Guyana began its return to a market economy in 1989 with the implementation of the “Economic Recovery Programme” (ERP) which was introduced by the Hoyte Adminis-tration. Since that time, the Guyana economy, for the most part, has shown continuous signs of economic progress. With an increasing reliance on and experience with the market, there is general agreement that the market has produced outcomes and efficiencies with which most Guyanese could be satisfied. But crime and social problems abound. Despite the implementation of a poverty reduction programme, the continued emergence of serious social problems linked to poverty, unemployment and the economy leaves many Guyanese wondering where things have gone wrong. A filthy environment, an improperly maintained drainage infrastructure, unabated domestic violence and brazen criminal attacks are daily manifestations of disaffection and disillusionment with life in Guyana.
Under the present circumstances, one has to wonder if the market in Guyana is really being allowed to work the way it should to provide employment and help bring better benefits to Guyanese at a faster rate. This article begins where all students of macroeconomics start and will then seek to connect the general understanding of how the economy is supposed to work with circumstances in Guyana. Of necessity, the article will extend beyond this week’s publication.
Circular Flow of Income
Very early on in the study of macroeconomics, students encounter the discussion about the circular flow of income. The two-sector diagram is used to educate those studying the subject of economics how an economy operates. In a deliberate simplification of reality, the model is careful to emphasize that the economy of a country is controlled by private actors. To make the point, the private actors are separated into two groups. One group is made up of persons that form the household. They are also seen as playing dual roles, that of consumers and that of providers of factors of production. In the case of the circular flow model, it was assumed that households provided labour alone.
The other group is made up of persons that form businesses. They utilize the factors of production (labour) and produce the goods and services that the households purchase and consume. The model takes behaviour at the micro level and condenses it into an aggregate relationship between the two groups. The relationship between the two groups says three things about an economy. One, factors of production are used to generate goods and services. Two, factors of production earn income that is used to buy the goods and services that they help generate. Three, there is therefore an interdependent relationship between the two groups in the economy. For an economy to function properly, households and businesses must work together and take care of their mutual interests.
Despite its limitations, the model gives us a sense of who makes up the private sector. From the foregoing perspective, the private sector is that part of the economy that is not run by the government. As understood from the model, the private sector, in effect, consists of households and businesses who cannot survive without each other. But contrary to the depiction by the circular flow model, the interdependence between households and businesses is more substantial and quite different.
Much more resources
First, households provide much more resources to the economy than manual labour. They provide managerial talent and specialized expertise that not only shape the goods and services produced, but also create the marketing strategies and channels that get the goods and services to market. Households make land, office buildings, and other physical capital like factories, warehouses, furniture, vehicles, equipment and fixtures available to businesses. They also provide financial capital, and financial services like insurance, banking, money market and capital market services. They provide transportation services, security services and communications services. Many of these services are supported by various types of technology, including the global platform of internet technology.
Second, the participants are not confined to one side of the equation. Members of households start businesses so they sometimes make these things available to themselves. Some households provide the factors of production as registered entities and some as unregistered entities. Some do so as sole proprietors, companies, corporations, partnerships and co-operative enterprises. Some are large and some are small. When registered, they transition from households to businesses, and back to households when they had had enough of the trials and travails of the business world.
Make ends meet
Alternating between the two sides or roles only alters the expectations of each. On the household side, they look to generate income from employment and create as much residual income as possible through purchasing stocks and holding cash in various types of savings accounts. On the business side, households look to generate income from investment and create as much residual income by earning large profits from their investment. In many instances, households straddle both sides of the fence. They keep employment while running a business on the side to make ends meet.
(To be continued)