Guyana perennially runs a trade deficit which in the simplest of circumstances means that it is continuously in debt to other countries. As this writer has pointed out in previous articles on the subject, it also means that Guyana is not saving enough money. Yet, the country continues to trade each year knowing that at the end of the day it will be indebted to some other country and limited in its capacity to invest. It is not unusual for countries to run trade deficits. Some countries have big economies like the USA and Spain and expansive production structures and even strong currencies and still have trade deficits. One must ask the question, why would Guyana, with its small economy and relatively weak currency, do something like that? It looks as if the country has no hope of ever having enough money to pay up front for the things that it buys. There are good reasons which will be explained shortly as to why it makes sense to incur trade deficits.
The Guyana economy is dominated by private investors who make import and export decisions. There is usually no coordination between the two market participants even though market signals are provided through demand and price. Importers make the decisions on what to import. Those who want to take advantage of their core competencies decide on what to export. The decisions by both market participants are guided by the opportunities seen in the economy and influence the amount of goods that are produced and the level of income earned. This article seeks to explain the reasoning behind the decisions of so many businessmen and women to rely on the foreign sector for their livelihood and the wisdom of policymakers to support those efforts despite the continuously unfavourable balance in the foreign trade account.
A single number
The national accounts do not show the individual importer or exporter and the value of their trade. It aggregates everything into a single number for exports and imports and provides readers with a measure of the trade balance at a point in time. It is therefore the collective thinking of the market participants that is often presented in the national accounts. That common perspective enables one to recognize that the individual importers and exporters see some value in doing the things that they do. The impact of those decisions is reflected in what appears to be a willingness to take advantage of trade credits and other means of financing imports in order to make goods and services available to the Guyanese people. It also has the added benefit of creating employment and boosting incomes. This is the case even though people know that when it is all said and done, creditors will be waiting for payment. The impact of foreign trade is significant for Guyana. Recent statistics show that the entire national income depends on foreign trade and even though Guyana ends up owing producers of a foreign country each year, international trade will never stop. Some of the motivations behind the trade business are provided below.
Countries trade with each other mainly because trading makes a country better off. And this observation applies to Guyana as well. That might sound odd knowing that the country is borrowing to buy the things that it wants and ends up with an unpaid balance. The improvement in Guyana is seen in the wider consumer and producer choices that are available in the country. Guyana does not produce most of the capital equipment and intermediate goods used in the production process in the country. Guyana only gets them as a result of trading with other nations. The combines used in rice harvesting and the cranes used in building construction are not produced in Guyana. Many consumer goods like motor cars and computers that are used by households are also not produced in Guyana but are available through importation.
Another factor that motivates people to participate in the foreign trade is a desire to see improvements in their lives. Yes, international trade helps to improve the efficiency with which goods and services are produced and the greater amount of leisure and comfort that people enjoy. A cutlass can do just as fine a job as a weed-trimmer in cutting the grass. But, a person could cut a lawn in a shorter time span and be able to provide service for several lawns in a day against the output of the cutlass. The person earns a greater amount of income using less time and energy. As things stand at the moment, the machines and the equipment that are available to producers and consumers help to make it possible for the country to produce goods and services more efficiently than it could have without them. One therefore cannot underestimate the importance of trade to developing countries and in particular to a country like Guyana.
Creating this opportunity is a key principle in economics known as comparative advantage. It is worth digressing to talk about the principle of comparative advantage because of its importance in foreign trade. This principle holds that a country has comparative advantage when it can produce any good or service at a lower opportunity cost than another country, and not necessarily at a greater volume or simply cheaper, as absolute advantage suggests. Nor is comparative advantage in the exchange of the goods and services. Comparative advantage shows up in the inefficient use of resources in the domestic economy that prevents more efficiently produced goods from coming to market. Comparative advantage once overcome internally makes external trade possible from the excess quantity of the particular good that is available and the cheaper price at which it comes to market.
English political economist David Ricardo, the mastermind behind this theory, observed that the principle is far more helpful than is easily observed. The rationale for using comparative advantage is that it promotes efficient resource allocation and enables countries to specialize in producing the things that they produce most efficiently. Douglas Irwin calls comparative advantage “good news” for economic development. “Even if a developing country lacks an absolute advantage in any field, it will always have a comparative advantage in the production of some goods” and will trade profitably with advanced economies. No one country can produce all the goods and services more efficiently and cheaper than others and as a result, countries benefit from trade because of their comparative advantage. These benefits of comparative advantage and trade as a whole have significant meaning for the livelihood of developing countries. Some of these benefits include increased varieties of products and services at lower costs, the exploitation of economies of scale, enhancement of competitiveness, innovation improvements, and facilitation of export diversification, and the development of political relations through integration.
Lower opportunity cost
Having discussed comparative advantage and its meaning one can see how it gives rise to the thought that the extraction and export of fish by Trinidad might be produced at a lower opportunity cost by Guyana. But Trinidad might have opted to produce the commodity oil since the opportunity cost was lower than that of fish, at least where Guyana was concerned. Using the simplified model for revealed comparative advantage that is at times used by the World Bank and other institutions, there is evidence that Guyana has a greater comparative advantage in sugar products than Barbados and Trinidad and Tobago. Guyana therefore can feel satisfied that its exports to these countries are yielding benefits for each other.
Guyana’s own experience shows how crucial a role trade plays in the development of developing economies. Trade accounted for an average of 106 per cent of gross domestic product (GDP) for the period 2006 to 2015. Guyana depends heavily on trade for its economic survival. In 2012 for example, trade accounted for 121 per cent of Guyana’s GDP. It is this reality that makes it impossible for Guyana to modify its disposition to trade even though it perennially racks up a trade deficit. The additional benefit is seen in the wealth that is accumulated over time. The increased openness to trade led to growth in income in several industries, including the distributive trade industry, the construction industry, the mining industry and the information and communication technology industry. Trade therefore is also able to increase the income that people earn.
What trade does not do is enable everyone to share equally in its benefits. To the extent that trade drives the economy, it is a reality that policymakers will have to live with. But, it brings with it crime and poverty. To change that situation, it means that the trade policy of a country would have to be accompanied by constructive internal measures that help to reduce income inequality and improve the quality of life of Guyanese.
Despite its necessity, there is never consensus on how to proceed with the redistribution of income since there is the belief that too many free riders hitch their existence to such policies. The most reasonable solution might be to produce more goods and services that could enter the trade arena and increase the access of more persons to higher levels of earned income.