Development Watch

By Tarron Khemraj
Introduction
In my previous column (Sep 30, 2009), I underscored the important distinction between competitive advantage and comparative advantage. I also noted that we should emphasise the notion of productivity gains as the source of competitive advantage. The government since 2006 has proposed the National Competitiveness Strategy (NCS) paper outlining a broad set of proposals that are meant to make our traditional industries more competitive in the global environment. The NCS paper also emphasises the need to move to alternative industries. The key argument of this column is the NCS has to be complemented with a set of specific industrial policies so as to develop industrial clusters that are essential to the competitiveness of a nation.
The Traditional Sectors
From page 78 the NCS papers outlined a set of broad proposals to upgrade and make more competitive the traditional industries of bauxite, sugar, rice and timber. The plan for sugar is pretty clear cut. It involves the new factory in Skeldon, improved mechanisation, co-generation, packaged rather than bulk sugar exports and ethanol production. Some of these have already been implemented and recently the government signed an agreement for a US$12 million sugar packaging plant for Enmore.

The plans for the rice sector are also straightforward. These include drainage and irrigation, research into better varieties, export market diversification and so on. With respect to the forestry sector, I do not see anything innovative (see pages 83 and 84). For the bauxite industry the NCS places tremendous hope that the Russian Aluminium group (RUSAL) would play an active role in developing this industry.

These proposals ought to be welcomed and some are being implemented only as a response to crisis. Take for instance the US$12 million agreement for the Enmore sugar packaging plant. The purpose here is to shift away from bulk sugar export to packaged sugar because the latter has a higher price (a gain in productivity). However, this was in response to the erosion of prices from the Economic Partnership Agreement (EPA). I have seen research published as early as 1987 suggesting the sugar agreement under the Lome Convention is not sacred. Nevertheless, Guyana has a tendency to implement its economic policy only after major regime changes and external shocks.  There does not seem to be much pre-emptive policy changes prior to the LCDS, which we have seen has its fair share of uncertainty.

However, this column has continually emphasised that tweaks to the existing industries are not likely to be enough to raise the living standards of those who work there. As I have argued, the problem with Guysuco is the very product it produces – sugar. For the government to make the massive investments in Skeldon pay off it would have to squeeze cost (especially wages) given the price cuts from the EPA. Therefore, do not expect that Skeldon or the new Enmore plant would engender significant wealth creation for the masses.

The future of bauxite is even more uncertain. The NCS assumes RUSAL would play a pivotal role developing the industry and the surrounding communities. However, an excellent letter by Mr. Sylvester Carmichael in the Stabroek News (May 20, 2009) exposed the miscalculation. Essentially RUSAL is planning to focus more in Russia and the financial state of the global giant is not that healthy. In addition, according to Mr. Carmichael, RUSAL has not been producing at expected production targets even before the global financial meltdown. In my opinion, the key problem the bauxite industry faces is the high cost of energy. Therefore, any future development of hydro-electricity ought to be coupled with the development of an aluminium smelter. Of course, even alumina production could be more profitable given hydro-electricity.

From a strategic standpoint – also related to the notion of being proactive in policy – Guyana has been delinquent in levying the CET on cement even though the CCJ has ruled it should do so (SN Oct 11, 2009). Nevertheless, Guyana would need to depend on others in CARICOM to levy the CET for our products such as rice, sugar and the proposed non-traditional agricultural products (remember the Jagdeo Initiative?) Mr. Beni Sankar also made this point in a recent letter in the Stabroek News (Oct 10, 2009). Is the government serious about implementing its economic strategies?

Alternative Industries
The primary reason that makes the NCS a good document is it recognises the need for alternative industries. Long-term economic growth and rising living standards are better achieved from new products, new technologies and new processes. There are several proposals for diversification mentioned in the NCS. The strategy proposes aquaculture, non-traditional agricultural crops, ethanol, Information and Communication Technology (ICT), and others. I would like to comment on those I believe are most important.

