Regional Trends and Their Impact on State Formation: Guyana Guyana and the wider world
By Dr Clive Thomas
Stabroek News
April 29, 2007
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Three Pillars

The regional trends, which have affected the evolution of the state form in Guyana stem largely from the country's cooperation and integration modalities under the umbrella of the Caribbean Community (CARICOM). Three areas of these modalities are of vital concern to this analysis. First, the impact of CARICOM on the levels of economic well-being in Guyana. Second, inter-regional cooperation in the area of governance. And, finally regional cooperation in security, and associated concerns like border protection, the control of narcotics, money laundering, and the illegal trafficking of persons. There are of course other regional trends outside of CARICOM, such as border activities and relations with Suriname, Brazil and Venezuela. These have also had their impact, as we shall see as the analysis develops. These latter have in particular facilitated the systematic deformation of the state, because porous borders have made trans-border illegal activities relatively easy.

As readers are aware, CARICOM is by no means the typical textbook example of economic integration arrangements. It is a hodge podge or mix, which includes both traditional and non-traditional elements. By traditional elements I refer to its free trade area and customs union mechanisms. Indeed, as they develop most of the Caribbean Single Market and Economy (CSME) relationships are expected to revolve around what may be termed as the more traditional modalities.

However, in addition to the CSME there are two other major areas of CARICOM integration namely, the "functional integration" arrangements and the provisions for "foreign policy coordination". In official CARICOM documents these are listed as the "three pillars" of the integration movement.

Caribbean Single Market and Economy

In recent times the movement to a fully operational CSME has been slow and hesitant. The finalization of the Single Market (CSM) part of it has already been heralded by officialdom. Plans have been announced for the medium-term construction of the CARICOM Single Economy project, which will then usher in the full CSME. The Single Market (CSM) still contains many loopholes and therefore faces a number of challenges. Readers may be familiar with the recent disputes over Guyana's rice sales to the region, and the contentious energy agreements involving CARICOM members and both Venezuela and Trinidad and Tobago, the latter itself a CARICOM Member territory. Further, we have the situation in which some countries, like Barbados and the Organisation of Eastern Caribbean States (OECS), maintain a fixed exchange rate regime with the US dollar, while others have "floating" exchange rate arrangements. For these to coexist, controls on capital movement across the region are a necessity. Such actions impede CARICOM from developing a single market for labour, capital, and financial services.

Cooperation in Security and

Other Matters

Article 6 of the Revised Treaty of Chaguaramas establishes the basis for enhanced "functional cooperation". Chapter 2 of the said Treaty elaborates the institutional framework under which this is to be achieved. It identifies both the institutions and the "associated" ones, which are expected to fulfill these functions (Articles 21 and 22).

The assertion generally has been made that "functional cooperation" is the most successful area of CARICOM integration. This has not been established by any sort of objective evaluation or cost benefit studies, but is a generalization that everybody repeats. It has become politically correct to assert that functional cooperation has been a success. This means that cooperation in security and related matters as part of "functional cooperation" is always proclaimed as successful and positive.

Reasons for this are four-fold. First, such cooperation is seen as necessary and ipso facto valuable. Its value would not normally be questioned if it is seen as a necessity. Secondly, in so far as "functional cooperation" avoids duplication of effort in national jurisdictions it is likely to be, other things remaining equal, more efficient. Third, such cooperation usually enjoys strong local support as the population generally feels that irrespective of the cost of providing it they will receive discernible and tangible benefits. Finally, "functional cooperation" also enjoys exceptional external support. Big countries and big agencies do not want to deal with a multiplicity of small national jurisdictions. They therefore promote cooperation as part of their own economy of effort when dealing with the region. And, insofar as these governments and agencies finance much of the cooperation in CARICOM, this leverages support in favour of "functional cooperation". As usual, he who pays the piper calls the tune! Cooperation in regional security matters, as we shall see later has a long and well-established tradition in CARICOM, of which many readers may not be fully aware. This stems principally from narcotics control and border protection, and more recently has included terrorism, money laundering and trafficking in persons.

