Last week's article concluded for the time being the discussion on the much heralded "new geography or global division of economic power", in which I paid particular attention to China's recent phenomenal growth in production and trade. As was noted, this has led to a substantial alteration in the pattern of production and trade of the developing countries as a group as well as their share as a group in world output and trade. I was therefore left with the task of deciding what should follow in today's article. Usually I am guided by some combination of what is topical, bearing in mind the focus of the series on "Guyana and the wider world"; what I am currently engaged in researching and writing; and matters that arise from my engagements with students, whether formally in the classroom or outside of that where I have responsibility for research guidance.
On at least one occasion in the past, namely for the series of articles on "the rise of the criminal state", I explored matters of some theoretical significance using Guyana's experience to draw lessons and insights not only for Guyana, but the wider world. This week I will start a similar, although far less extensive exploration of matters related to the functioning of Guyana-type economies. As I did with the series on the rise of the criminal state, I shall explore different dimensions in the weeks to come and towards the end I shall pull the various strands together so that the mechanisms of the economy; how they are interrelated; and the pattern of Guyana's insertion in the global economy will be laid bare.
Salutary Lesson One
If we look back at the growth experiences of the economy in the 1980s this provides us with many lessons but two of these stand out for our purposes today. And, we ignore these lessons at our own peril. In that period the economy declined at an annual average rate of minus 3.5 per cent and expressed on a per person basis output declined by minus 3.9 per cent. This long secular decline or period of immiserirising growth was linked to massive macroeconomic imbalances. There was rampant inflation, massive black markets for goods and foreign exchange, the government deficit was about 60 per cent of total output and there was a huge un-repayable foreign debt and payment arrears. The first lesson therefore is that the maintenance of what economists term macroeconomic balance in economies like ours is a necessary condition for growth. It is not however, a sufficient condition.
This distinction is more than it might appear as it is also intended to indicate that failure to locate the pursuit of macroeconomic balance and stability in the framework and context of a primary and fundamental focus on growth is a trap into which the policy Authorities can very easily fall. The reason for this is that persistent macroeconomic imbalances and instabilities such as we have had here in Guyana force the Authorities to turn to the international financial institutions (IFIs) and donor countries for support. From the moment that such support is officially granted effective national control of essential economic priorities and the design of policies and programmes is relinquished by the Authorities to the new patrons of the economy.
Lesson Number Two
The second lesson follows from the consequence of becoming hostage to the new patrons. To appreciate this point we need to comprehend the virtual sea-change that occurred in the ruling economic ideas, and consequently the development strategies, prescriptions and policies practised and promoted in the decision-making structures of the dominant international development organizations during the late 1980s and 1990s. Purely as points of reference, and not for purposes of stereotyping these ideas and approaches they may be labelled as the Washington Consensus after Williamson (1989) who originally formulated the notion or the Augmented Washington Consensus as Rodrick (2001) later formulated it. More recently these formulations have been labelled as "market fundamentalism" by some analysts, for example George Soros or commonly referred to as neoliberalism.
It is widely acknowledged that these ideas have been framed within the theoretical constructs of that school of economics, which stresses monetarist approaches to government policy and relies mainly on the findings of models of competitive general equilibrium analysis. These ideas start from the view that there are perfect non-asymmetric information flows among all participants in the economic system. Further that speculative behaviour whether in financial or goods markets serves to stabilise prices. Consequently economic "shocks" when they occur are intrinsically transitory and minimal in their effects. This is encouraging as it is assumed that there are strong tendencies for government induced distortions in the economy. We will come back to these ideas at the appropriate stage where I shall try to make them clearer.
For now we need to appreciate that prior to this sea-change I am describing here, the ruling ideas and practice in official circles and institutions were framed in the context of Keynesian macroeconomics.
This perspective had a very different reading of development experience, both as seen from short-term and long-term perspectives. The Keynesian view of short-term experiences emphasised that private capitalist markets were prone to: 1) frequent currency and exchange rate crises; 2) a systemic tendency toward destabilizing speculation in foreign exchange markets; 3) the corrosive effects of unscheduled and uncontrolled capital flight; 4) endemic manifestations of pure gambling casino-like behaviour of financial and stock markets; and 5) frequent business cycles, both national and international in their scope.
