Crime sectors: Challenges and threats to economic stability

Part 6

Introduction

The last grouping of challenges and threats to macroeconomic stability over the near to medium-term which remains to be covered, is a miscellany of items which I term economic-structural. I shall consider a sample of these: the underground (phantom) economy, remittance flows, economic bubbles, the tax system, the NIS (social security), financial contagion, natural disasters and other ‘exogenous shocks.’ The first three items (underground economy, remittances, and economic bubbles) will be treated today. I shall argue these are sectors where crime, and not economics, is the main driver of performance.

Phantom economy

A longstanding feature of Guyana has been its huge illegal underground economy. During the 1970s and 1980s, when a commandist state-owned and state-directed economic regime prevailed, this underground economy was characterized by widespread black markets, particularly for foreign exchange. Regulations proliferated to restrain the black markets that had developed out of acute scarcities. Estimates at the time (including my own) put the underground economy at a greater size than the official economy! A norm of illegality prevailed, driven by regulatory non-compliance and tax evasion.

With the ERP’s post 1991 liberalisation of currency, goods and services markets under the guidance of the IFIs, the underground economy did not disappear as was anticipated, but it became transformed to what I term a phantom economy. In this economy, organized crime (linked principally to the narcotics trade, money laundering, and trafficking in persons and arms) predominate. Organized commodity smuggling continues, but this has become concentrated on strategic goods like fuel, precious metals, alcoholic beverages and tobacco.

Estimates of the underground economy in the 2000s vary, but the mean for three published sets for the years 2001-2008 averages approximately 40 per cent of GDP (Thomas et al 2011).

Being so large, movements in the underground economy are bound to have repercussions on the official economy. Many Guyanese (by choice or necessity) are dependent on the underground economy for livelihoods. Because it functions outside the official economy with limited economic instruments capable of regulating its performance, it poses serious risks to economic stability in the formal economy.

Remittances

In similar vein I argue remittance flows to Guyana pose risks to economic stability.

Estimates of these flows are unusually high. Starting at US$27 million in 2000, this grew nearly 15-fold to US$401 million in 2011, even though it had dipped by about 9 per cent in 2009 as a result of the global economic crisis (from US$325 million to US$294 million). While there are questions concerning the coverage and accuracy of these estimates (sourced from the IDB), they are indicative of trends.

In previous SN articles I have argued that, in light of the security (post 9/11) and global financial (post 1997) crises in the main countries from which we receive remittances (North America, Western Europe and the Caribbean), such a high growth rate cannot be properly explained by prosperity indicators (income, wealth, employment) of the Guyanese diaspora living there. I had raised therefore, the possibility that the remittances represent less “the wages of the hard-working Guyanese diaspora,” and more likely “the proceeds from sin.” That is, payments to operatives of organized transnational criminal networks, which dominate the phantom economy.

To be sure I am not seeking to classify all remittance flows to Guyana as criminal transfers. There are no doubt lots of transfers from the incomes, savings and wealth of the diaspora. Indeed it is impossible to determine individual transfers by motive. My concerns have arisen simply because I cannot see the extremely rapid rate of remittance flows to Guyana, as being generated by commensurate prosperity among the Guyanese diaspora.

Economic bubbles

I have never previously introduced the notion of economic bubbles in any assessment of Guyana’s economy. What, therefore, do economists mean when they refer to economic bubbles? And, what is the current relevance of this notion to a risk assessment of Guyana’s economy?

Simply put, an economic bubble describes a situation in specific product markets, where there is an exceptionally rapid upswing (expansion) of prices and transactions, which is followed by a swift dramatic contraction (collapse). The process captures the imagery of a bubble being formed and then bursting. During the upswing, prices rise so rapidly that they plainly outstrip the real value of the item.

Bubbles occur in markets for tangible products, as well as financial securities (claims). Bubbles are capitalist market phenomena, which have occurred throughout its history and across all regions. When an economic bubble bursts, depending on its intensity, it disrupts economic activity beyond the particular market, sometimes far beyond at the national, regional, and international level.

The experiences of the (post-1997) global financial crisis and the regional collapse of the CLICO and Stanford groups are good examples of the bursting of economic bubbles in financial markets. Older historical examples, however, can be found, for example, the rash of sugar plantations established in Guyana and the wider region, as international markets (for sugar) emerged as a transformational dimension of capitalist economy.

In all the cases of famous economic bubbles I know of, greed, speculation, fraud, manipulation, and get-rich-quick scams have played a primary role. This embeddedness of criminal endeavour in all economic bubbles is cause for the greatest concern.

In Guyana, I can perceive incipient economic bubbles in the making of three markets, namely, real estate (both commercial and private housing); precious metals (mainly gold); and mining permits/claims/licences (as the scramble for Guyanese minerals goes global).

Crime is the main driver of the three sectors discussed above; therefore, their motivations, incentives, behaviours, and performance are not those that ordinarily occur in the formal economy, thereby posing risks of unstable outcomes in the latter.

Next week I shall turn to the remaining items in this final grouping.

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