Development Watch
Introductory remarks
It took sixteen years for the Guyana government to propose a unified development policy framework – LCDS – which the public could view and scrutinise as a way forward. The fundamental idea of the strategy is based on the assertion that “Guyana’s pristine forests are its most valuable asset” (see page 8 of the LCDS). Armed with over 15 million hectares of forests (0.5% of the planet’s standing forests), the Guyana government (relying on consultants) estimated the economic value to the nation (EVN) of “its most valuable asset.” Page 43 of the LCDS document (hereafter the strategy) noted a 4.3% future rate of deforestation even though Guyana’s historical rate of deforestation is much closer to zero. On the other hand, to estimate the opportunity cost (the next best thing we could do with our forests) of keeping our forests standing, the document turned to historical forest and agricultural prices to establish a set of probabilities to determine the expected EVN; page 45 of the strategy notes that the EVN ranges from US$4.3 billion to US$20.4 billion. Given the probabilities that were derived from historical prices and an assumed discount rate of 10%, the government’s advisers came up with the now popular annual annuity payout for Guyana of US$580 million each year.
The purpose for estimating the EVN of US$580 million is to seek funding for a series of development projects which the LCDS proposes. Given the problem of climate change, Guyana hopes that it would be compensated for keeping its forests standing rather than cutting them down since the trees are important for mitigating carbon emissions – a main culprit of global warming (however, other major culprits include black carbon and ozone precursors like methane, carbon monoxide, nitrogen oxides, etc).
The government hopes to use the anticipated funds to build “a strategic low carbon economic infrastructure” (page 5 of the strategy). These include creating fibre optic bandwidth (the hope is to create an outsourcing industry), hydroelectric power, create infrastructure to access non-forest land for agricultural development, and invest in social services like healthcare and education. The government also hopes to link the LCDS with the National Competitiveness Strategy, which targets traditional and new production sectors. On page 7 of the strategy it noted that “considerable progress has been made in building capability in several of these new sectors.” However, as this column has noted in the past, the actual data does not seem to support the view of “considerable progress” in the non-traditional sectors. As we have noted the economy is still dependent on low productivity production sectors.
The government expects initial funding to come from developed countries via bi-lateral agreements. To date mainly Norway has signalled interest in providing funds. However, it is unlikely that that one country will be willing to transfer US$580 million annually.
There is also much uncertainty associated with the UN’s Reduced Emissions from Deforestation and Degradation (REDD) – for more information on this see the recently completed informative columns in the Stabroek News by Ms. Janette Bulkan (http://www.redd-monitor.org/2009/08/27/carbon-in-the-forests-of-guyana-janette-bulkan/ or http://www.jouvay.com/lcds/). In addition, the benefits emanating from an agreement in Copenhagen this coming December (the successor to the 1997 Kyoto Protocol) would take many years before they reach Guyana. Indeed, the strategy (page 14) recognises that it would be some time after 2013 before Guyana’s carbon credits (known as Assigned Amount Units AAUs) could be traded in global or regional carbon markets. Meanwhile, it is important to note that markets rise and crash; and markets are susceptible to speculation and herd behaviour. The government would want to think seriously about whether the future development financing of the nation should be deeply embedded in a casino (to borrow the term of the great John M. Keynes).
Some analysts believe Copenhagen would likely result in an agreement on measurement, reporting and verification (MRV). This agreement would be central to future climate change agreement. For instance, an MRV scheme would link support from the advanced economies to developing economies by monitoring whether countries like Guyana and others actually implement the agreed projects that would mitigate emissions. The MRV could be a transparency building mechanism. Nevertheless, whatever benefits emanating from agreements reached in Copenhagen would take many years before they are realised for Guyana. Meanwhile, intermediate policies are still needed to quickly enhance the living standards of the masses that live on less than US$2 per day or just above this minimum benchmark.
New government organisations
The implementation of the LCDS would result in three new government institutions (page 30). First, there would be the Office of Climate Change (OCC). This agency will be established within the Office of the President “to work across Government to support work on climate adaptation, mitigation and forest conservation” (page 30). In other words, this agency will have power above the other two. Second, there will be the Low Carbon Strategy Project Management Office. This latter agency is seen as providing support for GO-Invest to strengthen Guyana’s investment capabilities. Three, there will be the Low-Carbon Finance Authority to collect and manage forestry payments (page 30). As an aside, it seems that the traditional channels of receiving and allocating funds at the Ministry of Finance will be bypassed. I know Mr Christopher Ram who has written a wonderful review of the LCDS (see SN Aug 16, 2009) will be keeping a close eye on this development.
Alternative production sectors
and the foreign exchange gap
The LCDS has several very good ideas concerning potential production sectors. For example, I believe proposal of business outsourcing, non-traditional agriculture (fruits and vegetables), aquaculture and sustainable forestry are good proposals. However, the strategy is ambivalent on ethanol (it sees hydroelectricity as the main renewable energy) even though there is an existing sugar infrastructure (see page 26).
