By Tarron Khemraj
Recently I had the chance to listen to a reasonably good speech made by President Jagdeo. In the presence of thirty plus economists and central bankers from the US and the Caribbean, during a key feature of the recently concluded 41st Annual Monetary Studies Conference, President Jagdeo made two important points. First, he noted that productivity is important to a country’s development. Second, he mentioned what Guyana would do should REDD funding really materialize, as the LCDS envisages, after the Copenhagen conference to replace the present Kyoto agreement. According to the President, he would invest heavily in food production. I agree with the point on food production. However, I still believe Guyana could simultaneously move into sugar ethanol, bio-diesel and other renewable energy sources. We do not need to, and should not, clear forests to produce bio-fuels. The Demerara and West Berbice sugar estates need to be saved. Furthermore, coconut plantations can be created to make bio-diesel and the many other products that can come from coconuts. Coconut trees also absorb carbon and could claim carbon credits under present Kyoto arrangements. I would develop the latter point in a later column.
On the issue of productivity, one can never overemphasize its importance for increasing long-term living standards for the masses. As a matter of fact, I have been underscoring its importance in the letter columns and in these columns. It is the first time I have ever heard a PPP leader mention that productivity is essential for Guyana’s economic development. However, the PPP’s record, and specifically, President Jagdeo’s record in proposing policies that would enhance Guyana’s productivity is at best mediocre.
Before I outline what is meant by productivity, its measurement, and some specific conditions that impede Guyana’s productivity (hence development), I have to comment on the other half of the President’s speech. He castigated technocrats who criticized the LCDS (there was only one technical person in the audience who critiqued the LCDS). According to the President, these technocrats do not know what they are talking about. But the President’s punch line – in the presence of at least thirty economists and bankers from Guyana, the Caribbean and the US – was to let us know that ultimately the politicians make the decisions.
However, the greatest economist of the last century, John Maynard Keynes, had something to say about this issue. I would only quote Keynes as he wrote the final pages of (The General Theory of Employment, Interest and Money) and then proceed to the meat of this column. Here is J.M. Keynes: “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…it is ideas, not vested interests, which are dangerous for good or evil.”
Of course, there are many ideas that have been floated in Guyana over the years to make it a better country where its citizens will largely desire to remain at home. Our politicians since independence in 1966 have not been good at utilizing good ideas. One such old idea holds that a persistently positive growth rate of productivity is essential to raising the living standards of everyone. Indeed, wages and salaries can only increase in the long-term through increasing productivity. Politicians have tried to break out from this truth – the connection between productivity growth and high living standards – by printing money to pay for wage increases even though the society is experiencing stagnant or negative productivity changes. However, the latter typically results in capital flight, balance of payments crises, the loss of foreign exchange reserves, and ultimately increasing inflation and socially harmful currency depreciation.
In the economics literature productivity is usually measured in two forms. First, there is labour productivity, which equals total output divided by the number of workers or hours worked. Take for instance GuySuCo. Productivity would mean total value of output divided by the number of workers employed by the sugar corporation. In spite of the recent political tussle between GAWU and the corporation over wage increases, ultimately it is the value of output that matter for a better living standard for sugar workers and their families.
The politicians made a decision several years ago, in spite of the fact that several Caribbean academics were writing since the mid-1980s that the preferential sugar prices received from Europe could one day be reversed or eroded, to invest heavily in a sugar factory for Skeldon. It turns out that the decision is more consistent with political calculations than economic ideas and logic. I have noted several times in these columns (and originally in my donkey cart economy letter earlier this year), that sugar as a commodity is unlikely to generate the kind of productivity growth that is necessary to augment the welfare of the masses. There was an era when sugar did well, but its time has passed as diminishing returns must eventually materialize for such commodities. There are also two other important logics I had noted. First, the price of sugar has not done well over the decades because of the number of substitutes that exist. Second, as people (Guyanese, Caricom nationals and the rest of the world) get richer they do not necessarily consume more sugar in proportion to the increase in wealth. A sure way to increase productivity, I believe, is to produce goods and services that people would purchase proportionately as they get richer.
Economists, however, have a second and broader measure of productivity instead of labour productivity. The broader measure is known as total factor productivity (TFP), which estimates how efficient the society utilizes labour, capital and natural resources. In other words, a country could experience positive GDP growth but negative TFP growth. The latter would imply the country is not utilizing its resources in the best possible manner. In the long-term as diminishing returns step in it is essential for TFP growth to lead the way. It is important to note that two research papers from the IMF have documented the negative historic growth of Guyana’s TFP. What are some factors in Guyana that have retarded the TFP growth and thus hinder our long-term development?