Cooperation in Governance

Three principal areas of cooperation in governance are of considerable significance to this analysis. These are cooperation in the monitoring and surveillance of elections and elections systems, the Caribbean Court of Justice, and the Civil Society Charter.

It should be observed at this point that 'foreign policy coordination' is also relevant where it has an indirect impact on governance and the evolution of the state. This derives from the consideration that relations not only between Guyana and its neighbours (Brazil, Suriname, and Venezuela) but the major powers as well, particularly the United States, Russia, European Union, China and India, are bound to affect the balance of internal, social, political, economic and cultural forces.

For the next few articles I shall elaborate on these considerations as they contribute to the deformation of the state in Guyana, beginning next week with their impact on economic well-being.

Stunted Growth and the Deformation of the State
By Dr Clive Thomas
Sunday, May 6th 2007


Last week I started an examination of the impact of regional trends on state formation in Guyana and referenced CARICOM as the leading source of this impact and secondarily border relations with its land-based neighbours. To these regional trends should be added Hemispheric relations (mainly the Free Trade Area of the Americas) and European Union relations (Economic Partnership Arrangement).

Correlation or Causation

Turning to the main line of analysis as I proceed I shall argue that Guyana during the past decade has witnessed an unusually strong correlation between what may be termed as "stunted economic growth" and the systemic deformation of the state. This correlation is not offered as proof of a direct line of causation, which shows that stunted growth causes or leads to the deformation of the state. It is quite possible for dynamic interactions to have occurred so that both are simultaneously cause and effect. It is also quite possible that the two variables are dependent on some more fundamental set of independent ones. My task is to tease out these relationships, but I must first establish in what manner the regional trends have impacted on the economy.

As a region, CARICOM has had very modest economic growth over the past decade, on average less than 3 percent per annum. To many analysts this performance has been disappointing and sub-par, given the region's production potential, resource endowment, and its productive capacity when compared to other regions like East Asia. Due to this weak performance there has been minimal transmission of economic momentum to relieve the tendency to persistent stagnation in Guyana. This is not surprising, given the levels of economic interaction between Guyana and CARICOM. The region is generally of secondary importance. Exports to it from Guyana are mainly sugar, rice, fish, and non-traditional agricultural items. Altogether, these have not been dynamic sectors in world trade. However, Guyana depends substantially on CARICOM (mainly, Trinidad and Tobago) and Venezuela for its energy imports and the provision of "soft" payment arrangements for these purchases are important, given the continued rise in the global oil prices and the high energy-dependent structure of the economy.

Food items, beverages, equipment, parts and accessories, household articles, and office supplies are imported from the more developed markets (Trinidad and Toba-go, Barbados, and Jamaica). There is also a noticeable level of small trading based on "higgler" and small entrepreneur operations throughout the area. Further, the region is a significant outlet for job-seeking migration, both legal and illegal, and consequently a useful source of remittances.

Stunted Economic Growth

There are a considerable number of recent studies, which have sought to explain the economy's persistently poor economic performance over the past decade. Many of these are academic papers or publications from the Inter-national Financial Institutions (IFIs). I will address this body of work in the course of the next few articles.

The empirical evidence indicating stunted growth begins in 1997 at the demise of President Jagan. Prior to that year, the economic reforms of the Hoyte Admi-nistration, (the Economic Recovery Programme (ERP)), which began in 1989 saw the economy growing at an average annual rate of about 7 percent between 1991 - 1997 (one of the highest in the hemisphere). Such was the growth rate that between 1992 and 1999 the income poverty rate declined significantly from 43 to 35 percent of the population. The latter figure meant that a substantial number of poor remained as more than one in three persons was still living below the poverty line. The poverty decline however, did confirm the expectation that an expanding real GDP per capita (economic growth) would enlarge the economic pie and reduce income poverty. Parentheti-cally, it also meant that a more equitable distribution of income occurred over this period. By way of contrast, between 1997 and 2005 the economy grew only at an annual average rate of less than half of one percent (0.5). The growth rate rebounded in 2006 to 4.7 percent, which was more than double the rate in 2005. What does all this imply?

