The size of Guyana’s shadow economy
In January of this year an IMF Working Paper by Ebrina Faal attempted to measure the current size of the underground economy in Guyana and, as promised, we shall explore this study today. In my earlier study the statistical approach used was based on trend line analysis of the relationship between various measures of money and the value of economic transactions. This relation is referred to as the ‘income velocity of money.’ The IMF study improved on this methodology. Instead of the statistical estimation of trend, the model that is used starts from a demand function for money in Guyana. To be sure, the income velocity is a type of demand function for money, but here the only variable that is captured is the demand for money as a function of the value of income and transactions, for which the money is to be used.

The demand function for money used by Faal is a more complex concept. It incorporates in addition to income (after taxes), the rate of interest, the rate of inflation, the rate of taxation, and innovations/improvements that lead to a reduction in the amount of currency normally held (for example the introduction of ATMs by banks). The rationale for incorporating these other variables is obvious. Consider the fact that if you hold cash you lose the opportunity of earning interest on it if you had held the money as a bank deposit. Clearly therefore, the rate of interest would affect the demand for money. Or, if prices are generally rising, you will need more cash to carry on your day-to-day transactions. Similarly, if taxes are high, your incentive to avoid paying them, other things being equal, would increase. You are therefore more likely to resort to the shadow economy to hide your income and evade taxation.

The IMF study also benefited from revisions that had taken place since the 1980s to the earlier statistical data used in my study.

And, finally, as the Stabroek News’ report on the study has indicated, the IMF Paper uses an “error correction model,” which several lay persons have called and ask me to explain. Simply put, like my earlier study, the IMF study has used a long time-series - going as far back as 1970. With such long series one can get spurious results from using the annual figures as the differences or short run effects and the levels (the long run effects) are operating at the same time. The model used by Faal sought to correct for this problem.

The IMF study covered the period 1970-2000 and for the period that the earlier study had covered, 1982-86, the IMF estimated the underground economy as averaging 78 per cent of the size of the official economy. During the 1990s the size of the shadow economy had been reduced. However, it was still considerable, averaging 47 per cent of official GDP. Based on the US dollar value of GDP for the years 2000 to 2001, this represents a sum of US$320 millions.

By any count this represents a formidable figure. Data from a large number of studies worldwide have established certain ranges in the size of the underground economy, which are shown in the Table. As might be expected the more industrialised and developed economies had the smallest size of shadow economy, averaging 14-16 per cent of official GDP. In the USA it averaged 10 per cent of GDP, and in Switzerland 9 per cent. Among the developing countries the range is given as 35-44 per cent.

Shadow/underground economy as a % of GDP

                              Country Group                                           % of GDP
                                  Developing                                                    35-44
                                  Transition                                                       21-30
                                     OECD                                                        14-16
Source: IMF, Economic Issues, Number 30, Page3
Note: Average for the period 1988-2000

Having established the available data on the size of the underground economy, the next step in my argument is that the reasons for the underground economy of the type that existed in the 1980s do not survive in a significant way today.

Their relevance is marginal and affects certain commodities in certain areas. Perhaps the best example is the smuggling of fuel and alcohol, but both of these are largely organised and stimulated by the high level of taxation on these items. The leading component in today’s underground economy is therefore more likely than not to be, organised criminal activity.

By organised I mean well developed, systematic, and making full use of all the opportunities, which globalisation have provided for it to thrive.

Next week we shall make the point that an underground economy of the size of Guyana cannot exist without strong interactions with the official economy and without also tacit and other forms of support from the state, which after all is the guardian of the official/legal economy.

The substance of the shadow economy
So far I have produced empirical data and reported on a number of studies in support of the prominence of two relationships in small, poor, open societies like Guyana, as the process of globalisation widens and deepens. One is the relationship between corruption on the one hand, and the blocking of development and the persistence of poverty on the other. The second relation is that between corruption and the growth and spread of the shadow economy. With particular reference to Guyana it was pointed out that, although the size of the shadow economy has declined from the staggering heights of the 1980s (where it averaged 76 per cent of the official GDP), it has nonetheless averaged 47 per cent during the 1990s.

This amount exceeded the reported range for the developing countries, which as a group had the largest share for their shadow economies (ranging from 35 to 44 per cent of the official economy) for the period 1988-2000. Based on its official GDP for the last two years, this suggests that the shadow economy in Guyana has a value of about US$320 million. By any measure, this is a considerable figure.

