Readers would have missed this column over the past three weeks. As with every other Guyanese, the flood disaster that has hit the country and whose aftermath no doubt will be felt well into the future has altered my perspective on what is priority, perhaps permanently. Psychologically, I found that I had no desire to continue to write about the Banks DIH-Ansa McAl imbroglio, important as that is, at the height of the great flood, and this frame of mind has persisted ever since. A few days ago, however, it dawned on me not unsurprisingly that, perhaps I should write about what is engulfing my mind and thoughts - the flood itself. And since I am no engineer I cannot join the grand debates about the engineering origins and consequences of the flood. Instead I propose to address issues that are important from my professional perspective, and I begin by considering the question: how does one go about assessing the economic damage of disasters such as the flood, paying attention to the need for a social assessment to accompany this?
Practice and thought
In the midst of a natural disaster it is tempting to believe that the only activities which matter are the practical ones of mitigation, emergency response and initial recovery. The world, however, has had a long experience of responding to such challenges. The multitude of mistakes that has been made in the past and successes achieved in this area have been the subject of much research and study. This has led to significant advances in disaster management practice over the years. One of the most salutary of these lessons derived from previous experience is that in critical situations there is 'nothing more practical than a good idea.' Indeed, recognition of this maxim is an attribute that distinguishes humans from other living creatures, and throughout the world progressive cultures and societies revere this insight.
Having said that, given the nature of the flood disaster and its impact on people's lives and their livelihoods, emergency measures directed at its containment and early recovery do constitute a clear and distinct first priority. About this, there is no question. What is not widely appreciated is that experience has also shown that it shares this priority position with the equally strong requirement for an overall assessment of the effects of the flood and its aftermath on the economy and wider society. The reason why this is also a first priority is that without it, there would be no rational basis to go forward and determine the recovery and rehabilitation and reconstruction policies, programmes, and projects, which become necessary both to reverse the consequences of the flood and to prevent its recurrence from ever being so damaging.
This point is acknowledged in best practice management of disasters around the world. Indeed, when it is not observed or practised in disaster-prone areas, those responsible are accused and often condemned of practising what is termed 'moral hazard.'
Moral hazard
What is moral hazard? This term is widely used in economics, but it first developed in the field of insurance where, to take an example, it was the view that persons or firms with fire insurance or property protection coverage became less careful about fires or preventing thefts from their premises after they were insured, as they expected the insurance company to cover their losses. Insurance companies obviously could not determine which firm or person would fall into this category, simply because they did not have all the information they needed to know this about their clients. This situation gave rise to another insurance term that has become closely associated with moral hazard, namely asymmetric information. In this case the information is asymmetric, as the insurance client knows more about his/her behaviour before and after insurance than the company does.
In cases involving natural disasters, the asymmetric information flow is more likely to be one where the government knows more about a disaster or even a potential disaster and its probable damaging effects than the population at large. Armed with this knowledge, if the government fails to take precautions to minimize the damage from a disaster, for example through proper maintenance, preventative works, and planning, the government is then accused of practising 'moral hazard.' In other words the authorities would have gambled with other people's well-being with the expectation that if the gamble failed, they will get help from elsewhere 'to ease the suffering and pain.'
The assessment of the economic damage of disasters along with their social assessment has therefore to entail some determination of whether the disaster could have been foreseen and planned for as an eventuality in order to determine the 'pure effects' of the disaster from those compounded by human failing, willful neglect, or reckless endangerment.
Phases and the team
It has been found convenient to categorise disasters in phases, and one such common application is to speak of the three phases of emergency, recovery, and rehabilitation/reconstruction. For economists this is very convenient as it fits generally into their traditional classification of time into the short, medium, and long-term. In situations such as ours, we also find that in light of the complex effects of the disaster a key prerequisite for any credible assessment is the ability to mount an independent team with the requisite skills and capacity to cover effectively all the major dimensions of the crisis. Failure to do this, leads invariably to skepticism about the assessment and worse still failure to win support for recommended rehabilitation and reconstruction programmes and projects. This again is not an unsurprising outcome as you cannot ask the person/organisation/community or country that suffers a natural disaster to determine its effects outside of an independent point of reference.
That the team has to be independent is only one of two necessary requirements. The other is that the team must embrace the range of skills capable of making as full an assessment as possible. On the basis of impression, in our particular situation such a team should involve infrastructure specialists to determine the effects on the entire infrastructure of the country, water, electricity, roads, telecommunication and so on; engineers capable of assessing all of the hydraulic effects of the flood; agricultural specialists (both crop and livestock); macroeconomists to assess the impact on the economy, the government budget, sectoral performance, credit and so on; social sector specialists, especially in health, education, and housing; social workers/psychologists for assessing health care needs to deal with the social and psychological factors; environmentalists for obvious reasons and others.
Next week I will continue on this topic.
