Simplifying technical issues in a short article is a risk

Dear Editor,

It is always a risk to try and simplify technical issues in a short article and it is clear from Desmond Thomas’s letter (‘Economists don’t typically…’ Sunday Stabroek, July 2) that I was not sufficiently clear in what I attempted to do in my article entitled ‘The current account balance, savings and foreign investment in Guyana’ published on June 25, 2017 in Sunday Stabroek . I would therefore like to thank Mr Thomas for his observations and comments and for helping to improve understanding of the issue.

Mr Thomas drew attention to three points that he indicated led to incorrect conclusions about the central theme of my article in his letter. The first point referred to my use of the current account balance as evidence of savings. The second point was that savings were presented as a binding constraint on investment and the third was that the composition of Guyana’s imports gave an indication of its productivity.

When I was discussing savings, I was thinking of the sum of our investments and current account balance {S=I+(X-M)} and, perhaps, did not make that clear in the article.  Typically, one discusses the difference between savings and investment in the manner Mr Thomas pointed out.  However, my intention was not to discuss the savings/investment gap S-I=(X-M).  My intention was to show the importance of investment and exports to savings as presented in the equation above. As I wrote the article, I was thinking about the practical situation of businesses.  The connection between savings and disposable income is as much about savings and unconsumed goods. In the general scheme of things, savings also refer to produced but unsold goods and produced goods that are not sold in Guyana.

Consequently, the ‘I’ (investment) in the equation above consists of unspent money or, put another way, inventory. Savings in this context is reflected in raw material inventory, work-in-progress inventory, finished goods inventory or merchandise inventory in the case of the distributive trade.  Unsold goods or inventory is not a good thing unless it could be reallocated to X, which refers to exports, to change it from a stock item to a flow item. A reallocation of inventory to exports does not change the level of savings unless investment is increasing and imports are not. When I made my point about the savings and higher levels of investment and the link to the current account balance, I was thinking also about increases in inventory and the reallocation of those increases to the export of the inventory.  With imports assumed to be below exports, I arrived at the conclusion that as output (investments) and exports grew, savings would increase. Therefore, I did not have a closed economy in mind.

I made the point also that oil which would be exported to be refined would enable export revenues to rise faster than other exports and imports (no allowance for irrational human behaviour). With inventory (investments) increasing and exports (oil) increasing, I re-emphasized in the article that savings would increase.

With respect to Mr Thomas’s second point that I presented savings as a binding constraint on investment, I do believe that they are for domestic investment.  Remittances would have helped to ease that constraint.  I agree that domestic savings do not constrain foreign investment since that money is reallocated from sources independent of Guyana.

Mr Thomas’s third point linked the composition of Guyana’s imports to productivity. I was not speaking about the impact of imports on productivity.   I was attempting to reassure people that, despite a negative trade balance, they should not be too concerned since the bulk of the imports was being used for production purposes. As Mr Thomas noted, Guyana was not an exceptional case. I was not suggesting it was either.  Many people are criticizing the trade balance and believe that Guyana is importing and consuming too much of what it can produce.  It was in that context that I was attempting to reassure readers that the imports were not inappropriate. With 75 per cent of its value being used to produce other goods and services, it was helpful to the economy.  My greater interest was if most of the goods being produced with the imports were for export.

Once again, I would like to thank Mr Thomas for his comments and for enabling me to provide greater clarity to the article.

Yours faithfully,

Rawle Lucas