Last week’s article drew attention to the fact that over the past seven years the Guyana economy has been mired in an economic slump with an average growth rate of national output (GDP) of less than one-half of one per cent per annum. As the figures I cited and the accompanying graph revealed in that article, for three of those years per capita GDP actually declined. Alongside that observation we noted that nevertheless gross investment rates remained high in the country, averaging 23 per cent of GDP in the same period (1998-2004). When this is put in the context of the economic slump the need for an explanation of this paradox is readily apparent.
As an explanation, some would simply say the figures are too surreal to be true and that the national accounts data are little more than fabrication. I shall not pursue that issue at this stage, as it raises concerns and issues that go well beyond the intended scope of today’s article. As I proceed I shall, however, return to it. Suffice it to say that for the moment these are the only figures we have. What would replace the existing historical time series if we discard them?
The investment factor
That apart, one contributing factor that immediately springs to mind is that investment must be inefficient for this to have persisted this long. I started to address this last week. As I noted this would be true both for public and private investment, although it is pertinent to note that public investment accounts for more that 60 per cent of the total investment in Guyana. However, the inefficiency of much of the public investment is well known to the average Guyanese, and in fact bears no repeating.
Our recent history has been littered with infrastructure works, which, if not actually having turned sour, have certainly yielded very poor returns for money spent. To this observation we should add the wastage that has occurred because of favouritism in awarding contracts, corruption, and mismanagement.
Without gainsaying this, the situation does, however, also suggest that the system and methodology for project selection in Guyana is quite weak. Further, it seems that too much of public investment flows to ‘traditional’ low productivity sectors of the economy. Indeed, this latter occurrence may well link backwards to the period of immiserizing growth, which the country endured during the late 1970s and 1980s. That period was marked by a calamitous wastage of the productive factors. The deterioration of the physical infrastructure, including both public utilities as well as other areas such as roads, bridges, wharves and sea defences has been well documented in a number of my earlier publications. So too has been the evidence of the collapse of basic social services, particularly health, education and housing. And to add to this, coastal lands were also withdrawn from agriculture as the drainage and irrigation system deteriorated, along with access roads and storing and drying facilities. Readers, who have done so previously, may wish to re-read the Guyana Human Development Report, where a similar description to this was presented, almost a decade ago.
Because of foreign exchange shortages of that period, much of the machinery, plant and equipment used in both the public and private sectors, but particularly the latter, had become obsolescent, as maintenance and replacement could not be financed. In this regard therefore, the damage caused by the recent floods would have aggravated the situation of the economic and social infrastructure, which will in turn force further public investment in the direction of again simply replacing what was destroyed.
Sluggish export growth
Another important contributing factor to the economic slump in the face of high investment has been the sluggish growth of export earnings. The weak performance of the export sector becomes dramatically evident when one considers the trend in exports over the past decade from 1996 to 2004 (or the Budget projection for 2005).
Because in the Budget presentation comparisons are usually made with the previous two years, the impression might have been created in the document that export earnings have increased, with rising earnings from sugar as the US dollar has depreciated against the euro. The truth of the matter, however, is that an export earning of US$560 million in 2004 was still below that of 1997 nearly a decade ago (US$ 594 million). That year was the year before the economic slump started in 1998.
This decline in export earnings is very significant, as is in some ways one would expect that with inflation and the depreciation of the Guyana dollar (reinforced by its peg to the US dollar) that nominal values would just continue to rise over time, but this has not been the case. For 2005, the Budget has projected an even lower target of export earnings of US$533 million. This no doubt reflects the impact of the closure of the Omai mines, as exports of gold are projected to fall by about 40 per cent, from a total of US$145 million in 2004 to US$88 million in 2005. The Guyana economy as we all know is heavily dependent on export production and sales of goods and services. On average it accounts for well over 90 per cent of our GDP, the bulk of formal employment, and much of government revenue. Weakness in this sector cannot be compensated for by growth in the domestic sector, because it is too small and the government’s policy of wage compression has stifled its growth. The irony of course, is that despite these policies, growth of the economy has not been forthcoming. The future prospect for our exports does not look too bright. Sugar is facing a threat in the European Union market and the Omai gold exports are coming to an end. In the face of this there has been little diversification. Next week I shall continue this discussion.
