Part 3
By Tarron Khemraj
Introduction
The first two columns on this topic defined the nature of the post-1992 Guyanese oligarchy. We noted that an oligarchy is a small group of individuals who possess both economic and political powers. Some have tried to make the connection that the PNC was also an oligarchy. I disagree as the Indian elites who benefitted from the PNC never had political power. The PNC’s political leaders also seemed more concerned with political rather than economic domination. Indeed, Forbes Burnham shot himself in the feet by chasing out the IMF and World Bank and defaulting on the external debt. Had he kept aid cash flow going, as President Jagdeo is skilled at doing, he too could have maintained a façade of progress. This column will now outline how oligarchic control contributes to underdevelopment.
The transmission channel
I propose that there are two main channels through which the PPP oligarchy impedes the economic progress of Guyana. Firstly, this is done indirectly by making the existing binding constraints more punitive and constraining (see the last column for the binding constraints). It should be noted that the government did not create many of the binding constraints but worsens them. Secondly, it directly creates a constraint in itself. In both cases it affects the productivity of the entire nation. This productivity can be measured by something known as total factor productivity (TFP). TFP is also an aggregative measure of a country’s ability to organize itself efficiently so as to achieve the highest possible growth of GDP per capita in the shortest period of time. When this productivity is adversely affected the nation’s long-term prospects are hopeless and insecure.
A society has resources available to it. Examples of these resources are land, water, mineral deposits, forests, man-made things (buildings, infrastructure, machines, computers, etc), and most importantly human resources and entrepreneurs. TFP measures how successful the society is in utilizing the stock of resources in making material goods and services for the satisfaction of its citizens. When the growth of TFP is positive and high then the society is utilizing superior technologies, and superior private and public management systems. When growth of TFP is close to zero or negative the society has inferior technologies and management capabilities.
A country could achieve positive overall GDP growth per head and still have a low or negative aggregate productivity growth as measured by TFP growth. This is the case in several oil rich countries that have become complacent with oil revenues (something known as the resource curse). The leaders do not need to think long and hard about organization, fairness and the best use of limited resources as the oil funds come easily. On the other hand, the leaders of countries such as Singapore, Barbados and Mauritius with no oil deposits and limited natural resources could not afford to be complacent. They got their acts together and today they are significantly more developed than Guyana even though Guyana was at the same level of these three country examples in 1965 (relative to Barbados, Guyana was in better shape in 1965). Countries with positive per capita GDP growth but negative or near-zero TFP growth will not experience long-term development and there will eventually be a reversal of the little short-term progress that emanated from exploiting natural resources and oil.
A 2007 IMF Working Paper measured the growth of Guyana’s TFP from 1991 to 2004. For the entire period, 1991 to 2004, TFP grew at an average annual rate of 1.77%. For the period 1991 to 1997, TFP grew at a respectable average annual rate of 3.75%. For the period 1998 to 2004, TFP grew at a dismal rate of -0.22%. It should be noted that overall annual GDP growth for the three sub-periods was 3.9% (1991-2004), 7.1% (1991-1997), and 0.6% (1998-2008).
Specific examples
The discussion above might seem abstract. Therefore, I will now present several examples that could have accounted for the downturn in TFP growth. The examples and explanations are at two levels. I must first explain why the sudden downturn in period 1998-2004. Secondly, most of the examples would be relevant across time; meaning that Guyana is not achieving its full potential (this will be done in the next column).
One possibility explaining the downturn was the significant rise in the size of the underground economy relative to GDP. A recent paper by Professor Thomas and two co-authors suggests a steep rise in the percentage size of the hidden economy in 1994 after a period of relative ease. The underground economy, according to the academic paper, continued to climb steeply and reached a peak in 2000 (127% of official GDP). After 2000, although still large, the underground economy started to decline gradually in percentage terms. In a sense, 1994 to 2004 could be seen as the golden era of hidden economic activities in Guyana. One point to note is the steep rise in the underground economy would not have had a contemporaneous effect on productivity growth but a lagged one. In other words, it takes several years for the adverse effects to kick in.
Underground economic activities retard the productivity of the nation in several ways. Firstly, the drugs trade leads to corruption of public officials and law enforcement officials, crimes against citizens, and corruption of the legal system. It is well known that a legal system is an important institutional mechanism, which the economic literature emphasizes. In particular, the literature stresses the need for private property rights. In a sense, Guyana is doing this with the establishment of the commercial courts. But the major spanner in the spokes continues to be the dubious police reforms and failure to solve crimes.
Secondly, the drugs trade attracts talents away from the legitimate economy – thus a misuse of human resources. The illegal trade also creates a class of hustlers, cheaters, and the so-called street-smarts. But these are not the enterprises which stimulate the nation’s creativity and thus TFP. At the end of the day, the things that matter are management systems (private and public), research and development, technological innovations, sports and the arts.
Thirdly, money laundering makes it difficult for legitimate businesses to compete. Legitimate businesses have to borrow at high interest rates from the official banking sector. They must pay high profit taxes. Moreover, businesses under the purview of the law must worry about overall cost and the bottom line. Money launderers do not have to worry about profits as that is not the objective for starting the business; hence, money laundering crowds out the legal business class. Therefore, we have yet another example of a misallocation and misuse of the society’s resources.
Fourthly, in addition to the narco trade and money laundering, the underground economy also involves petty services, street activities and other production activities that do little for the nation’s aggregate productivity. There could be a societal improvement (what economists call a Pareto improvement) if these individuals had better industrial or service jobs.
Fifthly, underground economic activities – legal or illegal – are not taxed on income. Thus there is a loss of revenues, thus fewer funds for spending on important social services that could improve the health and attractiveness of the country. In fairness to the government, the VAT addresses some of this as consumption (rather than income) taxes. It does not matter whether the source of the income is legal or illegal, once the citizen consumes he/she pays the tax. The spike of windfall revenues from the VAT – in spite of many gracious exemptions offered by the government – could be an indication of the massive size of the parallel economy, which by definition is not recorded in actual GDP. We were told the VAT should have been revenue neutral. It was not and I think it reflects the consumption emanating from the hidden economy and not necessarily the desire of the government to impose a heavy tax on the masses. Of course, cash remittances also generate consumption and thus VAT revenues.
Conclusion
So far I have explained one possibility accounting for the downturn in TFP growth. As noted above, TFP measures how efficiently the country as a whole is at utilizing its scarce stock of resources. I argue herein that the hidden or underground economy is an explanatory factor engendering unproductive enterprises, illegality, corruption, mismanagement and therefore negative or low TFP growth. To the extent the government has failed to tackle these enterprises, it has implicitly contributed to the underdevelopment of the masses. As the Thomas et al (2009) study indicates, there was a notable spike in the percentage of the underground economy relative to official GDP under this government.
I still need to explain the more direct transmissions from oligarchic control to underdevelopment. In other words, I have to go beyond explaining the mere downturn which occurred over the 1998-2004 period. I also must outline several policies that could circumvent the debilitating effects of the oligarchy.
Please send comments to: tarronkhemraj@gmail.com
