The Guyana economy before and after the great flood: Mired in an economic slump
Guyana and the wider world
By Dr Clive Thomas
March 6, 2005
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.
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.