Introduction
In this and the coming weeks, I shall continue my assessment of the short-to-medium term prospects for the Guyana economy. The method I am using is to first consider the downside risks facing the economy, which are those that would impede its performance. Afterwards I shall report on the upside potential and expectations, which are those that could lay the basis for a sustained economic take-off.
Last week I expressed the opinion that, the performance of the economy over the 2000s as measured by the growth of real GDP in that period, was anaemic. It had in fact averaged less than 2 per cent per annum for the period, which in the context of the pressures to provide productive jobs and improved livelihoods for the vast majority of Guyanese has been inadequate. Further, in previous columns I had argued that Guyana’s potential output was nearer to the 7 per cent growth rate it experienced during the period 1991-1997. Measures of the determinants of growth for Guyana’s economy reveal the weak contributions derived from the intensive and productivity-enhancing utilization of the country’s productive factors.
The first downside risk considered in last week’s column was that posed by threats to global economic recovery and the possible slippage into a double-dip recession. I had indicated four of these threats, namely 1) political instability in the Middle East leading to a bleak business outlook; 2) rising oil prices and its many dangers for continued global economic expansion; 3) the negative economic fall-out from Japan’s earthquake, tsunami, and nuclear plants’ malfunction; and 4) the sovereign debt crises in several European Union countries.
This list is of course not exhaustive. Readers following the global economic news would be well aware of two serious threats facing the world’s largest economy, the United States of America. There are 1) the political threat of an imminent shut-down of the US government, and 2) the continued signs that the worst of the housing-mortgage crisis is not over.
External savings
If the performance of the global economy poses the first downside risk, then the second lies in the consideration that the largest share of investment in Guyana comes from flows of external savings into the country. Data from the IMF show that for the past five years 2007 to 2011 (including projections for 2011) external savings flows averaged 11 per cent of GDP; while for the same period national savings averaged 8 per cent of GDP. The share of investment in GDP for the same period was 19 per cent.
These external savings come from two principal sources. One is overseas development assistance (ODA) and the other is foreign direct investment (FDI). FDI is normally private-led, while ODA can be bilateral between the Government of Guyana and another, or multilateral, emanating from an international organisation. The historical evidence suggests that both these capital flows tend to be pro-cyclical. That is, they tend to rise when times are good and to decline when the economic situation goes into reverse.
Because capital flows to Guyana are linked to the global economic environment, the downside risk of global economic reversal and interruption to capital flows into the country are linked. This, however, does not mean other factors do not play crucial roles in determining capital flows to the country. Thus, if the economic, political or social environment in Guyana is seen as inhospitable to capital inflows, these would be affected, irrespective of the state of the global economy.
In my view the greatest risk is that donor governments and organisations will seek to cut back on their ODA, as part of a more general drive to cut spending at this stage of the global economic crisis and recovery. We can already see evidence of this in the efforts of donor countries and agencies to rationalize their ODA offerings in the Caribbean region and the departure of some aid offices from Guyana.
Remittances
In the 2000s remittance flows to Guyana have played very crucial roles in the performance of the economy. I have written about this in earlier SN columns and I shall not repeat much of the information here. But the data provided showed that during the 2000s the average annual rate of growth of remittance flows to Guyana had exceeded 40 per cent. While the data may be suspect to some readers, it does suggest to me that this rate of annual growth has no connection to growth rates and/or changes in wealth of the Guyanese diaspora living in the various economies where they work and live. No economy in North America, Europe or the Caribbean has performed so creditably as to make migrants afford remittance transfers at such an extraordinary rate. This holds true particularly when we consider the bleak economic situation in these countries post 9/11/2001 and after the global economic crisis erupted in Q3 of 2007.
For this reason, I had speculated in my earlier discussion of remittance flows that these flows seem to reflect more of transactions in the organized criminal segment of the parallel/ underground economy than legitimate earnings of legitimate workers in the Guyana diaspora living in North America, Europe and the Caribbean. If this is true, remittance flows would not be solely dependent upon economic growth and expansion in these economies. Transnational criminal networks and national interdiction policies will have important roles to play.
Next week I shall consider other downside risks, before turning to an assessment of the upside expectations/potential, which lie ahead.