The perspective on long-run experiences emphasized: 1) over time a growing nexus between national and international business cycles; 2) a recognition that industrialisation and export expansion are essential foundations for long run economic growth; and 3) the need for steering long-term capital flows into countries that were seeking to catch-up with the industrial leaders.
Both the short-term and long-term perspectives therefore converged in support of an active interventionist role for the state. Only the state was seen as being able potentially to be both a guarantor of short-run macroeconomic balance and long-term economic growth.
Next week I shall take up the discussion from this point.
Wanted: An export platform
The claim made previously in this series that small, poor, open, Guyana-type economies have been producing historically what is not consumed at home and consuming what has not been produced at home as a broad generality, captures several important technical conditions and relations which govern the operations of these economies. It is these that impart to them their particular rhythm and pattern of growth and development. Last week I had started to explore these conditions/relations and considered one, namely, that in these economies there is on the one hand a crucial absence of dynamic intersectoral linkages between export sales and domestic production, and on the other between domestic expenditure and domestic production. This formulation is not intended to deny that an income and final expenditure-type multiplier effect exists. Thus for example, rising domestic incomes arising from export sales would certainly lead to a rising demand for local goods and services, mainly consumption.
A second technical relation follows from this circumstance, which I shall explore today.
Domestic platform
Historically, until the recent East Asian and China export surges in manufactured goods, the larger and already developed economies had established their export production on the basis of their firms first producing goods and services for home consumption. Later, exporting developed, as these firms sought to widen their markets, increase the scale of their operations in order to reduce their unit costs, and thereby raise their overall profitability. In a true sense, therefore, the domestic economy has typically been the platform from which export activities took off. There were many advantages to be gained from utilising this approach, not least of all being the opportunity to pursue 'trial and error' production and distribution methods that firms could not risk in the open competitive international market. In the local market it was more or less expected that national sentiment and tolerance (not to mention government support, tacit or otherwise) would be supportive of these efforts of firms to move along the learning curve and become players in the global market after first establishing their presence and fine-tuning their operations locally.
This failure of Guyana-type economies to utilise their domestic markets as the initial entry point or platform for exporting was basically due to their small size and the inability of enterprises to reap significant economies of scale from producing solely for the national market. The long-term consequence of this has been that, not only have exports been disarticulated or cut-off from a domestic platform, but in this process the scope for exports to generate broad-based economic growth and development was also narrowed. We may therefore reason that a necessary requirement for these economies to have sustainable growth is the pursuit of policies which seek to develop and solidify the bonding between their export sector and the rest of the national economy.
The East Asia and China exception
The reference to East Asia and China's recent export surges in manufactured goods as exceptions to the general rule of the domestic market being a platform for the development of exports needs further clarification. This exception has come about as a result of the impact of globalisation, the transnationalisation and consolidation of much of global production into the hands of a relatively few global firms, and their subsequent elaboration of genuinely global value chains of production, flexible enough to permit the location of production for the global market at sites where the national market is itself not a major consideration. Again, however, the issue of size has still remained relevant. We see this in the case of China whose large population and exceptional potential as a market if incomes continue to grow at the present rate makes it attractive enough for global firms to produce primarily for its domestic market.
Responses
In response to these circumstances small Guyana-type economies have over the past two to three decades developed three broad strategies. One has been to diversify their exports. In the Caricom region tourism, travel, and financial services have spearheaded this drive with some considerable success. Service activities face fewer pressures from scale determinants as compared to manufacturing production. These pressures, however, nonetheless exist, since both regionally and worldwide transnationalized global firms dominate these services sectors. The second strategy has been a drive to promote regional integration and common markets like Caricom and its CSME. At least in part this strategy is conceived as an effort to overcome the limitation of size of the national markets of Guyana-type economies. In other words they seek to offer enterprises the opportunity to exploit the regional market as the preferred platform from which to later move into international exporting.
The third strategy has been to continue the present reliance on the traditional export model, with the difference that the country in question pursues a search for new agricultural and mineral resources for export to replace/supplement existing ones. Clearly this particular strategy is only feasible in countries where there is a significant natural resource potential in modern terms as is the case of Guyana.
Next week I shall continue this discussion.
