By Rawle Lucas
Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice-President of the Lending Services Division.
Mr. Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.
Roadmap
Guyana is expected to spend about US$27 million over the next few years in helping the private sector to improve its competitive position. The Inter American Development Bank (IDB) made the money available and the administration started spending it last year. Work commenced in 2008 on several projects aimed at achieving competitive position. Modernizing the Deeds Registry and instituting reform in the telecommunications industry are two of the activities that were set in motion last year. By the end of this year, the administration would have spent at least 15 percent of the money.
The roadmap for spending the money in the current year includes continuing the process of telecommunications reform, conducting a feasibility study on expanding shipping capacity, and implementing a Monitoring and Evaluation System for the NCS. The administration also plans to continue modernizing the Guyana Deeds Registry, establishing a Consumer Protection and Competition Commission secretariat, strengthening the institutional capacity of Go-Invest, setting up Guyana Trade Point and strengthening the capacity of Guyana National Bureau of Standards (GNBS) to provide support to businesses on International Standards.
These are important institutional reforms that need to be encouraged and supported. The value of these changes will depend on how well they serve users of the services and systems being upgraded and, in some cases, being introduced. While there is a need to overcome the challenges imposed by an inadequate support structure, the money received for improving competitiveness should not all be spent on public projects that reflect institutional changes and changes in infrastructure. Some of that money needs to be directed to the private sector to help existing businesses to improve the efficiency of their operations and for new ones to come into the marketplace better prepared.
Foreign Investment
The key to success in improving the competitiveness of Guyana is how well resources could be used to create value that is better and different from their competitors. One way to do that is to attract larger amounts of foreign investment. In addition to financial resources, direct foreign investment (DFI) usually brings new technology, high-level management skills and more efficient operating procedures. The transfer of technology usually permeates the local environment and lead to better performance by local businesses. In addition, most of the goods and services that Guyana produces are exported. For a country like Guyana that has a relatively small internal market, direct foreign investment usually means also an added ability to increase exports.
Currently, the export-led strategy results in Guyana exporting as much as 70 percent of what it produces. This is an indication that the major competitors of Guyanese businesses are foreign suppliers. Many Guyanese are heartened to see that the roadmap for improving competitiveness includes introducing reforms to enhance efficiency of trade transactions and to enhance export promotion. What is not clear though is how much money will be invested in studying and understanding the foreign competition so that Guyanese producers could be prepared to fight for market share in future years.
Moving in this direction would help Guyanese companies competing in foreign markets to understand the competitive terrain and to obtain a clearer vision of the effort required to create strategic value to gain and retain an advantage in those markets. Relying on preferential treatment might be necessary but that alone is insufficient to guarantee a continued advantage in foreign markets. The rules of the WTO will almost certainly lead to the whittling away of preferential trading advantages of the kind that Guyana’s exports enjoy. That has already begun to happen with some products.
Attracting DFI is proving difficult for Guyana and there is good reason for that. Apart form having a very small domestic market, good quality human-resource skills are in short supply. Labour productivity also leaves much to be desired in sectors such as manufacturing, agricultural, construction and transport and communication that would be of interest to foreign investors. Their mediocre performance drags the overall economy down. Additionally, the infrastructure to sustain support for efficient production does not exist.
Knowledge Base
The three sectors of agriculture, manufacturing and transport and communications are vital to the export-led strategy of Guyana and hence its competitive position in foreign markets. The efficient movement of goods from the farm or factory to market is a critical component of the production process. Unless the enhancement of production standards includes resolving inefficiencies relating to all components of the supply chain, the money being invested in improving competitiveness was likely to yield feeble results. With or without government support, it is critical, therefore, for businesses to build up their own capability to integrate transportation, warehousing, work-in-process and finished inventory in an effort to improve their performance. To do this requires a knowledge base that is embedded in the human capital of the private businesses. The extensive migration of good skills makes the achievement of this goal extremely difficult.
In any successful enterprise, it is the availability of adequate amounts of labour, finance and capital equipment that leads to core competencies, that is the ability to perform vital functions of production and produce core products that yield good profits. If talent does not exist in sufficient quantity or is not developed, greater emphasis was likely to be placed on high-priced technology or the importation of expensive talent. The evidence shows that, without a suitable mix of both, the reliance on the use of capital would not lead to better performance.
Indications that Guyanese businesses lost core competence could be seen from the falling returns from imported capital equipment. If capital imports are used as a proxy for investments in long-term assets and the asset goes into production immediately, then it is possible to conclude that capital assets are not being employed efficiently. This could be because these assets are very expensive and are not being fully utilized or are costing far more than necessary to maintain.
Downward Slide
A clear indication of this could be seen from the relationship between output and capital assets used in the productive sector in Guyana, if we could set aside for a moment the weakness of this methodology. Over the last 10 years, capital assets returned an annual average of 19 cents on every dollar invested. Yet, the trend from 1999 to 2008 was not a good one. In 1999, capital assets yielded as much as 23 cents per dollar invested. The return reached as high as 25 cents per dollar in 2002. Since 2003, the return on capital has been on a downward slide and reached a low of 12 cents in 2008. The difficulty in using this metric to measure capital performance is that it does not account for annual price changes, depreciation, replacement of aging equipment or the effects of tax policy on capital spending.
Nonetheless, other evidence exists to support this finding. Production is down significantly compared to where it was in the year 2000. This is true for a majority of the agricultural commodities and half of the manufacturing items listed by the BOG in the production indices contained in its annual report of 2008. While other factors might be involved, it is clear that both labour and capital are under performing in the Guyana economy. If action is not taken to arrest the inefficiencies in production, there is very little chance that Guyanese businesses will be able to compete successfully. It is not too late for this to happen since the bulk, 85 percent, of the IDB money is still available for use.
