doing as such an industry requires a guaranteed supply of electricity and not a supply that surges and destroys equipment.

Guyana is strategically situated and with a long term and shorter term plans there is no reason why this country cannot forge ahead and become one of the most prosperous countries in the hemisphere. But to achieve this requires government working as the facilitator, motivator and regulator with private enterprise moving the economy forward.

Understanding Inflation Part 3
Controlling Inflation

Mechanisms and Consequences

We have so far examined the nature and causes of inflation (Part 1), and the effects of inflation (Part 2), referring where possible to real world experiences to illustrate causal relationships. In this concluding article, the control mechanisms available to policymakers and their consequences are examined.

As would be realized by now, inflation is perhaps the most devastating economic event that could be visited upon a country. While some economists view inflation as cyclical, the combined effects of external shocks and bad policy options have been the major causes of inflation in developing countries in the 1980s. Indeed, external shocks of the 1980s: high oil prices, a high interest rate policy of the U.S. (it reached 17 percent in 1984), and lower export-commodity prices, were cataclysmic for small developing economies during this period. Inapprop-riate policy options encouraged primarily by negative effective interest rates in the 1970s (the international money-center banks were eager lenders), and the monetization of fiscal budget deficits also contributed to the debacle. The shift in focus of bilateral aid from development to military in the early 1980s did nothing to alleviate the impact of the shocks; rather it served to exacerbate the social disruption in the poorer developing countries. How, then, can a country control inflation under these conditions? Examined here are the two broad policy-options, monetary policy and fiscal policy, that have been extensively utilized by the developed countries and generalized to developing countries.

Monetary Policy Options
a) Open Market Operations

The success of the U.S. Federal Reserve (FED) in keeping inflation at bay in the U.S. in the 1990s speaks to the controllability of it in an essentially stable market economy. The FED's policy basically is one of controlling the money supply through open market operations and the interest rate mechanism so as to dampen demand for borrowings, as it did in year 2000, without bringing the economy to a screeching halt. The as-sumption here is that, with the economy operating at full employment, a tighter monetary policy would have the effect of increasing cost of borrowing, thereby reducing demand for goods and services and hence output. With a reduction in output, wage pressure is likely to be alleviated, as the increase in the demand for labor abates.

Less dramatic than an increase in interest rates is the sale of short-term securities (open market operations) in the first instance. This has the effect of reducing the commercial banks' reserves held with the FED and thus forces them to adjust their lending accordingly so as to maintain the statutory ratios. Indeed, this preferred and less publicized option is an almost daily occurrence as the FED enters the secondary market for short-term securities. Hence the importance of the Fed-Fund rate to financial institutions and treasury managers.

Where inflation does not respond to increases in interest rates or to its intervention in the short-term securities market, the FED likely will resort to more drastic measures, such as increasing the statutory reserve requirements of commercial banks and increasing margin requirements for stock traders. Both have the effect of directly reducing liquidity on a sustained basis and are effective mechanisms of monetary policy.

It is important to note that the FED is independent of the government in setting monetary policy and has in the past found itself at variance with the government of the day over its prescriptions.

However, it is because of the independence of the FED in determining and applying monetary policy that the U.S. administration is obliged to restrict government spending in times of full employment for fear of having the FED increase interest rates or reduce liquidity to levels unacceptable to the administration.

It bears pointing out that more importantly, monetary policy as described above is effective only in a market economy that is large and broad-based enough so that the effect of an interest rate increase is incremental in impact and not destabilizing to the economy. Indeed, an often-overlooked constraint to successfully generalizing orthodox economic doctrine to developing countries is the absence of market conditions. A market economy exists only where there are enough buyers and sellers so that no one buyer or supplier can influence price, a condition that can hardly be said to exist in most developing countries, least of all Guyana.

Yet another aspect found in the dominant market economies but not considered in textbooks on theoretical economics is the myriad of support mechanisms, including non-tariff barriers, that have been put in place to ensure survival of a domestic industry or to preserve domestic jobs. In addition, the ability and readiness of a G-7 government to bail out an ailing domestic industry by unilateral action despite trade agreements and international dispute settlement mechanisms, ser-ves to engender domestic support for their respective monetary policies. France's opposition to the removal of farm export subsidies at the 2001 World Trade Organi-zation (WTO) in Qatar stands in evidence of this willingness, as does the existence and often resorted-to Super 301 policy of the U.S.

Closer to home, the recent bankruptcy of the Chiquita Banana corporation speaks to the power of the transnational lobby, al-though in this case it was a little too late to avert the de-mise of the company.

b) Developing Economies

In developing countries it is more difficult to control inflation, as, often, the role of the central bank is not as clearly defined as that of the U.S. Federal Reserve, and neither is the central bank as independent of the government, although the tendency is to promote it as such. Moreover, in small econ-omies and fledgling democracies, in addition to the ab-sence of the conditions of a market-economy, perceived responsibility for economic and social development is often in conflict with the notion of an independent monetary policy institution. Nonetheless, monetary pol-icy is still a viable policy option although it derives not from the central bank but from the government. For example, although the decision to sterilize for excess liquidity (take money out of circulation) is a government's decision and not the central bank's, it has the effect of keeping inflation under control, provided the funds are accounted for separately and are not utilized to finance a government budget deficit.

