Productive capacity of economy can only be expanded significantly via non-white elephant investment

Dear Editor,

Noted Guyanese economist Professor Ganga Ramdas made an important observation in the Comments section to my last letter (SN, 23 August 2018).  As a mark of respect, I believe I owe him a response.

 Professor Ramdas takes issue with my attempt to gauge potential GDP in nominal terms; that is, without accounting for economy-wide price changes.  It’s a valid point but I did examine both variables, nominal and real.  I avoided the real GDP variable for two reasons.  First, it did not make a difference as to which variable is used, nominal or real, as this letter will explain.  Second, I did not want to complicate an already difficult letter given that the audience is the general public, something that another commenter notes.  As an economist who has had practical experience working with governments, I am acutely aware that attention must be focused on the real economy.  That is, having allowed for price changes, which can distort trends and produce wrong-headed conclusions.  Professor Ramdas writes in part: “If the real economy were measured, rather than a trend extracted from nominal GDP in the chart, that red line would have headed south! Does anyone believe that the Guyana economic potential is a mirror image of Guyana dollar valued GDP, when we have been shutting down sugar plants, stop planting in several areas, importing/outsourcing rice production, closed OMAI, stop producing Calcined Bauxite, barely able to supply electricity etc.?” 

Using real GDP, the output gap – that is, excess capacity – was a paltry 0.13 percent, which means that the economy was operating at full capacity during the fifty-seven years from 1960 to 2017 (output gap = difference between actual and potential GDP).  On the other hand, if nominal GDP is used, excess capacity was 6.8 percent. Hence, contrary to what Professor Ramdas asserts, the “red line” – potential GDP in the figure that accompanies my previous letter – headed north instead of south! 

I do agree that productive capacity has been reduced in certain areas, such a sugar and bauxite but it has also been expanding in other areas such as gold, rice, construction and services.  The productive capacity of the economy must be seen as a whole, across all areas of production.  A jaundiced lens will show a partial or coloured picture.

Even if one narrows the time period to 1995-2017, the difference in excess capacity is insignificant whether one uses nominal or real GDP.  In both cases, the economy operated during these twenty-three years with a spare capacity – what Prof. Thomas calls absorptive capacity – of less than half a percentage.   That is the real constraint to more robust performance of the economy and thus robust growth: absence of the capacity to produce goods and services.

Given the above, the conclusions reached in my previous letter are unimpeachable. They remain unchanged. That is, the performance of the Guyana economy during the last fifty-seven years did not conform to mainstream economic theory.  There is little excess or absorptive capacity.  This means that the productive capacity of the economy can only be expanded in a significant way via non-white elephant investment.  That can only be done if tribalism and self-aggrandizement are factored out of the economic equation and vision and commitment breathe new life into it.

Yours faithfully,

Ramesh Gampat

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