Oil imports, technology and the great slump
So far we have looked at two factors that may help explain the persistence of the economic slump since 1998. One has been inefficiency of investment and the other the sluggish growth of merchandise exports. The discussion on these items is not complete. For example, I am yet to look at the problems faced by specific products in the export market such as the threat to the Sugar Protocol between the European Union and the African Caribbean Pacific Group of Countries (EU-ACP), the end of Omai gold mining, and the recurrent problems of bauxite. Also I have not yet addressed the issue of diversification of exports. In the case of investment, however, I shall advance the discussion one step further today.
Stagnant oil imports and stagnant growth
Before turning to this it would be useful to make one further observation, which helps to validate the view I have expressed that there has been a slump in economic activity for the period 1998-2004. This is important especially for those persons who might wish to question the accuracy of the national accounts data and the other economic time series from which this conclusion was derived. Consider that Guyana's primary energy source is imported fuel. Over the years there has been smuggling of oil into the country. To the extent that occurred the official published data on oil imports would have understated the amount of oil that is actually consumed in the country. However, there has been in recent years some effort directed towards reducing smuggling. Any success in this effort would have narrowed the gap between the officially recorded imports and actual usage. In addition, the price of oil has reached unprecedented levels in recent years. The expectation is that this rising oil price will continue during the coming year. Indeed the recent budget in its review of the global economy refers to the oil market this year and expresses concern over the likely impact of a higher oil price on the economy.
This combination of higher oil prices and reduced smuggling will almost certainly lead to a rise in the official figures for oil imports, given the oil-dependent nature of the economy and no noticeable effort at conservation. It is some surprise, therefore, to observe that in the budget the value of oil imports budgeted for this year is almost identical to that spent last year, US$170 million and US$169 million, respectively. If the authorities anticipated significant growth and took into account the considerations raised here, it is difficult to see how they can realistically project no growth in oil expenditure. Static growth in expenditure on energy supply can only result in no growth. The possibility therefore is that the projected growth rate is not to be taken seriously and that the slump in economic activity is expected to continue.
More on investment
Let us return to the investment issue. Contrary to popular perception in Guyana where investment is portrayed as the primary determinant of economic growth, studies in other economies suggest that the main contributing factor to increased growth is increases in productivity. By productivity we simply mean the amount of output that is achieved for each unit of input used. Thus if it takes 20 sugar workers to produce 1000 lbs of sugar then the output per unit of input (one worker) is 50 lbs of sugar. Productivity has increased if the same 20 workers can later produce 1200lbs of sugar, as the output per unit of input is now 60. Over the years improvement in productivity has been for most economies the primary source of advances in their economic well-being, growth and development.
Most often when persons refer to productivity they refer as in the example above, to the productivity of labour. However, productivity is also measured for the other productive factors, which combine with labour to produce output. Thus one can speak of the productivity of the land, as when we do when we refer to yields of sugar or rice per acre. We can also have productivity measured for the capital used up in the process of production.
Technology
There is, however, another absolutely indispensable productive factor which we need to introduce into the discussion and that is technology. Now most of us believe we know what technology is. After all we see it embodied in new tractors, cell phones, computers and cars every day. But in fact we are often not sure that we can separate the technology from the product. To be sure economists use a broad definition and say that technology is anything that makes it possible for real output (GDP) to increase beyond that contributed by the other factors, labour and capital.
The purpose of this long discussion is to indicate that if we go one step further we can measure what labour contributes to the rate of growth of the economy and we can measure what capital does separately. The difference between the sum of these two and the amount by which the economy grows can be said to be due to technology. To take a concrete example, if the growth rate of the economy was 4 per cent, and labour contributed one per cent to that total and capital contributed half of a per cent, then taken together the two factors, labour and capital, would have contributed 1.5 per cent. The remainder (that is 4 minus 1.5 per cent = 2.5 per cent) can be said to be due to technology as we have described it.