The share of organised crime
Many types of illegalities contribute to our shadow economy. Some of these activities are explicitly illegal. Good examples are drug dealing, smuggling, trading in stolen goods, bribes and fraud. Other types of activities may be legal, but the income generated from them is not reported for tax-paying purposes. Good examples of these are incomes gained from self-employment by professionals, artisans, and farmers; fringe benefits; and, gratuities (tips) earned by service employees. Some of these illegalities require monetary transactions or transfers of cash, while others may involve simple barter or exchanges of goods and services without any recourse to money. From this description it would be realised that the shadow economy is a fluid one, developing and transforming itself continuously.

The major proposition that I am advancing in today's article is that a significant portion, if not the bulk of the shadow economy in Guyana, is related to organised criminal activity. Emphasis is placed on 'organised.' Last week I described this as embodying the features of being "well-developed, systematic, and making full use of all the opportunities, which globalisation has provided for it to thrive." Whether this organised activity represents three-quarters or one-half of the shadow economy or any other portion cannot be definitively established.

However, in the light of the sheer size of this economy in Guyana, the absolute size of the organised portion would be substantial. Thus, if it represented three-quarters of the shadow economy it would equal US$240 million annually, and if it were one-half, it would still be as much as US$180 million annually. Indeed, even a figure as low as one-third would be well over US$100 million or 19 billion Guyana dollars annually.

Are the shadow and official economies related?
The IMF study by Faal cited previously, reports that there was no evidence of a systematic relationship between changes in the real growth of the official and underground economies in Guyana. Indeed when these two variables were correlated by Mr Faal, the coefficient of correlation between them was found to be both negative and very low (-0.05). This low correlation indicates that there was little similarity to the patterns of change in the two economies. However, it was also noted that the variation in the rate of growth of the shadow economy was found to be far higher than that for the official economy.

In any situation there are likely to be many connections and interactions between the official and shadow economy. This follows from the fact that they occupy the same geographic space and are separated partly by function but mostly by their legal character. The question arises therefore, as to whether the relationship between the two is, in general, a competitive, antagonistic, complementary, or even synergistic one. My own observations suggest that the relationship captures all these characteristics simultaneously.

Thus for example, the relationship is clearly in part competitive since the two economies compete with each other for the same human resources, entrepreneurial talents and skills in the society. At the same time however, it is also in part, antagonistic. For example, if the shadow economy encourages tax evasion, as it invariably does, this means that resources that could potentially be available to the public treasury are lost. This situation would not apply to purely criminal activities, since by definition the public treasury could have no legal involvement in this.

This exception however, was not recognised in the IMF study when it estimated that "government revenue would have been higher by at least, an estimated 7 percent of formal GDP per year over [the] period 1970-2000." It would be less when adjustment for purely criminal activities is made.

The relationship can also be deemed as complementary. Thus, in many countries where narcotics production is large it represents an important source of (illegal) employment and (illegal) income for farmers and other producers. Indeed some of this can even be glamourised as when the emergence of criminal enterprises becomes the forerunner for 'leading' legitimate business enterprises or when leaders of organised crime are seen as patrons and benefactors of the poor, dispossessed and marginalised. This phenomenon has already occurred in some communities in other CARICOM countries - Jamaica and Trinidad and Tobago.

The relationship between the official and shadow economy can also be synergistic in that the combined effect of the two economies is greater than the sum of their separate parts. This however, is an extremely dangerous development as it usually indicates that the shadow economy has gained the upper hand and is the driving force in shaping the society. Such an outcome is unsustainable in the present globalised environment.

Significance of the study
These observations are important to the premise on which my exploration of the state as a vehicle for criminal enterprise is based. The growth and spread of the shadow economy and with it corruption, affects the evolution of society, if for no other reason than that it alters the rules of economic and social organisation, undermines the norms and values of society, and perversely modifies the institutions of the state. My basic belief therefore, is that this work of exploration is of greater importance than may be immediately recognised or acknowledged. If citizens as well as decisions-makers, present and prospective, do not address these issues now, they will find themselves unable to define appropriate instruments to manage change in our country, in either the short, medium or long-term. In a globalised world, as the rules and norms of economic and social organisation change, so will the incentive and reward system within which resources are mobilised, allocated, and put to use in the service of the nation. And, since as a small poor open society Guyana is severely exposed to the global environment, the question arises as to how complicit are global players and institutions in this degenerative process of criminalisation.