Careful Examination

If one examines the two periods of strong positive growth 1991 to 1997 and 2006 carefully, one would be skeptical as to how genuine was the economic performance based on the GDP indicator. Much of this growth of real GDP per capita appears to be a statistical illusion induced by the way the GDP is in fact measured. I have argued before that the record of rapid economic growth between 1991 and 1997 has to be modified when we take into account in those years there was a rapid reduction in the size of the underground economy due to its absorption into the official economy. Indeed, this was a key aim of the economic reforms. Recall, I had estimated in an academic paper cited earlier in this series that the size of the underground economy ranged between 29 and 99 percent of the official GDP for much of the 1980s. This was huge, and given that one of the principal purposes of the reforms was to eliminate incentives for the underground economy. The data suggests that this was accomplished.

A further observation is that following on a long period of negative growth (1980's), the rate of increase over the years 1991 to 1997 was bound to reflect the statistical advantage inherent from growing on a small base. From a small base the growth rate would always appear larger than from a large base. This can be seen in a simple mathematical example. Add-ing 5 to 10 to get 15 represents an increase of 50 percent; however, adding the same 5 to 100 to get 105 only represents a 5 percent increase!

These observations are not intended to deny that the economic reforms played a substantial role in the upturn of the economy between 1991 and 1997. To the contrary, they are merely intended to express caution against the simple conclusion that levels of economic well-being in Guyana expanded at a "phenomenal rate" over the periods 1991 to 1997.

2006 Deceptive Growth

The increased economic growth rate in 2006, which more than doubled that of 2005 (1.9 percent) is similarly deceptive. It should be recalled that the great flood occurred in 2005. By all accounts, the damage this did to the environment was considerable, and rivalled in magnitude the damage done to current production. The damage was to the environment, as well as the physical and economic infrastructure. Efforts to rehabilitate this damage led to a general rise in construction, which logically impacted on GDP in the following year (2006). The resultant growth of GDP was partly, therefore a by-product of redressing the damaging effects of the flood. However, in practice GDP measures do not fully subtract for environmental damage to the economy, but it does add all expenditure on rehabilitating environmental damage to output in the year this expenditure occurs. The result is that economic growth in 2006 also reflects in some measure the flaw we maintain when GDP is measured as the annual net increase in either production of goods and services, or the annual expenditure on these goods and services, or the incomes produced from these activities, while at the same time ignoring environmental damage to the country's natural assets.

Next week I shall continue this exploration of stunted growth and the degeneration of the state; by examining the many explanations the literature presently offers.

I have remarked on the severity and persistence of the economic decline after 1997 on several occasions, but the local response has been muted. The International Financial Institutions (IFIs) and donor countries, significant investors in debt write-off, aid, and technical assistance to Guyana, have recently become rather concerned. An IMF Paper (2006): 'Guyana, Why Has growth Stopped? An Empirical Study on the Stagnation of Economic Growth,' points out that: "the degree of its [Guyana's] slowdown together with its duration is perplexing." Indeed there is now a significant body of related writings. In these I have counted over 100 separate explanations for the slowdown. I have organised these into 10 broad categories, (which are not cast in stone) for my thesis is that until the factors determining stunted growth are accurately diagnosed one cannot arrive at effective policy responses.

Governance

Selected randomly, the first category I will treat with is governance. Here, governance is strictly construed as the manner of exercise of governmental authority (including other executive branches of the state). It is a public sector constitutionally-oriented concept as more general uses of the term would cover other sectors.

In these studies the constitutional defects can be best summarized as 1) the absence of adequate checks and balances and 2) the routine exercise of arbitrary, discretionary, autocratic and bureaucratic power by the central authorities over citizens and other arms of the state (judiciary, security, legislative and local government). Together, these promote executive lawlessness, and encourage state functionaries to pursue "rent-seeking behaviour." That is, to use their authority and access for private gain ("selling favours," "looting the treasury" and nepotism).

The domination of the executive is encapsulated in the wide powers of the executive president, especially as regards appointments to public offices which are designed to provide constitutional checks and balances. Chancellor of the judiciary, chief justice, ombudsman, head of the elections commission, public service and teaching commissions, auditor general, and so on.

