Development Watch
Part 2
By Tarron Khemraj
Introduction
Last week’s column argued that the stage for nationalisation was set by the early 1950s owing to the Marxist-Leninist ideological orientation of the Jagan-led nationalist movement. In response to the pressures emanating from the nationalist movement, the Booker sugar plantations, led by Jock Campbell, implemented far-reaching policies to enhance social welfare among the poor on the plantations. These policies are documented in detail in Clem Seecharan’s book “Sweetening Bitter Sugar.” However, as British Guiana’s politics became enmeshed in Cold War politics, the elected 1953 PPP government (which included Cheddi Jagan, Forbes Burnham, Ashton Chase, Sidney King [who later became Eusi Kwayana], Jai Narine Singh and others) was suspended. The latter events and the split of the pre-independence PPP would lead to the postponement of nationalisation.
There were many qualitative events between 1953 and 1976 when nationalisation of the sugar industry actually took place. However, during the first half of the 1970s Jagan’s PPP and Burnham’s PNC openly mobilised for a socialist Guyana in which the government would control and run the main production sectors. As a matter of fact, there was a kind of ideological brinkmanship to show which party was closer to Lenin, Stalin and Mao. Of course Cheddi Jagan’s PPP usually won in these matters. After all, Dr. Jagan claimed to have “total understanding” of the dynamic path which leads from socialism to communism – an illumination that came from Lenin’s literature.
Forbes Burnham’s PNC would eventually nationalise the sugar industry in 1976 with critical support from Cheddi Jagan’s PPP. According to Professor Thomas in his book “Plantations, Peasants, and State” one reason that accounted for the late nationalisation was the fact that Jock Campbell’s policies made favourable contributions to Guyana from the 1950s. Therefore, some of those reforms I outlined in last week’s columns may have bought Bookers some more time in Guyana. Thomas also noted that Campbell’s reforms made the case for Bookers to receive compensation from the Guyana government for nationalising 90% of the sugar assets.
This column would provide an analysis of why the policy choice of nationalisation failed to improve the economic condition of the country and specifically improve the welfare of sugar workers.
Analysis – nationalisation
and economic stagnation
The first thing to note is that nationalisation of sugar coincided with other key government take-overs in the economy – mainly the bauxite industry. According to noted Caribbean economist, Dr. DeLisle Worrell in his book “Small Island Economies”, no other Caribbean country went as far as Guyana with its experiment of state control of the economy. It is not that the role of the state is unimportant in economic development or we should jettison state involvement for libertarian principles, it is the balance between state involvement and private enterprise that matters. All the other Caribbean Islands utilised some form of state involvement in the economy. Indeed, Mauritius and Singapore made use of state guided industrial policies with great success. So too did Japan, South Korea, Malaysia and Taiwan in South-East Asia. But in Guyana’s case the pursuit to be the best and purest socialist pushed the state pendulum too far to the left.
The Guyanese nationalist leaders underestimated the resource gaps or bottlenecks at that time that would lead to severe economic hardships. The first constraint faced by Guyana at that time was the foreign exchange constraint. As an aside, all economies – especially small open economies and mini states – face this constraint as long as they do not possess an internationally medium of exchange or reserve currency. This means there is not enough US dollars to buy the scarce technologies and other items the country could not produce; for example, machines, fuel and other oil-based products, raw materials and so on. The skilful policy maker would be able to take this constraint and make the best out of a bad situation (of course, Low Carbon Development Strategy – in its current form – would not fill this foreign exchange gap; but we are coming to that soon).
The nationalisation policy would exacerbate this constraint. The foreign currency earned from sugar windfall of 1974 and 1975 was used to pay compensation to Bookers for the nationalisation. According to DeLisle Worrell these funds would not only deplete foreign exchange reserves, but also widen the fiscal or budget deficit. The government also had to borrow from the local banking system and accumulate debt to service this policy choice – while there would be nothing on the production side to show. On the other hand, according to Professor Worrell, Barbados used its sugar windfall profits to invest in housing and light manufacturing as that country, around the same time, pursued policies to shift its dependence away from sugar to tourism and light manufacturing.
