Policy makers puzzled by decline in growth -IMF working paper
Priority should be given to political consensus
April 15, 2007
Guyana's sharp decline in economic growth in the late 1990s after the initial rapid expansion that followed the implementation of major economic reform has been puzzling policy makers and observers for some time.
In a recent IMF working paper entitled 'Guyana: Why Has Growth Stopped? An Empirical Study on the Stagnation of Growth,' by Cornelia Starlitz, Ruben Atoyan and Judith Gold, it is said that many factors explained the slowdown, but among them was "the significant deterioration in the political and institutional environment," which coincided with a dramatic reduction in the labour force because of emigration, and a sharp decline in domestic and foreign direct investment.
Working papers do not necessarily represent the views of the IMF and are published to elicit further debate on a particular topic.
Sustained economic growth, the authors stated in their conclusion, would require the revitalization of both foreign and domestic private investment, but this in turn would necessitate "significant improvements in the investment climate," something which was inseparable from increased political stability.
Therefore, priority should be given, they went on, to working towards political consensus and improvements in governance and institutional quality, which would generate high returns in terms of future economic growth.
The paper said that Guyana experienced an exceptionally strong economic performance up until 1998; "However, the degree of the slowdown together with its duration is perplexing, particularly taking into account that many of the identified factors are common to many developing countries."
The report observed that Guyana remained highly dependent on the export of a few primary commodities with poor access to external markets. Like other countries, Guyana too suffered from under-developed labour and capital markets, with limited access to credit, and these constraints became even more severe in the latter part of the 1990s. It said that emigration, especially of the highly educated, had always been very high and this had resulted in a shortage of skilled workers.
Infrastructure, the paper said, remained very deficient and the transport network underdeveloped. The losses in power generated by the electricity company contributed to making it the most costly in the region.
While many factors, including weak infrastructure, adverse terms of trade and exogenous shocks, appeared to explain the slowdown of growth, the sharpness of the decline and its long duration had raised questions as to why Guyana had been more vulnerable to adverse developments that also affected other developing countries.
"The empirical findings of this paper strongly suggest that revitalising private investment - domestic and foreign - would be key for restoring sustained economic growth in Guyana. Neverthe-less, increasing private sector investment will require significant improvement to the investment climate, which is inseparable from strengthening political stability," the paper said.
"Progressive deterioration in the political and security climate has been detrimental to investment and growth. The longstanding political tensions between the two main political parties, which reflect the polarised nature of the Guyanese society, have led to increased instability in the latter part of the 1990s, including violent protests in the wake of the December 1997 and [March] 2001 elections," the study said.
The paper pointed out too that the situation had been compounded by the lengthy civil servants' strike in 1999 and increased organised crime in 2002-2003.
The study found that while public investment in Guyana had been substantially higher than in other Caribbean states, HIPC and other PRGF-eligible countries, it could not compensate for the deterioration in other factors and as a result, it had not translated into higher economic growth.
The decisions process continued to be very centralised, the enforceability of laws remained low and the court system was slow with a large backlog of unresolved cases. The regulatory framework remained complex and cumbersome. "While significant progress has been made in recent years, acquisition of land for investment is still a lengthy and costly process and most of the land remains in the hands of the Government," the study said.
Despite improvement in the regulatory framework with the promulgation of the Investment Act and the Small Business Act and the establishment of the Commercial Court, significant problems still remained.
According to the study, growth rates for Suriname and other countries in the region had averaged around 2 per cent between 2001 and 2004. The study found that Suriname's superior economic performance in the post-2001 period was associated with relative improvements in the political and institutional climate and higher shares of private investment to the GDP.