Lesson

The first and perhaps most important lesson of the stock market saga is that the efficiency/innovation that market competition offers, and which is its main contribution to development, is inseparable from the greed and criminality that lurks in every corner of every market place. Where markets are not tightly regulated with strong oversight, efficiency/innovation gains do not materialise. In this sense therefore, corruption, thievery and criminality are fundamental threats to economic growth and development.

Obvious as this is, it took the World Bank and other institutions responsible for regulating the global economy, decades to admit this reality. Recently, the World Bank on its New Anti-corruption Home Page on its Website stated that "the Bank has identified corruption as the single greatest obstacle to economic and social development." Late as it is, it is welcome that the Bank has finally acknowledged that corruption undermines development by distorting the rule of law and weakening the institutional foundations of the economy.

Guyana situation

To most observers of the Guyanese economy this is clearly true. A significant proportion of the national GDP is lost by corruption, theft and other criminal endeavours. In Guyana those hardest hit by corruption are the poor. This occurs, not only because economic growth is reduced, but also because public revenues decline and with this the services on which the poor are especially reliant.

Because of the importance of corruption, groups like Transparency International generate worldwide corruption surveys and indexes. To take a couple of examples they undertake a regular Bribe Payers Survey, which gives a comprehensive coverage of bribe paying in international trade. They also conduct a Corruption Perceptions Index, which ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. The purpose of such surveys is to offer more than anecdotal evidence to assess the prevalence of corruption. As we know quite well from experience here in Guyana, those who would want to defend against the charge of corruption typically resort to the tactic of requesting "proof." This is more often than not a device to avoid constructively engaging the issue. Surveys and indexes aim to preempt this response by their assessment of "the extent, cost, dynamics and perceptions of corruption." For those interested in an anti-corruption strategy this is a crucial first step.

Cooking corporate and national accounts

The economic analysis of corruption recognises that it takes many forms. The most recent revelations in the USA linked to the stock market crash show how the corrupt hide behind inaccurate, misleading, and manipulated financial and economic data. In my article of August 4, I summarised the different "flavours of fraud," as Paul Krugman described them for the New York Times, which have emerged. The resort to deliberate manipulation and misrepresentation of financial and economic data is not confined to private corporations. Governments too have been engaged in this practice. Indeed one really grave emerging problem that is attracting the attention of economists, is whether the national accounts data (GDP) supplied by some countries are accurate. A research project is expected to commence on these. Regrettably Guyana has been mentioned in this regard.

The basic truth we must not lose sight of is that if the information supplied to the market place is false, the possibility of rational decision-making disappears. The famed efficiency of the market place is no longer possible to attain.

Anticorruption strategy

The approach to an anti-corruption strategy is usually broad-based. Thus the World Bank emphasises five key elements. One of these is increasing political accountability. Clearly, if politicians do not hold themselves accountable for what is taking place during their watch, there is no prospect for learning and improvement. Unfortunately, the style of our political leadership is to publicly blame someone else for every problem that is encountered and comes to public notice. By so doing the political leadership diminishes its stature and loses the aura of broadmindedness and forward-looking solution-oriented approaches that are necessary for meeting the challenges of development.

A second element is strengthening civil society participation. In Guyana, civil society is very weak. It is under-resourced and lacking in institutional/corporate memory. There is not even a defined legal foundation for the large number of NGOs and CBOs that exist. The third element is to promote more competition in the private sector. This, however, is very difficult in a small market, so that the orientation has to be towards export activity. The fourth element is the need for checks and balances and other institutional restraints on executive power. In the absence of broad-based constitutional reform and a strong separation of powers this would not exist in Guyana. Finally, the World Bank stresses improving public sector management. In Guyana the prospects for achieving this are not very good in the present climate.

The foregoing suggests that corruption in Guyana is here to stay. Eradicating this cancer from our society is no easy task and we should not delude ourselves on this. It is equally important that we also do not blind ourselves to the sober reality that corruption benefits a few but contributes massively to the persistent poverty, unemployment and underemployment that are everywhere around us. The lesson to be learnt therefore is that there are great perils ahead when companies and governments cook their financial and economic data.

Lesson Two: Do not underestimate the ‘political market’

Capitalism’s flexibility
The first lesson drawn last week from the stock market gyrations in the USA is the peril that a country faces when corporations begin to cook their financial statements and governments their national accounts. The spread of mistrust this generates, strikes at the heart of the market system, and undermines its effectiveness, which is founded on trust and confidence. The second lesson we draw attention to this week is the remarkable flexibility and responsiveness that capitalism, as a social mode of economic organisation, so frequently displays at times of crisis. Time and again capitalism has been written-off and described as headed for its “final crisis”. So far, however, political and economic reforms have always appeared, which not only avoid the crisis, but seemingly give renewed vitality to the system.

It is in a similar vein that some pundits had argued that the August 14 deadline set by the Securities and Exchange Commission (SEC) for Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) to certify their financial statements would have precipitated the final blow to consumers’ confidence in the USA, and thereby precipitate a major crisis of eventually global proportions. One reason for this expectation was the enormous amount of public and Congressional pressure that was required to get the SEC to fix the deadline in the first instance.

August 14 has passed and the final crisis has not been visited on the system. Indeed, since then the stock market has been on a nearly month-long rally, breaking the 9000 Dow Jones barrier last week. The details are that of the 745 CEOs and CFOs who had to certify their financial statements, only those associated with companies that had already been under the public microscope, failed to do so on August 14. The remainder signed-off as required. Amongst the former group are such well-known crooked corporations as World Com, Qwest Communications, McLeod USA, Enron, Dynegy, CMS Energy, AOL Time Warner and Bristol-Myers-Squibb. In the end therefore, August 14 did not sound any new alarm bells, even though we cannot yet say the stock market crisis is over.