The Guyana economy before and after the great flood: Mired in an economic slump
One good purpose coming out of the flood might well be the impetus it gives towards encouraging us to recognise that the economy of Guyana has been mired in an economic slump ever since 1998. By any standards this has been an unusually long period of time for depressed economic circumstances to persist in any country and is indeed a poor advertisement for all the effort put in by the international financial institutions (IFIs). Surprisingly, however, it does not seem to have generated much public concern, let alone debate. And, judging from the way those responsible for managing the economy continue to portray the economic situation in the country, not excluding the IFIs, it also does not seem to cause them much bother.
This is, however, a most worrying dilemma, which affects us all, since it follows after our having to endure a long period of immiserizing growth that lasted for most of the 1970s and 1980s. The consequence is that today, Guyana, which is the Caricom country best endowed with natural resources, still remains the second poorest (after Haiti) in the region, a decade and a half (15 years) after the ERP reform of 1989-91. Since no one can be happy with this situation, the purpose of this article is to draw explicit attention to it. The hope is that amidst our other woes, it is not forgotten and corrective measures are encouraged.
Boom then bust
Following the implementation of the Hoyte Economic Recovery Plan (ERP) the economy grew on average by more than 6 per cent per year between 1991 and 1997. Since the death of Cheddi Jagan, growth of GDP has averaged less than half of one per cent (0.5 per cent) per year for the period 1998 to today. This is illustrated in the graph below, which shows the annual changes in per capita GDP for the period 1991-2004.
I had long ago argued that the initial upturn in economic activity that took place after the introduction of the ERP would be illusory, and that the real test of economic recovery would follow a few years down the line as it would prove very difficult to sustain the initial high growth rate. There were three major reasons why I took this position. First, it is simple arithmetic that growth from a small base always looks large. We see this every day in our lives. Thus if one's income was $20,000 per month and you obtained an increase of $10,000, the growth in your income would be half, or 50 per cent. The same increase given to someone working for a $200,000 per month would result in only a 5 per cent increase. By the end of the 1980s the economy of Guyana was so battered and production so low that almost any increase in income would appear large percentage-wise.
The second reason I argued this position is based on the way we calculate the growth rate in Guyana, which is from real GDP changes. The GDP, which is one of the national accounts aggregates of a country only measures activities passing through the formal and legally recognised markets. At the end of the 1980s there was in Guyana a huge underground economy. This was spawned by the widespread bans on imported goods, the practice of foreign exchange controls and the prohibition on the holding of foreign currencies, as well as serious shortages of all sorts of basic commodities. Part of the strategy of the ERP was to liberalise markets and abolish restrictions and state control in order to encourage the informal blackmarket and underground economy to enter into the formal official economy. This process created a statistical illusion. This was so simply because activities that were always there, although not measured, now entered the formal economy. This automatically increased the GDP.
Momentum growth: Virtuous and vicious cycles
The third reason is the insight that we observe every day of our lives. Events more often than not have a certain self-generated momentum. In the momentum phase, expansion and increase in activities feed on themselves and a virtuous cycle is created. With time, however, the momentum invariably dies. At that point further improvement depends on hard work and deliberate action to sustain growth. With the ERP, the economy had entered into a virtuous cycle of growth. And, unless the authorities recognised that this would not last forever and that future improvements would depend on their efforts, the momentum would die. As it happened, this is exactly what occurred. The growth of the economy began to plateau and then went into a stall mode after 1998. Today, the great danger is that if the problems are not addressed, the economy could enter into another vicious downward spiral that is going from slump to depression to immiserizing growth. In other words, we could revisit some of the experiences of the 1980s.
Much of this argument was earlier developed in the Guyana Human Development Report, which I had authored. This document was sponsored by the United Nations Development Programme (UNDP, 1998) and included a Foreword by the then President Cheddi Jagan.
I mention this not only to remind readers that the warnings have been around for a long time, but to observe that when they were aired earlier the then President saw it as a challenge and opportunity to do better, not to retreat into denial and political spin. The Foreword, which he wrote speaks for itself.
Causes
Of course recognising the origins of the great slump raises questions about the causes for its persistence. There are many, but space would only permit me to address one of them today. A disturbing feature of our economy is that during the period of the great slump in economic activities (1998-2004) the investment ratio in Guyana has remained high. The graph below shows that total investment averaged 23 per cent of GDP over the period 1998-2004. Remarkably, investment at such a high rate yielded only a 0.5 per cent increase in output. This is a staggering occurrence.
As can be seen from the graph below most of this investment has been government investment. Indeed over the period 1998-2004, private investment averaged 9 per cent of GDP whereas government investment averaged 14 per cent of GDP. With such a poor outcome, the clear indication is that there must be massive inefficiency in investment in the country, particularly government investment.
This is not altogether surprising since there have been several examples of spectacular public works failures as in the collapse of wharves, drainage and irrigation work which produce floods, road reconstruction and repairs that do not last through a rainy season, not to mention the insidious role of corruption in multilateral agencies' projects. As we shall see as we continue this discussion next week, some of these inefficiencies and corruption have been documented.