The National Competitiveness Strategy – Part 1

Development Watch

By Tarron Khemraj
Introduction

The National Competitiveness Strategy (hereafter NCS or the strategy) paper was completed in 2006 (see website: http://www.summit.org.gy/ncs.html). The strategy aims at achieving a balanced role between government and the private sector in diversifying the Guyana economy and making the traditional sectors more competitive. However, the strategy does not define precisely what it means to be competitive. Nevertheless, given the policy proposals and suggestions contained in the strategy, the government appears to view competitiveness as the ability of Guyana’s companies to compete with foreign companies – especially competition presented by CSME.

Tarron Khemraj
Tarron Khemraj

It is important to note, however, that enhanced competitiveness could mean increasing output per worker, which is the same as rising productivity. The increase in output per worker could emanate from using better technologies in existing industries or from producing alternative products by an existing industry. As the strategy emphasised, it could also come from building new industries such as information technology and aquaculture.

I believe it is important to highlight the rising output per worker (productivity) as a judge for enhanced competitiveness. Thinking about the problem in this manner also produces a different but complementary set of policies to those outlined by the NCS paper.  In addition, rising productivity is at the heart of increasing the living standard of the nation in a sustained manner.  For example, as our firms and industries become more productive, they are able to pay higher wages, which in turn allow the government to collect more taxes while keeping the tax rate constant. Government can also use its higher tax revenues to spend on vocational and technical training, modernising the university, funding research and development, etc, to further enhance productivity. Thus rising productivity engenders sustained long-term growth and a virtuous cycle that cause the nation to upgrade itself continually.

In addition, the NCS paper announces that the policy proposals are intended to “deliver on the goals of the National Development Strategy” (page 6). In many ways, this strategy is superior to the LCDS, which is largely dependent on the rich countries transferring large sums of money to Guyana for keeping the standing forests. The NCS, therefore, should be the main strategy and the LCDS should be just a sub-strategy.  The LCDS is seen as the channel through which funds will be raised for Guyana’s development and for executing some of the policies outlined in the NCS. However, as was noted by my column on the LCDS (September 16, 2009), the funding are uncertain and if realised will flow in long after the Copenhagen summit. The question, therefore, of financing the NCS is still outstanding.
First principles

The NCS recognises the difference between comparative advantage and competitive advantage.  This is by no means a trivial theoretical point that is made by the strategy paper. It is quite important. Comparative advantage is static and is based on logics that could make a nation specialise in being poor.  For example, in spite of the massive investment into the new sugar factory in Skeldon, it will not really enhance the living standards of the people who live there. On the other hand, competitive advantage is dynamic and it recognises that a nation has to continually upgrade its production structure through active policies to overcome inherent market failures.

Nevertheless, the strategy seems a bit ambivalent on the nature of competition; I do not believe the strategy paper has worked out this matter clearly in spite of some sensible proposals. Let’s examine further the issue of competition. Are Guyana and the Caribbean going to have a monopolistic firm (single producer) or oligopolistic firms (several producers interacting strategically) dominating a given industry? Can Guyana and the region really break up its industries to encourage the entry of many participants?

Let’s take the banking industry as an illustration. The financial liberalisation thesis argues that the banking sector should be open to entry by foreign banking firms and local investors. Guyana did exactly that starting in the early 1990s.  However, not many new banking firms entered. Three totally new banks were created (Scotia Bank, Citizens Bank and Demerara Bank Ltd). These are examples of greenfield investments.  On the other hand, Republic Bank bought over NBIC and therefore it is an example of a brownfield investment.  The reason for this is because the size of the economy precludes entry of many more banks that could operate profitably (at the margin – this means the risk adjusted cost of setting up business plus lifetime cost of doing business is less than the lifetime or future revenues).  There are just not enough real sector economic productive activities that could justify the entry of other banking firms.

Therefore, the size of the economy acts as a natural barrier to entry and therefore necessitates that we will have an oligopolistic banking sector where just a few commercial banks will dominate. As the economy expands, the existing banks would benefit from economies of scale (benefits of being a large producer) or space will be created for new financial firms/banks to enter and be profitable on the margin. All future policy planning has to factor this in.  In a related matter, moreover, if the size of the economy determines financial growth, then it is the real sector which drives finance and not the other way around. Attempts around the world to break out from this binding constraint on financial development have produced financial speculation, the creation of financial products that do not necessarily engender growth, and massive debt accumulation – which eventually lead to a crashes and panics.

The same principle holds for building the manufacturing sector in a highly underdeveloped economy such as Guyana. As a matter of fact, the nascent manufacturing firm would need some amount of sustained monopoly profits so as to keep future investments going. It is one of the things that a well crafted industrial policy would have to ensure (the NCS paper seems to realise the importance of industrial policy, but is still unwilling to call it that; we will get more into this in the next column). However, the firm (s) that are given the monopoly rights must be subjected to performance criteria. This right must not be taken for granted as though it will exist indefinitely. Also, monopoly right does not mean a firm will get the ability to price gorge consumers. Monopoly right, furthermore, does not imply a new firm obtains the right to produce a poor quality product as eventually the firm has to demonstrate to the policy makers that it can win market shares in Caricom and other places. This is where government industrial policy and regulation come in to play. The point is a competitiveness strategy, if not properly crafted, could box in a country into perpetual underdevelopment – especially if this strategy is motivated at the ideological level by the European competitiveness strategies, which reflect European experiences.

It is for this reason I believe that issue of bringing in a new telephone company into a geographically fragmented country (in terms of the population spread) might not have been an optimal policy. Yes, the current GT&T was badly negotiated by the Hoyte administration. However, what could have been done differently to make sure this company spreads out the communication network faster and to the benefit of consumers and more importantly the potential Information and Communication Technology (ICT) sector? My conjecture is either GT&T does the job all by itself or the company is totally replaced by a new one. It is not necessarily a good idea to fragment an industry when it requires massive capital investments. Ultimately the unit cost (and thus unit price) is higher.

There should be a study into whether telecommunications in Guyana can be served by one firm (natural monopoly but a regulated one), two firms, or more than two firms. Page 65 of the NCS briefly outlines the government’s position on telecommunications.  There it is noted the government prefers liberalisation of this sector.
Conclusion

In many ways the NCS presents a better developmental vision than the LCDS for the future.  It recognises the very important role of creating competitive advantages of industries and firms. It is competitive advantage – rising productivity – which drives future economic growth and higher wages. In the next column, I will outline some of the policy proposals; I will also provide my take on some of the obvious omissions of this strategy.

Please send comments to: tarronkhemraj@gmail.com

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