To be fair, the strategy noted that bio-ethanol would be produced in the Canje Basin from 142,000 hectares of land set aside for that purpose. The government sees part of the anticipated annuity payout (remember the uncertain US$580 million EVN) as funds that could go towards preparing the land in the Canje Basin for ethanol production. However, is there a foreign investor who could do this earlier? What about the 11 proposals for ethanol investments that were made since 2008? Do we really need to wait this long before Guyana moves into ethanol? What about GuySuCo’s existing sugar infrastructure in West Berbice and Demerara? Is there no foreign investor willing to transform these estates into ethanol sooner rather than waiting for the post-2013 casino financing? Is the government afraid to privatise parts of GuySuCo? Is the government still seriously considering Fidel Castro’s complaint against bio-fuels? Are these estates going to be allowed to fail so the assets could be sold off to the chosen ones? What’s the position of GAWU on this matter? I know the chosen boys and girls in the three new offices will be well compensated, but what about the sugar workers in these uncertain post-EPA times?
It is clear that the financing for the transformation of the Guyana economy, as envisaged by the LCDS, is dependent on very uncertain future financing. Also, any future financing will occur long after Copenhagen. Moreover, it is unlikely Guyana would receive the anticipated EVN. Therefore, the LCDS leaves many questions unanswered as to how some of these very good ideas the government proposes are going to be financed. As a matter of fact, I think it is the major weakness of the strategy.
I have noted in past columns that a main obstacle to economic progress in Guyana is a foreign exchange constraint or gap that prevents Guyana from transforming the economy and buying the essential machines and technologies. It is unlikely the bi-lateral help from Norway would be enough to fill the foreign exchange gap or requirement for economic progress. It is also not a good idea to base the development financing of the nation in casino financing. Thus, the strategy would have to be augmented. The government and the Marxist-Leninist PPP would have to reconsider the role of multinational corporations as one source of financing the economic transformation. I suggest the thinkers at Robb Street take a second look at China.
Political economy issues
I do not believe the Guyanese masses fully understand that they really do not choose their Parliamentarian and President even though they may elect them. This is because the current Constitution does not allow for our leaders in Parliament to be elected directly by the people. The political party – through something called democratic centralism – picks the parliamentarians and then places them on a list at the time of election. The masses then vote for a highly filtered list of like-minded individuals. More specifically, in the case of the ruling PPP, there is voter collusion by the like-minded individuals against anyone who is not liked by the majority in the Central Committee. Therefore, someone like Mr Moses Nagamootoo is prevented from joining the coveted group of 15 (the Central Executive Committee of the PPP) which essentially decides the destiny of Guyana. Even the President, who is eventually offered to the nation in free and fair elections, is filtered by a sub-group within the group of 15 individuals. Had the PNC been in power the same principle would apply as it offers up its own list, filtered of dissenting voices.
The point I am trying to make is this does not seem to be the best political structure and Constitution under which this country should receive US$580 million annuity payout – assuming of course Guyana gets this large payout. This would concentrate an enormous amount of financial power in a very narrow group of individuals. The much touted Parliamentary Standing Committees (see page 6 of the strategy) are just not enough to compensate for this deep flaw in our so-called democracy. What makes matters worse is Guyana is of the ethnically bi-communal type in which a sub-group within the 15 individuals basically obtain most of the votes from the Indo-Guyanese and Amerindian population. As an aside, there is a well-developed literature in political science on the problems in bi-communal societies and how to manage them. Ironically, the great Caribbean economist Sir Arthur Lewis wrote on this issue also but economists have generally ignored it and as a result economists like me have to turn to the political science journals for answers.
Conclusion
The LCDS is a good step forward in terms of a proposal of new production sectors. However, the strategy seems to settle on the notion that Guyana needs to wait until the carbon credits roll in so government could first establish the infrastructure before actual sustained job-creating businesses can be established. I am not so sure whether Guyana must wait so long after Copenhagen for uncertain funding before preparatory work gets started. The ruling party will seriously need to get over its Cold War era hang-up on the role of foreign multinationals as an alternative source of finance. Moreover, the strategy makes a weak excuse against the diversification into bio-fuels. Guyana does not need to wait until the Canje Basin is prepared as there is an established sugar infrastructure in Demerara and West Berbice.
The strategy has two critical omissions. First, given that most scientists expect flooding and sea level increase, why not start planning now to create a new city in the interior. Perhaps all government operations can shift there first. Second, our people are the most valuable asset and not the forests. Therefore, I find the lack of a Diaspora policy a major shortcoming of this draft that is meant for consultation. Finally, given our current political institutions, it is likely that significant financial power will be given to a very small group of people or one individual. Furthermore, given the ethnic voting pattern there is likely to develop a highly skewed and adverse distribution of income and wealth.