Globalisation: Backward capitalism and the criminalised state

Last week I argued that a major indicator of the criminalisation of the state is the combined share of organised criminal activity in the shadow economy, and the size of the shadow economy relative to the official economy. I suggested that “a significant portion, if not the bulk of the shadow economy” is accounted for by organised criminal activity, in contra-distinction to what prevailed in the 1980s, when in fact the shadow economy was larger. I also indicated that “organised” meant being “well-developed, systematic, and making full use of all the opportunities, which globalisation has provided for it to thrive.”

Like most Guyanese I would hazard the guess that by far the leading sub-sector in this “organised” criminal activity is narco-trafficking. Clearly this assertion cannot be ‘proved,’ but it is a working assumption that would be shared, if not substantiated, by surveys of the population. If this holds true, the organised criminal activity I refer to is ‘transnationalised’ as my description of it above implies. Everyone knows that the production and distribution of narcotics is a global enterprise, and moreso in Guyana with its small domestic market. As such it is associated with a number of other well-known activities. Chief among these would be money laundering, arms trafficking, illegal communications and transport, and real estate transactions.

Together these form a cluster of activities, some of which are openly illegal, for example, arms trafficking, and others, which may be substantially legal, for example, real estate dealings.

Backward capitalism
Given the above argument, the next question that needs to be addressed is - what is the nature of the economic logic that drives the economic environment in which these developments are spawned? This is a most important issue, as it requires the fixing of the substratum or base, as it were, on which all these various arrangements I have referred to so far depend. From time to time in this series I have referred to Guyana’s economy as an example of backward capitalism. My present argument is that, it is those features which constitute a backward capitalist environment, that create the ‘potential’ for the emergence of the criminalized state.

Capitalism encapsulates certain key features of economic organisation. These include 1) producing and trading for profit as the driving force behind investment/accumulation, and in the way in which resources are organized to produce and distribute goods and services 2) private markets as the dominant form in which both resources and goods and services are acquired or disposed 3) substantial private ownership of firms, businesses, other forms of enterprises, and financial assets used in production and trade, and 4) legal protection for the social and property relations, which develop from this economic structure. Capitalism is also a global phenomenon, and historically there has always been marked unevenness in its levels of development among countries. Additionally, there are differences that can be significant between countries at the same level of development.

Guyana’s insertion
In the present global capitalist system, the manner of Guyana’s insertion exhibits many of the backward pre-globalisation features of the colonial economy. Thus, for example, its major exports are still natural-resource intensive, primary products for which little or no domestic value is added beyond what has been traditional. In some instances there has even been regression, as for example the abandonment of alumina production, and the retreat from the pursuit of R & D aimed at the diversification, and utilisation of new by-products from both the sugar and bauxite industries. New foreign direct investment still flows principally into the natural resource primary sector, as the cases of Omai in gold and possibly bauxite, and Barama in forests products demonstrate.

Further, while as a colonial territory the local authorities had little or no scope for the exercise of domestic autonomy in the framing of economic policies, since independence and before the full impact of globalisation was felt, Guyana had already ceded much of its national autonomy under the structural adjustment programmes (SAPs) entered into with the IMF and World Bank, especially the ERP.

Thus although we now spend a great deal of time dealing with the ‘liberalisation consequences’ for our services, manufacturing and agricultural sectors posed by agreements in the WTO, the pending Free Trade Area of the Americas (FTAA), and the Economic Partnership Agree-ments (EPA) which are to replace the Cotonou Agree-ment between the European Union and the African- Caribbean-Pacific Group of Countries (EU-ACP) of the former Lome Convention, the truth of the matter is that even before the WTO came into effect in 1995, we had already liberalised our trade arrangements under the SAP beyond the requirements of the WTO! With the strict conditionalities of the recently concluded HIPC-I and HIPC-II agreements, the role of external agencies in fixing the parameters and directions of public policy has further expanded.

Indeed many Guyanese have not yet fully grasped the fact that present levels of government expenditures on health and education, its stubborn parsimony on wage awards to the traditional public service employees, and the mushrooming of ‘special conditions/service contracts’ for top public service personnel, and who knows, even the ‘technocrat ministers’ to come, are all the direct consequences of the conditionalities attached to these HIPC programmes.