In practice many permutations are possible, other than the example given above. For example, the growth rate of the economy could be negative, or the contribution of capital and labour could exceed the rate of growth. In the latter case, technology is diminishing not adding to output.
Fortunately there has been in recent years efforts by both the IMF and the World Bank separately to measure the contribution of the major productive factors to Guyana's growth. The technique is called 'growth accounting,' and it is something which the informed citizen should be familiar. Indeed no trade unionist, farmer, business person, or professional, would be able to appreciate the economic circumstances of the country fully, if they are not familiar with these ideas. In the rest of the Caribbean where these studies have been available for many years the public is well informed about them, and judging by letters in the regional press citizens pay keen attention to what the data show when these studies become available.
In light of the roles the international financial institutions (IFIs) play in framing Guyana's economic policies it was perhaps incumbent on them to prepare such studies for Guyana. As we shall see next week, these studies offer a useful perspective on the growth problems of Guyana and throw light on the great slump (1998-2004).
Productivity decline and the economic slump
Last week I introduced into the discussion on the great slump in economic activity in Guyana a technique widely used by economists to determine the contribution of the various factors of production in an economy to its overall rate of economic growth in order to isolate the contribution of productivity improvements or technical progress.
That technique of accounting for growth or 'growth accounting' as it is commonly termed is used to throw light on the nature and sources of a country's growth problems. The technique has been applied by the IMF and World Bank along with other international financial institutions to the Guyana economy for broadly similar purposes.
IMF growth accounting for Guyana
From studies publicly available, the IMF's exercise seems the most comprehensive. This has been published in its recent book on the Guyana economy, which came out in 2003. Following the example I gave last week, in that book the economy was simplified and its output initially based on two factors of production, namely capital and labour. The period of analysis was for 1953-2000. This was sub-divided into four further sub-periods.
One of those was the pre-independence period from 1953-1965. The second period was the early independence years of 1966 to 1975. And for the other two, there are the period of the co-operative socialist economy (1976 to 1988), and the period of the Hoyte reforms after the introduction of the ERP, 1989-2000.
The results of the analysis show that taking the entire period (1953-2000), growth in total output or GDP in Guyana averaged 2.9 per cent per year. Over the same period the labour force grew at 1.4 per cent per year and capital formation increased at a rate of 7.9 per cent per year. It was then calculated that a one per cent increase in the growth of capital formation yielded an increase of 0.53 per cent in total output or GDP. And for labour, this same one per cent increase yielded a 0.47 per cent increase in total output or GDP. When some simple calculations were made it was found that labour contributed 0.7 per cent to the overall growth rate of the economy and capital 4.2 per cent for the entire period 1953-2000.
This made for a combined total of 4.9 per cent from the two factors of production, labour and capital. However, as noted, the growth rate was only 2.9 per cent. The inference from this is therefore that productivity, technology and all the other factors which should contribute to economic growth actually slowed the economy by 2 per cent per year over the period 1953-2000.
This is an astonishingly perverse result. In most economies such studies show that productivity and technical progress contribute the lion's share to economic growth. Instead for Guyana, we have a situation of them reducing the rate of economic growth. It is because the result is so perverse that I have found it necessary to persuade readers to bear with me in directing attention to these calculations in this article.
Several questions arise about the method used for these calculations. However, let me first report on the results of the individual sub-periods where there was very wide variation, before attempting to address some of these questions.
Not surprisingly, it was found that the only period where productivity/technology contributed positively to growth was in the early independence period of 1966-1975. In that period, it grew at a very robust 2.9 per cent per year. In that period also the rate of growth of total output or GDP was 4.8 per cent per year.
For the period of co-operative socialism the contribution of productivity/technology was negative, and it slowed the economy by minus one per cent per year. As some readers would remember, in this period there was negative economic growth. The overall economy (GDP) declined at the rate of 2.9 per cent per year.
For the other two periods the negative contributions of productivity and technology were huge. For the ERP period (1989-2000), productivity-technology declined by an annual rate of 5.5 per cent.
