In last week’s column I considered three major economic shocks/challenges which rocked Guyana’s economy during the first half of 2008. To repeat, these were the continued rise in 1) food prices 2) oil prices and 3) a speculative bio-fuels bubble, which threatened to delude the authorities into believing they had found a ‘miracle’ solution to Guyana’s energy woes. The first two challenges/shocks generated strong inflationary pressures in Guyana (through rising import prices), as well as impeded export production (through rising input costs). The former effects were compounded by the value-added tax (VAT). Government’s principal concern over this period was to mitigate these effects through various safety-net and relief packages, which focussed on its “grow more food” campaign, plant seed distribution, and aiding the development of farmers’ markets.
Dubious economics data
Despite the obvious magnitude of these economic reverses, the official data do not fully portray their impacts on ordinary citizens. Indeed, the Bureau of Statistics had declared an inflation rate of only 5.8 per cent for the period January-June 2008. Over the same period it reported a dubious growth of real GDP of 3.8 per cent.
Remarkably these data indicate that the Guyana economy was insulated from the global shocks during the first half of 2008! Personally, however, I remain skeptical of this. I cannot prove though that the economic data are being massaged to support predictions of the authorities as some critics argue. Nonetheless, I share the widespread agreement that the bases of our national statistical collections need to be revised and improved.
Why rising food prices cannot last
Readers may not have been fully aware of the significance of the fundamental statistical relation between the demand for food and income that I introduced in last week’s column. As I indicated then, this relation undermines (short of a global disaster that drastically limits food output), any long run tendency for food prices to rise and thereby to promote price imported inflation in net-food importing countries.
The fundamental statistical relation states that, as persons and nations get wealthier, a reducing proportion of their incomes will be spent on food. This relation holds true for all regions and cultures. Because of this demand growth cannot sustain a lasting tendency for food prices to rise. Short-term disruptions of supplies may affect prices in the short-term. With the long run trend for food productivity to rise, even if at a reducing rate, I venture the opinion that rising food prices will remain exceptional occurrences and not the rule. This means that Guyana must guard against being sucked into a ‘food bubble.’ If food prices were to rise sustainably in the future, Guyana, as an agricultural-based economy, would find considerable opportunities, not threats or economic reverses.
The fundamental relation of oil production
I should point out that there is another fundamental statistical relation at work in oil production. Oil is a commodity that is ultimately in fixed supply. It can only increase through geological time. Because of this, once the annual global output of oil (or that of any region) peaks, an inexorable and irreversible decline in output is immediately set in place. After this decline commences the price of oil will rise sustainably.
However, there is no evidence that the global annual output of oil has peaked. Nor for that matter, is there strong evidence to show that this will occur some time in the near future. Unexplained rises in oil prices (as with food) are better explained by speculation and/or temporary disruptions in their annual supplies, including stocks.
From this perspective the twin shocks of rising food and oil prices during the first half of 2008, bad as they were, could not be sustained indefinitely. As we now observe all commodity prices are in decline, particularly oil. The immediate threat is not inflation but deflation of commodity prices.
Bad as they were, these exogenous economic reverses, which occurred in the first half of 2008, pale in comparison to those that emerged in the second half of 2008, particularly towards the end of the third quarter and all of the final quarter of that year. Here, the worst case scenario occurred.
I displayed a Schedule two weeks ago (January 25), listing the fourteen major economic shocks/challenges of 2008. Eleven of them occurred during the second half of the year. The first of these eleven was the financial crisis and credit crunch in the United States.
Financial crisis and credit crunch
As I have previously explained in earlier columns (November 2 and 9, 2008) there is good reasoning behind my consistent description of the initial finanical fallout in the USA, as constituting these two elements. The credit crunch refers to the massive and sudden freezing of loans and credit by US commercial banks. This reflected the basic distrust they had for the securities on offer from credit seekers. It also reflected a great unease about their own portfolios of assets. The latter reflected the opacity of the assets being traded on the US financial markets. These assets came to be described as “troubled” or “toxic.” As these names suggest they were too risky to acquire, at any cost. The freezing of credit brought the smooth workings of the wheels of commerce in the US to an abrupt halt.
A financial crisis is different. It refers to a regular systemic dis-order of the capitalist financial system. Here while credit continues to flow, there is a definite cyclical periodicity to these flows. This cyclical periodicity is part of the normal rhythm of capitalist expansion and contraction. A financial crisis could be triggered by any number of factors. In the era of globalization, financial crises have become more global in scope, more easily transmitted from one country to another, and involve immensely large sums of money in comparison to the value of global GDP output.
What effect did these two events, the credit crunch and financial crisis, have on the Guyanese economy in the second half of 2008? I shall respond to this question next week, but readers would have already recognized that the Guyanese authorities have been playing ostrich, pretending and perhaps hoping these US based catastrophes would simply go away.
I shall continue the discussion from this point in next week’s column.