Inadequacies of export growth and declining aid in Guyana-type economies
Because small, poor, open Guyana-type economies have developed limited intersectoral linkages in their production structures and have also failed to develop their export sector from the platform of their domestic market, a number of further weaknesses and limitations have emerged over time. One of these is the high correlation (which one would expect to find, given these circumstances), between the rate of expansion of their merchandise exports (for those that are commodity exporting countries) or the rate of growth of tourist arrivals (for those that are services based) and the rate of economic growth of the overall economies and well-being of the population. In truth, this high correlation signifies a dependent relation as in the markets to which these countries export their goods and services, they exercise little or no influence on the price at which the product is sold. These economies are what economists term as 'price-takers.'
Price takers
Price-taking economies do not compete on the basis of the price of their exports, but on their quality or other features. By itself this is not a bad position for an economy to be in, although some regional economists seem to assume this is the case. The difficulty in my view arises from the fact that changes in the demand for their exports (over which they have no control) exercise an exceptional impact on local jobs, incomes, and levels of consumption. As a consequence we find that, whatever causes changes in demand overseas, whether it is an economic recession, a change in tastes, a new invention, or some set of social or political occurrences, the small, poor, open Guyana-type economies bear the brunt of these effects. Thus there is much truth in the saying "when the USA or the European Union (EU) sneezes, Caricom economies catch a cold."
This negative situation has been aggravated by two further considerations. One is that the export sales of Guyana-type economies are quite heavily concentrated in one or two major markets. This concentration heightens the vulnerability and susceptibility of the economy to what economists term as 'external shocks.' The other is that their export products are usually at the low end of the technology-intensive production scale so that product development is often not a logical next-step or outgrowth of exporting.
Inadequacy of export growth
Crucial as export growth is for small states, this alone, even in the best of circumstances, is likely to be inadequate to generate sustainable development. This is particularly the case because of 1) the lumpiness of infrastructure investments and 2) the demands already placed on these states to develop rapidly a range of complementary capabilities, institutions, regulatory and incentive frameworks, and services. The result is that, international assistance, whether financial, technical or material inflows are essential even under the best circumstances of export growth to sustain broad-based growth. As a rule however, such assistance would have to be efficient and effective if it is to ensure that international trade works for people.
Declining aid
Unfortunately, we find that overseas development assistance (ODA) or what was formerly called 'aid' has been falling as a share of aggregate net resource flows to developing countries.
Between 1980 and 2001 this fell from 46 to 28 per cent. Private flows have grown to fill this gap, rising by nearly four times in total value.
Regrettably, however, the volume increases have been very erratic, concentrated in only a few countries, and its composition has changed drastically with time. Thus, although private flows have replaced ODA as the main source of capital inflows in the 1970s, these fell sharply during the debt crisis years of the 1980s. As that crisis eased they once again grew rapidly until the mid 1990s when the Asian crisis occurred, leading to yet another slowdown.
The private flows have changed considerably in character, from syndicated bank lending and suppliers credit at the beginning to foreign direct investment (FDI) today. Thus between 1980 and 1985, the former represented 69 per cent of private capital flows and by the recent period (1998-2002), it fell to 11 per cent.
In the same period FDI grew from 30 per cent to 82 per cent of total flows. For the sake of completion, readers should note that portfolio equity investment rose from less than 0.1 per cent (1980-85) to more than 6 per cent (1998-2002).
FDI flows to Guyana-type small states as a separate category of receiving countries have averaged $9.2 billion for the period (1992-96). This amount more than doubled to $18.8 billion by 1999, but fell in succeeding years to $10.9 billion in 2002. In 1992-96 two small states (Singapore 74 per cent and the Dominican Republic 7 per cent) accounted for 81 per cent of the FDI flows.
This concentration was maintained in 2002 when 86 per cent of the flows went to three countries (Singapore, 70 per cent, the Dominican Republic 9 per cent and Trinidad and Tobago, 7 per cent).
In recent times also remittances have become increasingly important. Fortunately, these have proven to be less erratic, speculative and volatile than FDI flows. In some small states, for example Jamaica and Guyana, the total value of remittances is estimated to equal more than 10 per cent of their GDP.
Given all these circumstances, experience suggests that a third key technical relation is that insufficient capital flows to small poor states lead to the spectre of growing public indebtedness (external and internal); pressures on government accounts; and, rising debt service obligations.
These divert resources from the poor. When this occurs, we can say that a beneficial nexus between trade and poverty is being impeded by 1) the lack of export dynamism in some poor small states, especially commodity-dependent non-oil exporters 2) the growing indebtedness identified above, and 3) weak links between export growth and economy- wide expansion.