However, the growth of the economy was at its highest for this period at 5.4 per cent per year. The combination of a high negative contribution from productivity-technology and a high growth rate meant that capital growth had necessarily to be exceptionally high, and it was. In that period the annual growth of capital formation was 20.6 per cent.
For the pre-independence period productivity-technology had declined by 4.8 per cent per year. And, again with a high rate of growth of total output (GDP grew at 4.9 per cent per year) capital growth was again high at 15.4 per cent per year.
I have reported here only on the simplest of the calculations and the results in the article. Those readers who are interested can pursue the details in the chapter in the IMF book on Guyana (2003).
The data problem
Some persons looking at this type of work have argued that it helps to explain the causes and sources of growth in an economy. This in my view is an overstatement of the significance of this type of calculation.
At best, it is an accounting exercise based on extremely limiting assumptions and in the case of Guyana, very dubious national accounts data for the period 1993-2000. To take one example of how limiting the assumptions are, consider the statement I made above that a one per cent growth of capital contributed 0.53 per cent growth to total output or GDP and for labour a similar one per cent increases would lead to a 0.47. The figures of 0.53 and 0.47 combine to give a total of one.
This implies that if growth depended on only these two factors, all growth will be accounted for by the contribution of these two factors. But in fact it does not, so that something else, which is not directly measured, makes that contribution. The technique calls that something else, that remainder, or residual, productivity, or technology's contribution to the growth of the economy.
Furthermore the ratios of 0.53 for capital and 0.47 for labour are really based on estimates of the share of national output that goes respectively to capital and labour. It is this share that is used to measure what each contributes to total output or GDP. For this assumption to hold true, one has to assume that a perfectly competitive economic environment exists, which certainly is not the case for Guyana.
One final illustration of the limiting assumption is the case of the labour force. We do not have the data on the size of the total labour force for the period in question. As a consequence the size of the population (which itself is uncertain) has been used as a substitute for this.
However, there is always going to be a discrepancy between overall population behaviour and the pattern of total labour force usage in an economy.
I have promised to address the question of data more comprehensively at some stage of this discussion. Therefore, I shall not pursue the matter further at this point. My principal interest in this article has been to make readers aware of how different was the pattern of growth (and decline) of the Guyana economy, from what has come to be normally expected.
There was only one normal period where productivity and technology contributed positively to the growth of total output or GDP, and that was the early independence years of 1966-1975.
For all the other sub-periods and the entire period of 1953-2000, productivity-technology performance has retarded, not aided growth in Guyana.
Explaining Guyana's productivity decline
This column went missing for the past two weeks, for reasons well beyond my control. Four back-to-back meetings held overseas in such a short period left little opportunity for me to complete the column 'on-the-road.' Optimistically, I had thought I would be able to do it, which is why I did not advise readers beforehand.
Over the past two weeks, however, I found opportunity to have face-to-face and e-mail exchanges with a number of persons who were intrigued by the data which showed that improved productivity had not, contrary to expectations, promoted growth in Guyana. Indeed as we observed the reverse held true. Readers would recall that the data showed for the entire period for which the IMF had made calculations (1953-2000) the average economic growth rate was 2.9 per cent per year. Of this growth, increases in the capital stock contributed 4.2 per cent, while the other productive factor (labour) contributed 0.7 per cent. With a combined total contribution therefore of 4.9 per cent to growth from the two productive factors, capital and labour, and an actual growth rate of 2.9 per cent, the obvious inference was that productivity, technology and all the other factors, which in most economies contribute between 50-70 per cent of growth, actually slowed the economy on average, by 2 per cent per year over the period 1953-2000.
Measurement error
The exchanges I had with readers, here helped identify a number of reasons or explanations for this perverse occurrence. One has been questioning the accuracy of the IMF's measurements. There are serious and well-known data limitations in regard to the Guyana economy. Indeed readers have already written to challenge the national accounts data, the price data, the basis for estimating the capital stock and arriving at measures of labour supply and their 'contribution' to economic growth.