The first reason has to do with a lack of national purpose and consensus for economic development. The LCDS is a very recent proposal and before it the National Development Strategy was ignored. Of course, the LCDS is far from the best articulation of policy for Guyana.
The second reason relates to the political system under the current tinkered 1980 Burnham Constitution. The system leads to perverse and inefficient outcomes that ultimately retard TFP. There are two channels I would like to emphasize that could account for the perverse outcomes. First, the main political party only promotes those within its rank who are obedient to the group-think method. Anyone who dissents against the dominant party position is banished or marginalized within the party. For instance, Mr Khemraj Ramjattan was forced out from the PPP; while Mr Moses Nagamootoo is marginalized for dissenting. Mr Balram Singh Rai faced the same fate many years ago. The message sent to the young leaders in the PPP is sycophancy is virtue; but new ideas are vice. The second channel has to do with the nature of national politics that is polarized along ethnic lines. Intra-ethnic group networking is very important in Guyana. It so happens that those in the right ethnic network win most of the new top positions and state contracts. Moreover, the group-think syndrome has conspired with the intra-ethnic group networking to engender significant inefficiencies in the system that inhibits Guyana’s productivity. It has also led to the feeling of alienation of the other main ethnic group (African Guyanese). Unless a better Constitution which legitimizes cooperation rather than alienation is crafted, I see Guyana developing in an unbalanced manner that is ultimately socially explosive.
The third reason why Guyana experiences low TFP growth has to do with the depletion of human capital through migration. Human capital is essential for organizing and utilizing labour, capital and raw materials in the most efficient manner; more importantly, it is essential for creating new technologies and generating new ideas – the engines that keep living standards increasing. One aspect of the depleted human resource base is significant outward migration of the investor and entrepreneurial class. Another aspect is the limited focus of the government on funding research at the local university and vocational education at technical schools. The government just does not have a vision for what UG really could be. Furthermore, the university itself does not seem to care about pursuing avenues of independent funding. There are just not enough researchers (yes technical people) who are readily available to absorb foreign technology and make them suitable to domestic circumstances.
In closing, therefore, the total factor productivity of the country is determined by the existence of a favourable political environment that promotes cooperation and nurture independent ideas, limits feelings of alienation, and the existence of a core group of entrepreneurs, researchers and innovators. The President’s LCDS is yet to address any of these issues.
Please send comments to tkhemraj@ncf.edu
As an economist, what are some of your suggestions to maintain the balance? Intial capital investment can only be surpassed by constant productivity- maximisation of daylight saving time and working factories at their optimum with as little downtime as possible- no strikes or no industrial action whatsoever- is this not the ideal rather than the realistic???
Rose,
The first step to establish balance is to have a national Constitution that makes it necessary for cooperation. Also, it is important to make sure that no individual political party has the right to offer to the population chosen leaders for Parliament. I think if these things, at minimum, are done then we would be heading in the right direction.
I have responded below to your question of balance. But am a bit puzzled by “Initial capital investment can only be surpassed by constant productivity- maximisation of daylight saving time and working factories at their optimum with as little downtime as possible- no strikes or no industrial action whatsoever…”
Please help. Rereading and rereading, the only interpretation which I can figure is whether you mean constant organizational technology because conceptually, constant productivity does not mean holding technology constant since by adding investments we are indeed accumulating productive capital thus it is hard to argue about “constant productivity. So as long as the strikes continue and we do not optimize daylight hours, that these arcane ‘organizational technologies’ are likely to strip productivity gains occasioned by increased capital investments.
Further, the notion of “constant productivity” relative to capital investment often is not a reality, maybe an ideal, but surely not a reality because no matter the pace at which technologies are introduces through capital investments (accumulation), there is bound to be indifference (ups and downs) in its performance given gestation period where often learning by doing and learning by using occur…Skeldon factory, case in point. Then it leaves the question of whether such externalities like strikes and maximization of daylight saving time have significant impacts on wiping out productivity gains occasioned by capital investments.
I think what I am getting at, is whether changes in productivity will be realized through continued capital investments (technological change)when our organizational technologies affect actions that impact unfavourably.
The Government of Guyana is thinking in terms of conventional economics. They are telling to people to produce, increase productivity, hopefully somebody somewhere will be willing to buy the produce. It does not work that way.
Lets look at the Chinese model. The Chinese make all of the brand name goods, but they also make all of the fakes including fake Viagra. They understand that there is no such thing as fair trade, so in addition to that they send dozens of lobbyists to lobby in Washington.
The Brazilians are producing vast quantities of meat products which they sell to Russia and the middle east. They are selling at a price that the importer can afford to fly the produce over vast distances and still make a profit.
