US financial intervention
The recent unprecedented and spectacular intervention of the US Federal Government into that country’s financial markets is testimony to how serious the risk of financial meltdown is in the USA, and around the world. As pointed out a couple of weeks ago in this column, the two mortgage giants, Freddie Mac and Fannie Mae own or control nearly half (US 5 trillion) of the US $12 trillion home mortgage debt. A significant proportion of this debt has been off-loaded on a number of financial institutions around the world, and principally in Europe and Asia. The bail-out by the US government is expected to reach US$200 billion, making it the largest bail-out in US history.
The recent distress at Lehmann Bros, the financial powerhouse, adds to the concerns. Altogether, these developments confirm the point I made earlier that the near-term prospects for the global economy up to the end of 2009 is bleak. It is clear that the US mortgage crisis has not yet bottomed out. And, until it does, the developed economies would continue to face economic slowdown or worse, recession combined with inflationary pressures.
Rosy picture
In previous columns, I highlighted the rosy picture painted by the Bureau of Statistics. That body indicated only a one (1) per cent rise in the overall price level of consumer items for the second quarter of this year and a less than six per cent increase for the first six months (January to June). Despite this, I predicted that the external environment is likely to adversely affect the Guyanese economy over the near term.
In support of that prediction, I examined exchange rate behaviour of the Guyana dollar, prospects in our export markets, the flow of remittances from overseas Guyanese, and the difficulties facing our main foreign exchange earner, sugar. In all four areas I pointed out that difficulties could be expected to continue well into 2009. The question I pose today is: does the internal environment hold out better prospects?
Industrial unrest and budgetary
deficits
I would argue that on balance, the economy faces formidable internal difficulties over the near-term.
Fortunately though, the situation in two important internal aspects is not threatening. First, despite industrial unrest and action in the sugar industry and at Guyana Power and Light Company and Toolsie Persaud Ltd, no broad-based industrial action is threatened across a wide swathe of enterprises, on the horizon. The dispute in the sugar industry can also be seen more as an external consideration rather than internal one, because sugar is produced overwhelmingly for export.
The other favourable consideration is that internal inflationary pressures are not only reduced because the industrial environment is quiet, but also because the unprecedented yield of the VAT tax, makes distorting budgetary deficits less likely.
Crime and violence and the
investment climate
When we turn, however, to the broader social, cultural, and investment climate we see grave dangers.
This situation is not new, as recent surveys on Guyana, produced by a number of international institutions like the World Bank and the World Economic Forum have highlighted crime, violence and corruption as among the most important impediments to the growth of businesses.
Clearly, where the rule of law does not apply, and where criminal violence is the order of the day, businesses are bound to feel insecure. This is compounded when the business sector is also heavily infected with illegal activities directly or indirectly linked to organized crime. Guyanese openly describe several businesses as ‘laundries,’ implying that their primary function is money laundering and not the ostensible activities for which they were established.
Proof of this endemic lawlessness is to be found in the three massacres this year that occurred at Lusignan, Bartica and Lindo Creek in which 31 Guyanese were killed. No one truly believes that the killing of the most wanted ‘Fineman’ and ‘Skinny’ to whom nearly 50 murders have been attributed by the police will introduce us to an era in which the rule of law prevails.
To begin with, there is the widespread view that police intensity applies only to criminals outside the organized crime network, the political directorate and its allies. The scant regard for even the appearance of even-handedness in criminal matters will continue to deter legitimate investors. When persons and enterprises routinely flout the law and get away with it, the business environment is fatally compromised. This occurs also when those who are responsible for the preservation of law and order engage in torture, murders, systematic extra-judicial killings, corruption and extortion.
Deals
Recent ‘deals’ have also affected the investment climate badly. Several of these have come under close scrutiny, and some observers indicate that the authorities do not act even-handedly when it comes to the way in which public funds are expended, assets disposed of, and tenders procured. Experience worldwide has shown that where corruption, nepotism, and favouritism prevail, the state becomes an arbitrary, destructive agent in its relations with the legitimate business community.
There is no change on the horizon that is likely to reverse these damaging trends. In light of this I conclude that a worsening of the investment climate in Guyana will occur. This will certainly adversely affect the inflow of capital for new enterprises and the expansion of established ones. And, without investment in new technologies, new ideas, new products, and new businesses, the economic effort in Guyana will falter.
Infrastructure
Finally, but briefly there is the issue of the state of the business infrastructure. Sadly this remains deficient with no chance of a major reversal. The regulatory and oversight framework remains weak. As long as this is so, good economic governance will not prevail in the near term.
While some sections of the economic infrastructure have clearly improved, like telecommunications, others remain in dire straits such as electricity, water, transport and communications.
This concludes my discussion on these matters, which started several weeks ago with the aim of assessing the impacts of rising food and fuel prices and the relief packages on the Guyanese economy, locating these impacts in the wider world.