I acknowledge all these problems. My purpose here is not to defend, or for that matter present the results of the IMF studies uncritically. Indeed in my last article I had referred to the fact that the labour force measure used in the studies is the annual series of total population, which as every Guyanese knows is one of the most unreliable statistics in Guyana. This remains true despite the fact that it is one of the most commonly available statistical series worldwide.
I should point out, however, that readers who find the time to visit the studies would note that sensitivity tests were conducted on the results. This is a method designed by economists to see how robust the results would remain if there were large and significant changes in the estimated data. The results stood up to these tests.
The missing economy
Putting the question of measurement aside, the next important issue is whether or not the national accounts data are true and accurate measures of economic activity in Guyana. Do they miss important areas of economic activity? One obvious discrepancy that arises is the size of the parallel or underground economy. Earlier in this series I had visited this issue and pointed out that recent studies suggested on average the parallel or underground economy was as large as about two-fifths the official economy. There is therefore a big discrepancy. The existence of this discrepancy, however, does not lead to the certain conclusion that the activity excluded would systematically reverse the estimate of the contribution of productivity/technology to economic growth in Guyana.
Performance
Other explanations focus on the performance of the productive factors, the state and the overall management of the economy. Over the past two decades and more a substantial portion of economic activity in the country was based on the unsustainable exploitation of mineral resources. Mineral production requires high capital outlays to get mines and their related communities functioning as productive units.
In some instances in Guyana, the situation was that mining operations were from the outset not expected to be sustainable. A good example is Omai, where the mine had a limited and finite life over which it was expected to contribute positively to growth then cease production. In other instances such as Linmine, mining operations have imploded and the bauxite industry entered into a vicious circle of collapse, disrepair, obsolesence, and management decay. As a result output plummeted, so that the productivity of the assets the industry possessed as well as the labour force it employed inevitably declined.
A broadly similar situation occurred in the agricultural sector. Drainage and irrigation systems collapsed, access roads to farms fell into disrepair, storage and drying facilities were neglected, and the output and yields of major agricultural products declined for most of the period 1953-2000. In particular the two main crops, sugar and rice, went into crisis and it was not until after the ERP reforms had taken hold that there was a halt to the degeneration of the agricultural sector. In such a situation it is not surprising to find that there would have been negative impacts on productivity/technology.
All these developments reflected, as well as contributed, to a decline in the physical and social infrastructure of the country. It was not only drainage and irrigation and access roads as mentioned above that were affected, but virtually every sector of the infrastructure went into a collapse mode.
This included particularly, electricity, telecommunications, road and river transport in the physical infrastructure as well as education, health, sanitation, and housing in the social infrastructure. Again it would seem obvious that in such
circumstances it would be unreasonable to expect positive contributions from technology and productivity to economic growth.
Non-economic factors
The problems were, however, not only economic. Bad politics, antagonistic industrial relations, and weak management of the public and private sectors have made enormous negative contributions to economic performance in Guyana, both separately and together. A massive amount of human resources (dwindling every day because of exceptionally high levels of migration) has been consumed in the struggle for political office and control of the machinery of government. This has been, typically, pursued as an end itself, so that it would be fair to say that the pursuit of economic development of the society as a whole and the promotion of economic growth in that context has never been a number one priority. I am aware that lip-service has been paid to this goal throughout the entire period, but there is considerable evidence in support of the point of view expressed here.
Next week I shall continue this discussion.
More on why economic growth is not forthcoming
There is abundant empirical and anecdotal evidence to support the statistical observation made in IMF studies to the effect that total factor productivity, technology and all the other intangible elements which contribute the lion's share to growth in normal economic circumstances do not apply to Guyana. This provides I believe a significant insight into the present economic downturn that has dogged the economy resulting in an average annual rate of growth of less than half of one per cent for the period 1998-2004. Last week I briefly referred to some of this evidence and this week I shall continue with the discussion.
Governance and corruption
A consistently important negative contributor to the unacceptable economic performance we have had over the years has been poor governance. Most persons would readily observe this at the macro-political level, where political and racial conflicts have been endemic. These conflicts have led to the destruction of the nation's capital assets, capital flight, added risk and uncertainty which has deterred investors both local and foreign, and lost production. Poor governance has been equally insidious, even if less readily observable in the area of entrenched corruption, waste, and inefficiency, in both the public and private spheres. I am always reminding readers in this series that no less an institution than the World Bank has made the claim on its website that "corruption is the single biggest obstacle to development."