There has been much talk about ethanol as a way to transform the sugar industry. However, not much concrete action is realised at this point. One important innovation of the government’s economic strategy is the potential for the Skeldon sugar factory to supply electricity (approximately 15 MW) when it’s fully operational. This is precisely the kind of renewable energy production that makes sense for the LCDS. However, one gets the feeling that there is not going to be more of this development in West Berbice and Demerara. It should be noted that by 2007 Mauritius was generating approximately 25% of its power from sugar mills. Reunion Island and Hawaii (Hawaii currently generates about 7% of power from burning bagasse) are also adopting a similar approach. Mauritius, moreover, is researching the possibility of producing ethanol from bagasse itself rather than just molasses. This is the kind of innovation that ought to form the core of the LCDS, in my opinion. But there seems to be no urgency on this matter. We are perhaps waiting for the single silver bullet – hydroelectricity – to solve the energy needs. However, I still believe hydroelectricity should be coupled with aluminium production in Region 10 (while our energy ought to come from a portfolio of renewable sources).

The NCS mentions ICT as an alternative focus. This should be welcomed.  ICT – especially the internet – enhances the productivity of human capital. Furthermore, it enhances the amount of information investors, researchers and managers could have on their desktops. Importantly, also, it facilitates the emergence of alternative businesses.

The strategy recognises the need to promote manufacturing (pages 91 to 92). It is noted that studies would be commissioned to assess the possibilities for an export processing zone (EPZ).  The strategy paper notes that the EPZ would depend on WTO rules on subsidies and tariffs since Guyana has now reached the US$1000 per capita GDP mark. However, it should be noted that although WTO rules complicate industrial policy it is still possible for an economy like Guyana to do so. This should be a matter of urgency. Remember a small country like Mauritius established an EPZ since 1970 to attract foreign private capital. What if Guyana starts off by focusing on the CARICOM market? Yet, another reason to reconsider the CET-cement issue, by the way.

Weaknesses of the NCS

First, the NCS paper, like its prototype (the NDS) and the more recent LCDS, comprises of a set of broad policy proposals and suggestions.

However, what are now needed are specifics directly targeting the suggested industries. In other words, you need several sectoral industrial policies. Here the engineers, investors, scientists and government policy makers are brought together on an industry-by-industry basis. At this stage several large industrial clusters need to be created in order to pull along the many new micro businesses that have emerged in the recent past. I would argue that without a few highly productive industrial clusters, the small businesses will stay small and uncompetitive.  The academic literature – owing to the work of Michael Porter and Paul Krugman in particular – has long documented the need to build industrial clusters for the purpose of industry competitiveness.

Second, there is ambivalence on how to finance the various proposals. Indeed, page 92 notes that foreign investments would be sought with respect to the EPZ and manufacturing. However, the latter is very general and the strategy does not make a commitment with respect to foreign investment.  The strategy recognises the need to enhance the intermediation of investment funds by the domestic commercial banks. However, an important omission, in my opinion, is the NCS paper does not see the need to re-establish a state development bank. This current government has privatised and dismantled the previously abused development banks.  However, this concept has to be revisited and this time around only skilled bankers must be allowed to sit on the board and also run the enterprise. No favoured party comrade who is unskilled in banking must be allowed (including the President’s driver!). Are our politicians this mature?

It should be noted that President Lula of Brazil offered to use finance from that country’s state development bank to build the proposed hydroelectric power plant in Guyana. The basic question that has to be answered here is how can Guyana have a successful development bank while not aggravating the monetary aggregates that can engender inflationary pressures? It’s quite possible.

Third, although the NCS mentions the brain drain (page 56) and proposes several ideas to train Guyanese, the strategy is very weak in this regard. Guyana would need a national science, technology and innovation policy framework. This would have to be combined with a policy to convert the brain drain to brain gain. How can Guyana integrate its skilled non-resident Guyanese into this national strategy? Could this be linked with the ICT proposal?
Conclusion
The NCS is a detailed policy document that has to be complemented with specifics to create industrial clusters. Clusters are important for building competitive industries and the competitive advantage of the entire country.  It should be noted that the above discussion is premised on the assumption we would settle our intractable ethnic security dilemmas and implement a Constitution and electoral system conducive to co-operation among the various groups rather than conflict and alienation. Are our politicians mature enough?
Email comments and feedbacks to: tkhemraj@ncf.edu