The danger of not having an independent central bank as is often argued by some observers is that, the sterilized funds while not available to the commercial banking system, could be accessed by a government so as to avoid it having to secure prior approval for budget over-runs. In such a situation, it could be argued that crowding out occurs, that is, the private sector is denied access to funds by the sterilization process, which, by its very nature, keeps interest rates artificially high. The process thus becomes skewed towards pursuing an essentially tight monetary policy and possibly financing an over-sized government at the expense of private-sector development. Furthermore, financing an inefficient government translates to inefficient use of resources and stifled economic growth.

On the other hand, a country with thin foreign exchange reserves needs to protect such reserves by maintaining a high local exchange rate. In such cases, sterilization benefits those industries that are import-dependant. Exports are, however, constrained by an overvalued local currency, and consumption of foreign goods and services is encouraged. The dilemma for governments in developing countries recovering under structural adjustment, then, is how best to comply with liberalization prescriptions while at the same time develop a sound internationally competitive economy.

From an economic development strategy perspective, government intervention that seeks to target specific sector for special treatment translates to a policy of "getting prices wrong," and includes a policy of multiple exchange rates, as was pursued by South Korea in the 1960s. Such a policy allows a government to be selective in its subsidy and other support programs concurrent with a policy of high interest rates. However, it is doubtful that developing countries under structural adjustment or in receipt of debt relief under the Heavily Indebted Poor Country Initiative (HIPC) would be allowed to pursue such a development policy. Indeed, that South Korea was able to effectively industrialize on the basis of such a policy was due to its projected image of outward orientation during the crucial period of its industrialization.

Fiscal Policy

In addition to monetary policy, the government can implement fiscal measures to dampen inflation resulting from the increasing demand for goods and services. One such measure is to increase the tax burden: raise the marginal income tax rate or reduce allowable deductions, or increase indirect taxes. Another is to implement a wage and price freeze. Yet another is to cut back on government expenditure. These are examined below.

a) Raising taxes

A sure way of taking liquidity away from consumers is to increase taxes, direct and indirect. The difficulty is in determining by how much. But, raising income and other tax rates can be regressive, resulting in less tax collected at the higher tax rates. According to Arthur Laffer, the chief proponent of this notion of regressivity, higher tax rates will not only result in lower tax revenues collected, but also acts as a disincentive to investment and other economic activity, thereby further reducing the tax-base. Moreover, in economies where taxes are already high, the evidence suggests that increasing taxes further will lead to an increase in tax evasion. Evidence the regressive properties of the Guyana consumption tax and the spate of under-invoicing during the 1980s and early to mid1990s as a result. Evidence also, the thin tax base of most developing countries in consequence of tax evasion.

b) Wage and Price Freeze

A wage and price freeze, as its name implies is setting a ceiling above which wages and prices cannot go. It was a popular inflation control mechanism up to about the 1970s. In pursuing the wage freeze option, a government runs the risks of alienating its political support base where such support resides in the working class, especially if unionized. The risk notwithstanding, a wage and price freeze allows the economy to benefit from currency devaluation in the short term, that is, so long as wage and price increases can be held in check. In the long run, of course, wages and prices will adjust upwardly to reflect the devaluation.

c) Reduce government expenditure

A third option, either as a stand-alone or in conjunction with either of the above two options, is to reduce government expenditure. In times of high employment, the pressure for government provisions is likely to be reduced as more persons are employed. Unemployment benefit payments will be reduced and government projects possibly could be deferred to reduce competition for resources. Indeed, in times of high employment governments often budget for fiscal surpluses, which can be utilized to reduce the national debt. The challenge to an incumbent government is to recognize the appropriateness of such a cut back in expenditure and the political will to follow through.

Conclusion

Notwithstanding that the absence of separation between monetary policy and fiscal policy appears to be absent in small developing countries offends economic orthodoxy, the infancy of the market for trade and commerce requires a pragmatic approach to controlling inflation in these economies.

Indeed, the absence of market conditions requires that the control of inflation be by way of managed government intervention so as not to destabilize the economy. Unfortunately, the balancing act that is often required in these economies, especially those that have been traumatized by external shocks, is often seen as favoring one sector or program over another or in contradiction with multilateral and bilateral loan prescriptions.

Finally, as an overarching comment, it should be evident from this three-part series on inflation that the intention is to present a causal relationship between the current economic conditions of the small developing countries such as Guyana, and the global inflation of the early1980s, the impact of inappropriate policy options notwithstanding. It is also intended as a framework against which recovery can be intuitively assessed. In this latter regard, it is significant to recognize that in recent years the lending agencies and donor community have come to realize that development issues, including recovery from the ravages of inflation, requires a holistic approach involving not only government, but also the private-sector and civil society.

It is therefore hoped that, with this approach and the patience and understanding of participants, small developing economies will not only in time recover from the disruption of the 1980s but also realize effective welfare enhancement in the process.

