The phantom economy and the crisis of credibility

Guyana and the wider world

Recap
In last Sunday Stabroek  I had started a discussion on what I described as the “crisis of credibility” facing actions by the government and its functionaries on economic matters. This credibility gap runs throughout the entire gamut of economic matters, from review and analysis of the current situation and recent trends to the setting of targets, framing of policy proposals/programmes/projects, and the efficient execution of these.

I have so far considered two of the factors that I believe have contributed to this outcome. First, the glaring weaknesses of official statistics: late dissemination, hoarding, and the widely assumed ‘massaging’ of these in order to conform to the preferences of the administration. The second factor identified is the repeated instances of revealed inconsistency and incoherence in the execution of public policy. This latter has generated much confusion and distrust among a wide swathe of economic actors, including small and large businesses, waged-labour, the self-employed, and civil society organisations.

Criminal motivations
In this week’s column I begin with introducing a third factor. This is the common knowledge or belief that a significant proportion of economic transactions in Guyana are inspired by criminal motivations. Among these are repeated instances of 1) general corruption and fraud 2) generating and distributing proceeds from organised crime 3) illegal capital flight 4) tax evasion and 5) foreign currency substitution (US dollar) in day-to-day transactions.

Such criminal motivations do raise doubts about the genuine nature of much of today’s economic activity. They are also more broadly linked to the modus operandi of the criminalised state.
I reminded readers last week that there is a symbiotic relation between political elites and organised crime bosses, who together form the ruling cabal over events unfolding in the economic sphere. A state that has tolerated the extra-judicial execution of hundreds of young men, cannot be expected to pursue uncorrupted economic policies. This would seem to be too much of a contradiction to be at all possible.

Phantom economy
Let us examine the case of the underground economy, to see how this unfolds. The underground economy in Guyana emerged into prominence during the years of the PNC administration. Estimates that I had made showed that the underground economy was very large, ranging in size between 26 and 99 per cent of official GDP for the 1980s. This high estimate was independently confirmed in a study by Bennet published in the same journal (Social Economic Studies) in which my study appeared.

The 1980s underground economy was principally centred on 1) smuggling of goods banned by the PNC administration and 2) black markets for foreign currency (mainly the US dollar).

The latter arose because of legal restrictions on residents holding foreign exchange. As a consequence of these restrictions, a huge gap developed between the official exchange rate and the black market rate, providing a fertile outlet for illicit trading in foreign exchange.

With the liberalisation measures that came into place after 1989 under the ERP; and, in particular, the removal of foreign currency restrictions and the licensing of cambios, it was expected that the underground economy would have been effectively phased out.

It did not. At last estimate the underground economy averaged 47 per cent in Guyana for the 1990s up to 2000, according to a 2001 Working Paper published by the IMF (Faal, 2001). Along with other colleagues at the university’s Institute of Development Studies (IDS), I am currently updating the estimates of the underground economy for the period 2001-2007, using the methodologies employed in the three previous studies by Thomas, Bennet and the IMF (Faal).

Although not yet complete, so far there are no surprises to the estimates we are obtaining. The dynamic of the underground economy, however, no longer revolves around the evasion and/or avoidance of government prohibitions. Today it centres on the proceeds of organised crime: narcotics trafficking, organised smuggling, and trafficking in persons, arms, ammunition, and high-priced items. This portion of the underground economy I had previously termed as the ‘phantom economy.’

Estimated size
Assuming as I do that 1) the size of the underground economy remains more or less the same as the IMF estimate of 47 per cent and 2) between 25 and 75 per cent of this represents the proceeds of organised crime (phantom economy), then a considerable proportion of real and financial activities are controlled and/or contaminated with criminal endeavours. This estimate would range from about 12 to 35 per cent of Guyana’s official GDP at market prices (or roughly 130 to 380 million US dollars).

This estimate would make it reasonable to assume that significant portions of transactions in the economy are guided by illegal and illicit motives. If so, this clearly distorts and complicates the operation of both private and public enterprises. Persons are therefore, forced to treat public policy with the proverbial grain of salt.

Other factors
There are other factors contributing to the present crisis of credibility. Some are also linked to criminality. Good examples of these are capital flight and money laundering. Both of these require systematic corruption and the undermining of due process in order to make them work. To date no serious efforts have been made to bring to the local courts major cases on these matters, despite the widespread public assumption that there is an extensive presence of criminal pathologies in economic activity in Guyana.

Other factors are more benign. A good example is the role of remittances. Weak information on these, however, has created a significant blind spot in the economy. This makes it difficult to give credibility to official pronouncements and/or actions in regard to the economy.

Next week I shall turn to a discussion of the pervasive stench surrounding the CL Financial and Stanford Financial Groups, which has been around the region for some time now.