Let’s take the presidents million duck vision into consideration. It is perfectly feasible. I go into Chinatown all of the time and see smoked ducks, roast duck, salted duck all neatly sliced and vacuum wrapped on the shelves. The ducks are being produced and sold at a price that the Chinese importer can afford to fly in the ducks all the way from China and still make a tidy profit.
Here is the catch, if a trader from say Trinidad cannot make a tidy profit after doing whatever is necessary to get that duck to Trinidad then the poultry farmer in Guyana is stuck with the duck, it is that simple.Now if the trader can make a tidy profit after all expenses paid, whole different ballgame, just keep producing the duck at the right price, turn a blind eye and let the trader do his thing. That is what the Chinese do all the time.
The poultry farmer cannot produce a profitable duck by feeding it with imported feed. He can feed the duck with duck weed but he also need to feed the duck with little fish so that it can pack on weight with the added protein.
These are some of the little things that need to be taken into consideration, anyone in Guyana can raise a duck, no one in Guyana as yet can raise a duck for export. That’s the big difference
Again I must say that there is no such thing as fair trade in this world. The business is determined by price and profit. That is why rice and sugar can never be profitable because these products are forced to go through the hands of the traditional marketers who always get the upper hand in determining what they are willing to pay for the product.
The Americans conduct their trade behind a gun, the Chinese make their trade goods so cheap that the importer will do whatever it takes to get that product to the consumer and still make a tidy profit. What is Guyana’s trade strategy? Please do not tell me fair trade policy.It’s a war out there.
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Some authorities are now calling for a probe. Check out this article.
http://www.dailymail.co.uk/debate/article-1230113/The-devastating-book-debunks-climate-change.html
Joe.
Joe,
I agree that conventional economic wisdom is not enough to address the problems countries like Guyana face. Conventional economics cannot address the observations you have made with respect to free and fair trade. That’s why I take more of an eclectic view incorporating both orthodox and heterodox wisdom.
TKhemraj, I agree with you all the way. I was not debating the wisdom of your article, just putting in my two cents worth on the state of the economy. Keep up the good work.
Joe.
Excellent piece as usual TK. I myself have taken an eclectic approach to economic development matters.
Rosemariecsn asked the very pertinent question of balance. And this has been something I am concerned about as a policy analyst/adviser to the extent that my MSc thesis in macro-economics policy and planning dealt with this aspect….my area of focus was industrial policy. I did a causality analysis of the relationship between investment and growth in Guyana and found that there were two main variables which accounted for the trend of a negative relationship between GDP growth and TFP. Data on Guyana showed declining GDP growth and also a faster rate of decline in TFP. The conclusion was the slow rate of technological change and its appropriateness, and significant economic leakages and this has been historical and not confined to the PPP alone.
The balance can be addressed by identifying the technological interrelations since we all agree that technoligical change and its dynamism are the major determinants of a sustainable long term growth of GDp fueled by innovation, adaptation and processes which would lead to new products from the implementation of supportive organizational technologies. Here I am moving on from research evidence to a discussion on policy.
You have clearly articulated, therefore, from my premise, that the infusion of new technologies to emhance productivity of factor input are needed to transform our standard of living over the long term. President Jagdeo has to be careful in the type of policies he implement to increase food production is Guyana. If one takes the Skeldon factory as an example, we might be heading up a creek without a paddle since the major deficiency with the policy on sugar had to do with the whole issue of an inadequate and inept application of organizational technologies to support the capital investment. The point is that since new technological knowledge is embodied in capital investments, technological change and investment are related because investments facilitate the introduction of appropriate technologies in the production process which output is measured by GDP. So it stands to economic logic that for an economy to boast a sustainable long term growth in GDP, concomitantly, we need to introduce new technological choices. Thus, growth in GDP will be negaitive or grow painfully slow if there is a snail pace development of technologies (including policy choices) or the rate at which new technologies are introduces in new investments ( it is instructive that in many developing countries like Guyana, the acquisition cost of such technologies have impacted on technological dynamism). however, we have the example of how this has been overcome in Brazil, India, China and the Asisn Tigers before the former). My thesis found that a high correlation between new investments and growth does not demonstrate that investment is the main cause of long term growth; technological change technological change, application of appropriate technologies, and investments are needed. This position is supported by Lipsey, Weiss among others. Dr. Frank Long also did some work on this and we actually shared some of the discussion while he was at UG during the late 80s while I was preparing the thesis. It concluded that the introduction of technological change and its dynamism in Guyana was not optimum and that such outliers as economic leakages and others which you describes possibly contributes….this I did not measure since it was not the objective. But suffice to say the model identifies that the ‘unexplained variables’ were statistically significant.
