Elected Oligarchy and Economic Underdevelopment – Part 4

It was noted recently by Prem Misir, the energetic government letter writer, that the United States could also be characterized as an elected oligarchy and therefore Guyana is in good company. Without much analytical and critical insight, Misir cited a few American professors to buttress his letter. Indeed, this is a point that has been made over the years by several analysts and academics in the US. Economist Simon Johnson and his co-author James Kwak made the same argument in their popular book, 13 Bankers, which was published last year. These authors argue that a financial oligarchy, Wall Street, wields significant powers over American policy. There is a substantial element of truth in the Johnson-Kwak book.

However, a few days ago (on July 15) US lawmakers voted for the most far-reaching reforms since the Great Depression to regulate and limit the powers of Wall Street. The same thing was done by passing Anti-Trust Laws in 1890 and 1914 to limit the powers of the business trusts (monopolies) and by extension the powers of individuals like J. P. Morgan and John D. Rockefeller. J. P. Morgan, for instance, was so powerful that he had to step in to bail out many banks after the 1907 financial crash and therefore he exercised great influence over American policy at that time. But the Federal Reserve Act of 1913 would establish the American central bank so as to prevent an individual from exercising that kind power and undertaking a role which is the purview of the government.

The point is, American democracy is versatile and it delivers progress, offers checks and balances, and it frees up the individual spirit to achieve.

On the other hand, Guyanese still await the passage of the Freedom of Information Act. Now let us revisit some of the essential arguments – regarding the nature of the Guyanese oligarchy – made in the past three Development Watch columns. Firstly, it was argued that the Guyanese oligarchy is the product of the PPP’s Democratic Centralism, which filters leaders to select like-minded individuals and then offers them to the electorate.

The PPP selects the Presidential candidate (in the US the candidate must be elected in the primaries). Moreover, Democratic Centralism allows a few individuals to collude in voting to keep out dissenting members from meaningful decision making in the PPP. Secondly, the leaders then utilize the mildly tinkered 1980 Burnham Constitution to choose like-minded and subservient Parliamentarians. Thirdly, the few leaders select and pick the business class of family and friends. Fourthly, the handful of leaders uses control over the army/police to consolidate power in the hands of a few Indo-Guyanese. Therefore, Guyanese post-1992 democracy is hijacked by about eight individuals in the PPP. The masses, on the other hand, continue to grind it out in penury, floods, garbage and an un-aesthetic environment.
The transmission channel
Fifthly, and critically, the Guyanese oligarchy retards the aggregate productivity of the nation – hence the transmission channel through which the PPP’s oligarchic control breeds economic backwardness. It drains the creative and innovative spirit of people as friends and family are selected for state concessions; and as it pursues sub-optimal strategies like the environmental financing side of the LCDS and the Skeldon sugar factory. Furthermore, the oligarchy worsens the existing binding constraints (these constraints were explained in the previous columns).

Specific examples

The previous column noted that the rise in the underground economy could have coincided with the decline in productivity as measured by total factor productivity (TFP). As a reminder TFP measures how efficiently a country is utilizing its scarce resources. I must emphasize again that we can have positive GDP growth but negative TFP growth. Studies have indicated that this did occur in the case of Guyana. I need to now present some examples which retard the society’s productivity in any period. In other words, the country is not doing as well as it could because of the control of the oligarchy.

The first would be the current organization and political control of the public service. Given the limited human resources, the public service is not deployed to undertake the most important tasks. There is also no mechanism to ensure meritocratic entry into the government service. Many of those who enter in senior decision making positions are not granted tenure (or tenure-earning positions) but short-term contracts that would make them bend to the wishes of politicians. There is also no technocratic public service arm which focuses on implementing industrial policies. Office of the President seems to know everything and does everything. An efficient and meritocratic public service is as important as building money and capital markets, setting up a mechanism of market-based monetary policy, getting the exchange rate regime right, and pursuing free trade (free trade can actually be harmful to poor economies).

Unfortunately, no IMF or World Bank policy package currently recognizes (or promotes) this and the oligarchic PPP government does not even care as it is busy constricting the public service and the main state-owned company (Guysuco) with its political tentacles. The development of market mechanisms would be made difficult without a developmental state. Moreover, a developmental state is best positioned to pursue industrial policies, and regulate and monitor market systems.

Secondly, the selection of the business class and the control of the economic space represent a serious immediate and long-term threat to the development of the country. This new business class was named by the President Jagdeo as the Newly Emerging Private Sector (NEPS). We must be pragmatic enough, however, to understand that in a democracy some political friends will tend to obtain favourable treatment.  This occurs in even the United States today via the campaign finance and the lobbying system. But one would be hard-pressed to find opposition business interests being stifled in the US.

The strategy of promoting the NEPS over the traditional business class means that the economic growth of the nation will be slow and young people will find it difficult to obtain good paying jobs. The oligarchs can pursue this strategy because they are already rich; the working class can wait 35 years to double their average income given the current tepid economic growth rates (and of course there is much controversy over the validity of the GDP growth numbers). At current 2% growth it means the poor will need to wait for 35 years to double their income.

The strategy of control is clear for most observers to decipher. The country has to wait until a friend or family emerges for major investments to take place. And even when a few friends emerge it is not clear they will pursue the best investment given the current state and needs of the economy. President Jagdeo got many small business owners to set up hotels for Cricket World Cup. Today there is excess capacity in the hotel industry and yet they will now establish a Marriot with a public-private partnership, which one day could very well be a study of an oligarchic government crowding out the private sector.

I like the idea of public-private partnerships as they would have to be part of a transparent industrial policy framework. But why not establish a pasteurization plant and a bottling plant so farmers can easily sell milk that can even make cheese, yogurt, butter and so on. Why not a public-private partnership in ethanol along with a national E10 (or E15) mandate? The latter will help to preserve the Demerara and West Berbice sugar estates and expand the manufacturing sector. Why not vigorously deploy the strategy in agro-processing in general?

As it relates to the control of the economic space, there is also another clear pattern emerging with recent announcements. It appears that Western investors are being kept out in place of investors from undemocratic countries. Places like India, China, and the Middle East are busy absorbing Western foreign investments and technologies.

The rich Guyanese oligarchs, many still in Cold War mode of thinking, can afford to shun Western governments and by extension their investors (example the PPP turned down British and American help for police reform; nevertheless the government willingly accepts aid for other things but not for security reforms).

Also, if Guyana will have an effective Diaspora policy – which is critical for easing the human capital bottleneck – it will need to form better relationships with Western governments as most Guyanese who migrated chose the West.

In the next essay, I will close off this series of columns by outlining several proposals to move away from an oligarchic government to a meaningful democracy.

Please send comments and criticisms to: tarronkhemraj@gmail.com