The substantive consultative function the president should perform with the leader of the opposition or other constitutionally-defined bodies is criticized as being token, symbolic and perfunctory. In this atmosphere, poor governance thrives, as there are no effective checks and balances. The absence of these vital pre-conditions for sustainable democratic-based market economy development stunts economic growth.

Such observations are buttressed with the universally poor showing of Guyana in governance-related survey data obtained from bodies like the World Bank (Governance Matters), the World Economic Forum (Global Competitiveness Survey), the Heritage Foundation (Index of Economic Freedom) and the Fraser Institute. Thus the World Bank "governance matters" computes worldwide, six indicators: voice and accountability; political stability; rule of law; government effectiveness; regulatory institutions and, corruption, where Guyana does very badly. The Index for Economic Freedom rates Guyana at 3.4 on a scale of 1 to10. This composite index includes indicators like judicial independence, impartial courts, and integrity of the legal system. The Global Competitiveness Index (2006/7) ranks Guyana at 117, 110 and 101 out of 125 countries surveyed for centralization of power, favouritism in government, and undue influence of the government, respectively.

Unquestionably, poor governance is associated with stunted growth, but some economies with similarly poor rankings, have better economic performance. The question therefore, persists as to whether there is a line of causality from poor governance to poor economic performance or is the situation one in which both are interacting with each other and some other sets of factors determine both simultaneously?

Institutional quality

A closely related category to governance is institutional quality. This is kept separately here, because institutional quality includes both public and private institutions. In this formulation, institutions refer to the set of all encompassing legal rules, conventions and norms of practices, which a society observes in its general functioning. Two institutions have unusually poor quality: firstly, markets for goods, services, and the productive factors, and secondly, the oversight, regulatory and incentive framework. Markets contain the key defects of insecure property rights, personal insecurity, and the prevalence of crime and violence. The regulatory institutions have often been 'captured' by the enterprises they are supposed to regulate, and the incentive framework is distorted by the low-risk attached to the 'capture' of proceeds from criminal endeavours.

The impact of institutional quality on economic growth is well established and there is little doubt that it offers a partial explanation for the stunted economic growth we have found. Like governance however, studies on the institutional quality variable thus far establish an association or correlation but do not fix a definite line of causality of one to the other.

Historical factors

For this category, the legacy of both recent and distant historical periods is an inertia, which the Guyanese economy seems unable to overcome. The legacy of the distant historical period refers to colonisation, slavery and indenture and their impact on institutions and people. These, it is argued, have "over-determined" the patterns of cultural development, and the characteristic forms of social behaviour. Thus if you take any of the key sectors of the Guyanese economy (rice, sugar, bauxite-alumina, gold, forest products) it is impossible to separate the sources of their present malaise from the way they have evolved historically.

More recent historical legacies refer principally to the authoritarian rule and economic stagnation of the late 1970s and 1980s. During that period the economy was in steep secular depression, declining at an annual rate of about 3½ per cent. Massive capital destruction, migration and in particular the flight of skilled persons, substantial increases in the level of poverty led to the ruination of the productive sectors. Further, the explosion of public debt, inflationary growth in money supplies, massive devaluation of the exchange rate, the unprecedented rise of the underground economy, flourishing currency black markets, and widespread shortages, compounded this productive ruination.

This category of near and distant historical factors, is undoubtedly important. A recent IMF paper has examined the role of "colonial origins and institutions" on economic performance in Guyana.

The paper, which states that it "forms part of efforts to understand the underlying historical factors that help explain the wide divergences in institutions and economic performance in developing countries," compared Guyana with Barbados and attributes the very different levels of economic well-being prevailing in the two countries to institutional quality and colonial development.

This approach, which entwines historical factors with contemporary economic analysis has long been standard in the Caribbean. I recognise that to some readers the recent IMF paper gives respectability to this approach. But every Guyanese is aware of the truism that the impact of distant and recent historical factors is ever present in the functioning of the economy.

Next week I shall continue this line of enquiry.