It is not convincing to try and dismiss this point of view of theirs as being 'exaggerated,' since few institutions have had as much interaction with all manner of governments around the world in the area of mobilising and spending resources on behalf of their general publics, than the World Bank. If any institution could claim to have its finger on the pulse of corruption around the world, it has to be the World Bank.
In Guyana, corruption has consumed huge portions of output, which does not get officially recorded and therefore results in the understatement of the value of transactions captured in the national accounts. More importantly, the amount of time, ingenuity and skill utilised in pursuing corruption as a preferred activity also consumes a humungous chunk of our human capital. Corruption more often than not financially rewards time spent pursuing it far better than an honest living does with, in Guyana, minimal risk of disclosure and punishment. This state of affairs has reached such proportions that it has become widely acceptable and taken on a life of its own.
It is for such reasons that a turnaround in economic performance in Guyana will not be an easy task for any government. Consider for example what it would require to encourage a foot soldier or other small-time operator in the narcoeconomy to change his or her occupation and work for a minimum wage! How high must that minimum wage reach if it is to offer sufficient financial incentive for the change to be made? A similar scenario can be considered for a business operating as a front for money-laundering. What must be the level of financial rewards in legitimate activities to encourage its owners to go legitimate?
I raise these concerns not to be simply a soothsayer of gloom and doom, but really to encourage sensible responses and more importantly sober and reasonable expectations about what can be done now and in the near future to promote rapid economic growth and development in Guyana, assuming, at best, a resolution of the political impasse.
Backward capitalism
As endemic corruption eats away at efficiency and growth, it has spawned what in our country I have termed before as a "backward capitalist mentality." To take an example, among our investing and entrepreneurial class, persons still hang on to the view that labour is a cheap and exploitable resource in Guyana. This column has, however, persistently argued that if low wages is accompanied with even lower productivity then in fact the labour being bought by the employer is not cheap, but high cost. Clearly it is cheaper to pay labour twice the "usual rate" if one can arrange for the productivity of that labour to be greater than twice the standard level. The cost of labour is the wage and other payments paid to labour taken in relation to the productivity of that labour.
As a rule we pay little or no attention to productivity in Guyana. There are virtually no widely used productivity measures that are regularly calculated and disseminated in public documents for discussion. There is no benchmarking of standard productivity levels in either the public or private sector. Enterprises operate in the dark in these areas, and consequently, their true costs are really unknown, regardless of what the accounting information portrays. Poorly paid workers in Guyana have become skillful if not artful, at providing for their employers the level of effort and productivity their poor pay has in fact purchased. After all, we have had long experience at this game as we learned to adjust to the exploitative conditions of slavery and indenture.
Situations such as those I have described here are ultimately self-defeating ones for all concerned. Yet they continue to characterize much of the backward industrial relations practices that still prevail in our country. I believe that there can be no way forward until some arrangement is made for efficiency agreements and employers buy-out of prevailing restrictive work practices. Such a proactive approach takes courage as such buy-outs are never 'cheap.' However, if treated as an investment in order to lay the platform for future increases in worker productivity, they can be made profitable for dynamic forward-looking enterprises. I would stress in this regard that nowhere is this approach more needed than the government and public sector/parastatal enterprises.
The anecdotal evidence is equally rich in support of the points being made in this article. One example we often talk about is that not a traffic light works in Georgetown, our capital city and seat of business and government. This must surely be a record for inefficiency in year 2005. Indeed, not only is there frequently no light on these signs for months on end but when they do have light they can be simultaneously either stuck on red, green or amber at all four points. Readers can think of a huge number of things which are similar and simply do not work efficiently. The danger of this environment is that it creates the temptation to micromanage as the only way to ensure the things one wants done are done. The price one pays for adopting this approach to management is lack of vision and a persistent failure to be able to separate the trees from the forests.