Economists don’t typically make the supposed connection between saving and balance of payments

Dear Editor,
Rawle Lucas’s commendable effort to unravel the mysteries of the balance of payments (BOP) is useful coming in the wake of recent concerns about pressure on the exchange rate (see SN June 25). The balance of payments is critical in a small, open economy like Guyana and so understanding it is a fundamental aspect of economic management. Among other things, Mr Lucas has outlined the composition of the BOP current account, indicating the trade balance (of trade in goods and services), factor service flows (repatriation of profits and dividends of foreign firms, labour income, interest payments, etc), and remittances, and he has evidently tried to present the concepts in layman’s terms as part of his mission to strengthen public awareness.

A major focus of Mr Lucas’s article is to relate the BOP current account balance (CAB) to saving and investment in the country. This is highly unorthodox giving rise to possible misunderstanding of the impact of BOP. I hope that my comments will be seen as constructive criticism aimed at assisting in the public discourse rather than an attempt to discredit Mr Lucas’s sterling contributions.

Mr Lucas stresses the role of the current account balance (CAB) as a source of national saving, pointing out that the former provides “a sense of how much Guyana is saving each year”. There is the implication that a negative balance (a deficit) would be associated with negative saving. In general, economists don’t typically make this supposed connection between saving and the balance of payments. Rather, saving is derived essentially as the difference between disposable income (conceptually the take-home income at the national level), and consumption. Economists relate the CAB to the saving-investment balance, not saving, per se. Consequently, while the current account balances were negative from 2011-2015 as Lucas shows, national savings were positive, averaging 14 per cent of GDP annually in 2010-2016 and reaching as high as 27 per cent in 2016.

There is also the implication from Mr Lucas’s article that saving is a binding constraint on investment. He says, for example, that “higher levels of savings mean higher levels of domestic investment”. This constraint would only apply in a closed economy (which is a rarity in the real world). In a country like Guyana, the availability of foreign investment and other capital flows allows investment to grow independent of saving once the conditions are right.

Mr Lucas also comments on the fact that intermediate goods and capital goods together make up 75 per cent of total imports (the rest being consumer goods), observing that this high proportion “shows that the country is serious about working and investing.” In fact, this high proportion of ‘productive imports’ is typical of most countries, with oil imports making up a big chunk of this. It’s therefore a stretch to draw major conclusions about the productivity and growth of the economy on this basis.

Yours faithfully,
Desmond Thomas