Interestingly, I worked on this topic after coming across a similar study on India done by a student a couple of years before me which I thought was quite interesting. He had conclude that technological change and investment supported both the positive trends in GDP and TFP and identified education and adaptability in specialized sectors as the key for India.
I remember hearing jokes about technology procurement like this: a guy went to buy a 20 ton dragline for Guymine but instead bought 4 five ton from 4 different makers because there was no twenty ton machines available and the operating manuals were in foreign languages.
Joe,
I know you are not debating the article. As usual I value your contributions.
Good points Evan. What year you did your thesis? If you did the thesis in the 1980s then you must be one of the first Guyanese to work this out.
On extra point is to also look at the issue from a Schumpeterian perspective – that is no products and processes.
Productivity and National Development in Guyana
Dear Editor:
MY reason for following up on a thread by Tarron Khemraj in Stabroeknews, November 25, 2009 is for promoting clarity of associating short-term productivity gains with the more serious focus on the future outcomes of National Development:
The association of productivity and long-term standard of living is a correct one.
However, it is a strange bedfellow to associate productivity and economic development. Development requires capital flows, among other things, from the savings of residents and non-residents, as we see in the China-United States relationship. Productivity resides in the realm of marginalism and belongs to the real wage equation of microeconomics, where we at least try to keep our heads above water and cover the rate of inflation through market or non-market wage settings. How amusing was a Guyana teachers’ wage contract not so long ago!
The focus on food production through mobilization of savings and external capital, without cutting down the forest and harvesting it for multinationals would be a challenge for the nation, since much of the high valued potential unleashed for national development is hushed or simply vanished. The allocation of existing natural resources among competing uses could result in an enhancement of productivity of land, if indeed the forestry resources including land are not called upon to fuel real productivity increases in the food producing sectors. External savings may also materialize. Some transformation of the national forestry wealth taken out of the country resulted in overseas foreign wealth or Guyana’s capital outflows. External savings may one day appear on the horizon as capital repatriation or private sector capital inflows mobilized to fund development projects. Those residents and non-residents benefitting from Guyana’s wealth transformation could be the likely sources of savings required to finance the long-term investment streams needed for Guyana’s economic development.
Lord Keynes may have little relevance for the natural flows of capital into Guyana, as vested interests played a vigorous role in the exploitation of Guyana’s wealth. Microeconomic real wage productivity would help to raise standard of living, but it would be insufficient to fulfill all the development promises made by vested interests. At best, productivity enhancements may cover both inflation and pay for the interest indebtedness on wealth transfers from the forestry sector through investments trusts within the financial sector as harvesting of economic rents contained in the value of logs took place. Clever bankers are always at work to make more money through moving financial IOUs that are claims on real wealth, such as houses made from wood and concrete. Flows of funds within the financial sector, without lending to the economic sectors on projects allow bankers to ‘make money’ and up front bonuses before production takes place without lifting a finger!
Indeed, from the left pocket to the right pocket as we see in the U.S. financial meltdown. Guyana is no exception. Lord Keynes cannot help us! He lived in a different century! Vested interests rule the world! The U.S.A. is a living testimony on the opposite side of the Keynesian river of ideas.
Yours faithfully,
Ganga Prasad Ramdas
Professor Ramdas,
Thank you for the comments and it is a pleasure for us to read your insights on the SN blog. It has been a very long time since we communicated.
The issue of capital flows and savings are obviously important. However, you can have various types of capital inflows without stimulating the productivity of the nation. Take for instance Donald Ramotar’s recent observation in the KN where he said the main constraint to investments in Guyana is lack of infrastructure and not crimes. He then cited Congo as his example where crimes and investments are abundant…but that African country obtains investments in extractive industries that do not necessarily improve the productivity of the nation.
Capital inflows has to be combined with technology transfer, research and development, improvements in technical and university training, a vibrant local investor class, suitable institutions, etc. Example, remittances are clocking close to 50% of GDP for Guyana. But this inflow is associated with a depletion of the human capital base of Guyana.
Keynes of course cannot help us. However, those vested interests always seem to have a core set of ideas to teach us in graduate schools and so on. For instance, in grad school we were busy simulating geometric Brownian motions. One year ago we found out that credit default swaps and CDOs do not follow Brownian motions. But it was the idea from Merton, Scholes and Black that brought the world to its knees.
Had it not been for Prof Nixson of Manchester and the New School for Social Research, I would never have heard that industrial policies were used successfully in various parts of the world. The typical economics grad schools don’t want us to know that…and of course CNBC and Fox Business will try convince us America does not use industrial policies.
The vested interests also turned to McKinsey to conjure up the LCDS even though many practical solutions exists for Guyana to follow.
Keynes may not matter for capital flows…but the old man is right to say ideas matter. Let’s just pick the right ones for Guyana.