The press release on the Article IV consultation between Guyana and the IMF raised several important points, some of which dovetails nicely with the theme of unity and human development. Of course, the government press and the Guyana Times – engineered through oligarchic manoeuvring – emphasized the favourable macroeconomic figures referenced by the IMF. If we assume the GDP data are credible (I take it with a heavy dose of scepticism), the Guyana economy is projected to grow by 4.8% in 2013 after recording a similar rate for 2012. If true it represents a respectable rate of growth, although based on two volatile foundations.
First, the rice market in Venezuela is hanging on the string of a left-wing alliance between the Marxist-Leninist PPP (according to the party’s constitution) and President Maduro of Venezuela. Second, the price of gold has declined significantly in 2013 and we should expect it to fall further in 2014 as the Federal Reserve 
reverses the excessively easy monetary policy and starts to increase the benchmark target rate by end 2014. Other long-term interest rates are already increasing as investors take these expectations into account. Whether the price will fall below the marginal cost of producing an ounce of gold – somewhere around US$800 for the large mines – is yet to be seen. The small gold mines will have a higher marginal cost.
Government policy, guided by Minister Ramsammy, clearly accounted for the unprecedented success in rice production. However, it is yet to be seen how the barter arrangement will impact the exchange rate. Short-term exchange rate movements are determined by the flow of hard currencies through the market. As at October 2013, the Bank of Guyana stepped up interventions into the foreign exchange market, no doubt in an effort to curtail further depreciation of the Guyana dollar. I have to wait until the data are released before I can connect further the rice barter and the recent foreign exchange depreciation. Some of the data are usually released by now.
In spite of recent depreciation of the exchange rate, most of the macroeconomic indicators appear solid. The banks, except for rising loan concentration, are in good systemic shape. Non-performing loans are low, capital requirements adequate, and there is ample excess liquidity. It would be interesting to know the extent of the loan concentration exposure to the rice sector. An earlier rice sector boom due to the Other Countries and Territories (OCT) market in the late 1990s left the sector and the banks heavily exposed requiring the government to intervene when the OCT market was closed.
Notable praise went towards the VAT for helping to stabilize the fiscal deficit. The VAT is likely to be the most favourable long-term legacy of President Jagdeo and his administration. The consumption based tax does not affect investor or worker productivity. It is a crucially important tax in an economy like ours with such a large underground economy where the participants evade paying income taxes. Those operating underground must consume, often luxury and entertainment goods, thus they pay the VAT. Guyana’s VAT is certainly not the highest in the Caribbean. I never thought it was a good idea to cut the VAT. It makes more sense to give tax breaks on the income and profit tax side. Also the issue is more one of making sure that the goods and services consumed by the very poor are exempted from VAT.
The government news agencies and Guyana Times completely ignored the other side of the IMF press release. The release calls on the government to “promote more inclusive growth” and to safeguard “more even distribution of the benefits from economic growth”. Readers will recall that a major theme of these columns is the growing inequality in Guyana; inequality, furthermore, that is rooted in the pernicious political process. I am not here speaking about the situation in Parliament. I think the result of the November 28, 2011 election is a significant step in the right direction. I am not as pessimistic as some commentators about the election result. Without constitutional reform, a minority government is perhaps the best outcome.
One scholar, Eric Uslaner, proposed the idea of an inequality trap. It says that inequality results in diminished social trust, which in turn leads to corruption that engenders more inequality – hence the trap. This idea is certainly applicable to Guyana given its constitution that promotes ethnic distrust instead of cooperation. In-group trust takes over, while trust for the other ethnic group declines. Some people have close friends only from one ethnic or religious group. Ethnic divisions are hardened when out-group trust is low. I have tried to model the low out-group trust with a prisoners’ dilemma game that provides the prediction of entrenched ethnic voting, the virtual impossibility that a third party can win the election, inequality and below potential economic performance.
Much of the out-group distrust stems from the constitution and electoral process that promotes ethnic competition instead of cooperation. Once one ethnic group wins the election in-group networking takes over and entrenches inequality even more. Contracts, high level jobs, and small projects at the NDC level flow in a skewed manner to mainly supporters of the ruling party. No local government election in 20 years implies that the party faithful have infiltrated the local bodies. These local bodies may very well be functioning today as a redistribution mechanism for faithful party activists. I know of a few villages in which this is indeed the case.
Only last week the government signalled its position on constitutional reform, which is crucial for promoting out-group trust and cooperation. Denouncing the recent pro-democracy initiative funded by USAID, Dr Luncheon declares that he fears the project could influence constitutional reform. He is therefore providing an insight into the deep distrust the government has for a constitution that promotes equity and a better democracy. Of course, President Ramotar in the past said he sees nothing wrong with the present mildly tinkered, but pernicious, Burnham constitution.
The IMF’s press release also encourages the government to improve data collection and dissemination. The importance of data cannot be overemphasized. Only through data analysis can there be effective policy implementation. Only data can tell us who benefits and who loses from specific government policy. It appears like the population census data set is a national secret. Labour market statistics are not collected. We cannot say for certain what is the unemployment rate or the labour force participation rate. We do not have unbroken measures of inequality and poverty. Quarterly GDP is unavailable. These are just a few of the essential statistics that are needed for effective management of the economy.
Comments: tkhemraj@ncf.edu