From 1976 to the Hoyte reforms of the late 1980s, the Bank of Guyana did not hold foreign currency reserves. Professor Thomas noted that $102.5 million was paid to Bookers and $5 million cash to a smaller foreign owned sugar company – Jessel Securities. A balance of $15 million was paid off to Jessel over ten years at 7% interest. The latter implies, barring interest payments, the cost of nationalisation ran at 11.8% of Guyana’s GDP in 1976 – according to my calculation. In addition to the payments, the government entered into a four-year agreement with Bookers for marketing services and other technical advice.
I am certain these funds could have been better invested in alternative industries while still allowing the foreign companies to operate and do what they can do best – especially given the fact that Bookers was making good progress at improving the welfare of the poor. However, that would require a mixed economic system. Forbes Burnham had his brand of Cooperative Socialism in which the People’s National Congress (PNC) would assume a paramount role in the society; at the same time there was no sensible resistance coming from Cheddi Jagan who wanted his purer form of socialism that would eventually take Guyana to utopian communism.
The second constraint faced by Guyana was that of human capital scarcity. As noted last week, Campbell’s Booker had employed large numbers of Guyanese in clerical positions, bookkeeping, science applications, etc, in an effort to assuage the heat coming from the nationalist leaders. Last week’s column noted that Campbell preferred gradual reforms, while Jagan preferred radical revolution. However, in spite of such progress, there was still a serious shortage of skilled Guyanese. Therefore, there were just not that many skilled workers and managers to take over both the sugar operations and the bauxite industry, while still having enough skills to manage the public service and find alternative economic activities. Perhaps the outturn would have been better had there been nationalisation of one key industry. By this period also the rate of migration of skilled Guyanese had accelerated, thereby worsening the human capital gap.
Of course, the human capital and foreign exchange gaps are related and there are certainly feedback loops. They reinforce each other in a vicious cycle to the bottom. Professor Worrell made the following argument: “newly independent governments tend to be led astray by the realisation that many leading public servants are a match for their counterparts in multinational corporations and international institutions.” Sugar and bauxite production would eventually race to the bottom after nationalisation in part due to the dearth of skilful and qualified Guyanese. This further reinforced the foreign exchange bottleneck robbing the economy of needed foreign currencies to purchase capital goods to sustain the process of economic growth.
The architects of nationalisation programme failed to grasp a key economic insight from Joseph Schumpeter’s notion of creative destruction. That is, economic growth results largely from finding new products and production processes. Imagine what would have been the outcome today had the sugar windfall profits been invested in alternative industries even established by the state as was done in early Singapore development. The foreign multinationals could have concentrated in doing what they do best – make and market sugar, alumina and rum. While the new sectors that are developed would not only drive growth but also absorb gradually the skills and knowhow created in the incumbent sectors of the multinationals. Of course, this error continues to be made to this day in Guyana as was done by going deeper into sugar rather than using the established sugar cane infrastructure for alternative products and processes.
Conclusion
This column looked at the post-independence economic policy of nationalisation. Much of the problems faced by sugar workers today go back to these policy choices since nationalisation could not succeed given the severe shortages of foreign exchange and skilled individuals that a country like Guyana faces. Sugar production plummeted after nationalisation, thereby making the shortage (or constraint) of foreign exchange more severe. In addition, nationalisation distracted our leaders from pursuing policies that could have led to alternative products and processes; thus the country failed to sustain economic growth that could have absorbed sugar workers away from the arduous tasks on the estate. As I alluded to above, Barbados did exactly that by moving early from sugar to tourism, light manufacturing and financial services. Therefore, the next time you are placed on that special bench at the Grantley Adams International Airport, please spare a thought for the fathers of the Guyanese nation and of course the leaders they have bequeathed to us.
The next column will critically examine the Skeldon investment and address the question whether it could ever lead to higher living standards for poor sugar workers.
Please send comments and feedbacks to:
tarronkhemraj@gmail.com