Some analysts attribute this outcome in part to the vague penalties attached to non-compliance with the SEC’s August 14 deadline. These provide for little more than public outcry and the risk of further loss of investor confidence in these companies. The order did not provide for personal punishments and fines to be paid by defaulting CEOs and CFOs. However, under the Sarbannes-Oxley Act, which was recently passed by Congress, another deadline date was fixed for August 29. At that date, CEOs and CFOs are required to sign-off on quarterly and annual reports of their companies, if they believe them to be complete and accurate. If otherwise occurs, the concerned CEOs and CFOs face punishments and fines.

The political market

Taking heart from this situation some analysts observe that the recent failure of corporate governance is neither new nor a uniquely American phenomenon. Indeed they posit, what is uniquely American about recent events is the quick response to the unfolding crisis. This response, they claim, reveals the flexibility and reform capability of capitalism at its best. To them it is truly remarkable that, barely eight months after the Enron scandal broke, the political responses of the US system have been so swift and surgical. Consider for example that the President and his Republican Party who have traditionally fought against governmental regulation and state intrusiveness, had, within the space of a very short time, abandoned this ideological position and contributed enormously to the passage of the most wide-ranging pieces of economic regulation in the USA since World-War II.

American analysts also see in this development the remarkable power and influence of the competitive market place. Their argument is that, with all its faults, the American market place ultimately demands and gets performance. Indeed, performance is the sole guarantor of survival and prosperity in a competitive environment. As their argument goes this is true for the economic as well as the “political market place”.

As soon as problems emerge, the “political market” demands solutions and results, if participants in it are to survive and prosper. This makes the search for pragmatic responses and an inclination towards reform one of the intrinsic political features of fully developed capitalism. In other words therefore, it is only backward capitalism which is intrinsically reactionary.

This argument draws strong parallels with what occurs when problems emerge in the area of the economy. For example, if there are shortages in the labour market, or commodity crises, or technical bottlenecks, then it is expected that the economic response based on market incentives is swift, as performers seek to outdo each other in providing remedies.

The present situation in the USA gives support for this thesis. With congressional elections looming in November, we can already see results including 1) the wide ranging economic regulations passed into laws 2) the bankruptcy and likely dissolution of the defaulting corporations 3) the fact that some of the most prominent business persons in the USA now face criminal charges for their misdeeds. In detail we have found that within months of the Enron scandal, Arthur Andersen, one of the ‘Big Five’ accounting firms has virtually disintegrated, several CEOs and CFOs are facing legal charges, and, both accounting and financial activities are now subject to stringent oversight.

The importance of lesson two therefore, has much salience for Guyana and the wider Caribbean, where the political market place is as undeveloped and inefficient as the economic market place.

Lesson three: beware the narrowing gap between national and global crisis

First lesson

Since analysing the stock market crisis in the USA, I have to date identified two important lessons from this experience, which Guyana and the wider Caribbean would do well to learn. The first has been described as "the peril of cooking corporate accounts and national accounts." As readers would recall, the precipitous and erratic decline of US stock prices combined with the continued loss of investor confidence, particularly over the past year, have been closely linked to the events that followed the revelations of financial crookedness and collusion between Enron and its accounting/audit firm Arthur Andersen. The Enron affair was immediately followed by a string of other revelations related to the manipulation of corporate accounts and theft, which engulfed some of the largest corporations and most respected Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) in the USA. A year later that drama of cooked corporate accounts is still unfolding.

Even as these events have been occurring, it has been suspected for some time now that some countries, among which Guyana is included, also publish questionable national accounts, and manipulate data to put a positive spin on the country's economic performance. At this very moment, last year's published national accounts data for Guyana are under intense scrutiny, as experts and organisations have questioned the claim of a positive rate of growth for that year.

The lesson is clear, in the long run a country suffers immensely when it undermines the market place with lies, deception, and manipulation of economic and financial information.

Second lesson

The second lesson I drew was to observe the remarkable 'political flexibility' displayed by the US establishment in responding to the stock market and investor crisis, which threatened, and indeed still threatens, to precipitate the economy into a major depression. The remarkable turnaround of the Bush administration, away from its right-wing anti-state intervention and anti-regulation views of the market to ensuring the passage of the most comprehensive pieces of economic and financial regulation in the USA since World War II, shows a pragmatism and flexibility, which have many times before served capitalism well at moments of deep crisis. There is no doubt that, when it works at its best, the market system is an engine of efficiency.

The problem, however, is that this positive goes along with two serious limitations. One is that the market also is a natural haven for thieves, scoundrels, robbers and crooks of every possible hue and kind. It is important, therefore, for its own protection that the market is always subject to effective oversight and regulation. The other limitation is that the market's pre-occupation with efficiency is so strong that it literally disregards concerns of equity and fairness. As a result it has built into its workings a propensity to generate conflict and crisis, which, unfortunately, the market on its own cannot then resolve.

What appears to have occurred in the USA is that the competitive drive of the market place has entered into the framework of its politics. To the extent that this occurs, it makes US political organisations performance driven. It is for this reason I concluded last week that, where you have backward undeveloped market economies like Guyana, neither economic performance nor political performance is routinely efficiency driven. This is a sad outcome, as poverty and need give efficiency a higher priority, the poorer the country.