Sticker Shock

The government tax policy on both new and used cars is a burden on consumers and makes no sense for its own revenue collection.

There is still a perception in Guyana that a motor car is a luxury, affordable by a fortunate minority. This is true but mostly because of the excessive duties imposed on all imported vehicles, specially new ones. Many skilled Guyanese with relatively good paying jobs are therefore denied what in other Caribbean countries is no longer a luxury but a necessity of modern day living.

The taxes on new cars are particularly prohibitive and actually work against optimum revenue collection by the government. Of the estimated 2000 vehicles sold last year in Guyana only 150 were new cars and of that figure 90% were to persons and organizations with duty free concessions.

It is not difficult to see why. If you take a standard four-door saloon such as a Toyota Corolla 1600cc the actual cost of the car is $3.7m however when you add the 45% duty, the 30% consumption tax and purchase tax of 30% all compounded upon each other, the eventual cost is $7.1m. 46% of the total cost or $3.2m goes to the treasury. A smaller supposedly low budget car Mitsubishi Lancer retailing at $2.5m attracts duties of $1.915m.

The higher the engine capacity the more the purchase tax, starting at 10% for cars under 1500 cubic capacity and rising to 100% for vehicles over 3000cc. And this is imposed on the retail price, the C -Tax and the duty combined. It means that a Toyota Land Cruiser retailing for $7.8m attracts duties of $19m - enough to buy a couple of houses in a decent Georgetown neighbourhood. No wonder so few persons buy new cars and that the government fails to earn revenues from such imports. A lower rate would result in higher revenues as more persons would be encouraged to purchase new cars. If the government's policy is to discourage car imports it is self defeating since new cars last longer and thus don't have to be replaced by an imported one as quickly as a used vehicle.

The new car dealers are naturally not happy at the situation having seen their sales decrease from a 1996 level of 300 vehicles with their only business coming from the embassies, NGO's and companies awarded contracts by government. Meanwhile 75% of all concessions are given for government departments.

Sales of used cars continue to dominate. But here again the duties put the vehicles out of reach of the average consumer. Cars under 1500cc attract a flat C Tax of US$4300; between 1500cc and 1800cc - US$6000; 1800cc to 2000cc - US$6500; 2000cc to 3000cc - US$13500; over 3000cc - US$14500.

This was put in place by customs in September 1998 after they belatedly realised that many cars were being given declared values below their actual purchase price in Japan. Registration of private cars, hire cars and station wagons hit a peak in the same year at 2607 but in 1999 were down to only 1780. However this might have had more to do with the poor economic conditions than the increased cost of vehicles brought upon by the flat tax. The flat rate only applies to cars four years and older and those under four years attract a higher net rate. The dealers therefore concentrate on bringing cars over four years which are not always in the best condition. Anecdotal stories of customers buying lemons abound. It would make more sense to have lower rates on cars under four years if only to stop Guyana becoming the place where old cars come to die.

An average four door sedan four years and older retails before duties at $700,000. After taxes this will be in the area of G$1.8m.

It is easy to predict that a reduction in tariffs would bring car prices within the ambit of many more persons and this would in the end increase tax revenues not only from imports but from driver and car licenses and from increased profits from insurance companies and lending institutions. One proposal a few years ago from the car dealers was to increase the annual car license to compensate for a reduction in duties.

Trinidad is an example of the benefits of reducing import duties. In January 1996 the government reduced import duties on motor vehicles with engine sizes not exceeding 1599cc. This preceded an earlier reduction on all cars under 1999cc made in August 1995. New car registration jumped from 5280 in 1995 to 12180 in 1997. The receipts from vehicle taxes and duties tripled from $83.8m in 1993 to $301.3m in 1998 with 1996 revenue increasing by 32.7%, 1997 16.54%, and 1998 49.5%.

Bank loans for vehicles increased to $980m in 1998 compared to only $249m in 1995.

In Trinidad the rates for new cars now stand at 35% import duty and a 15% Value Added Tax (VAT) along with $4 duty per cc on cars between 1600-2000cc and $8 per cc between 2000cc to 2400cc. These are no capacity duty on cars under 1600cc. So the same Mitsubishi Lancer would cost in Trinidad the equivalent of $3.6m.

In Barbados the duty on new cars is 30% and a 15% VAT with a 1% environmental levy.

The spin-offs in economic activity caused by increased car ownership are considerable. Maintenance of vehicles requires mechanics and purchases of accessories (mag-rims, CD players and even nodding dogs) all provide employment. More cars mean more business for gas stations, car dealerships, car washes, tire shops, even drive thru restaurants!

The argument that there are too many vehicles on the road is exaggerated and should not be a reason for restricting car sales. Neither should the high incidence of accidents which have their roots in anti-social behaviour. The only real congestion of traffic is in central Georgetown and on the East Bank road for a short time during the traditional rush hours. Better management of traffic lights and monitoring of parking practices would easily solve many of the snarls, not to mention the driver's own duties to observe the road laws. With the government failing to provide safe and comfortable public transportation for its citizens, its responsibility is to build more roads and widen the existing ones so as to facilitate the justifiable demand for car ownership.