A horse and sparrow economy

There is probably no modern economic theory more thoroughly discredited than trickle-down economics. Economist John Kenneth Galbraith most vividly described it as the “horse and sparrow” theory: “If you feed the horse enough oats, some will pass through to the road for the sparrows.”

Alas numerous studies have found that the sparrows still go hungry: trickle-down economics does not result in higher growth or create jobs and the tax breaks end up being pocketed by the rich, thereby increasing inequality.

So it is remarkable to witness the current administration explicitly embracing what is a most conservative form of capitalism. Former President Donald Ramotar was being kind when he recently admitted it was “not extremely clear” what the party of the Jagans now stood for. “You don’t have to take my word for it, just look at any government statement there is quite a focus on the private sector”. The economy was, he concluded, essentially bourgeois..i.e. sushi-based.

Freed from the straitjacket of Marxist/ Leninism, the heavily transactional leaders of the New PPP/C have actually used the term “trickle down” since taking office while the emphasis of their budgets to date has been on granting tax breaks to their business constituents in the hope it kickstarts an economy that the recalcitrant coalition and the pandemic had so badly damaged until they came to the rescue. A prime beneficiary was the mining sector despite its history of unsafe business practices, tax evasion, gold and diamond smuggling and environmental degradation.

As it is the Guyanese economy did not exactly crater last year as was claimed. Bellwether company Banks DIH, with its geographically spread activity in consumer goods and banking, announced a 15.7% increase in profits in 2020. DDL saw its domestic turnover rise by 11% last year over 2019. Foreign Direct Investment of US$1.8B last year propelled Guyana to the top of the Caribbean in 2020 while the Guyana Stock Exchange has seen large increases in the valuations of its registered companies. So it was less than credible to read in December an executive of the Private Sector Commission claiming his members could not afford an increase in the private sector minimum wage that stands at the unlivable $44,280 for a 40-hour week. Nine months on there is a pregnant silence from Minister Hamilton who had originally suggested the increase, even as the government dodges negotiations with its own unions on public sector wages.

Two recent instances of government tax breaks exemplify why trickle-down economics doesn’t work here. Among the flaws of the previous coalition government was its tin ear for politics.

Having already shot themselves in their flat feet by awarding the Cabinet a generous salary increase they proceeded to put VAT on flights into the interior. It ended up being a gift to the opposition who made a big fuss about the extra costs to the (highly coveted) indigenous communities. And when it finally got into power, thanks in part to the hinterland vote, the PPP/C permanently removed the VAT on all domestic flights. However, surprise, surprise...in a recent visit to the Rupununi President Ali heard complaints that the 14% reduction was not reflected in lower airfares. Minister Walrond’s ministry’s Facebook page reported her as saying that “flights from Georgetown to Lethem are full and the price per ticket remains unchanged after 14% VAT was removed from the cost of the ticket under the PPP/C Government, she said no reduction in fares was granted to passengers.”

The second instance is the recent early Christmas present for importers who have been complaining about increased freight rates out of China and elsewhere. The idea was the importers would pay the duty based on previous shipping rates and pass the savings on to the consumer. Everyone knows this is highly unlikely to happen. Moreover GRA Commissioner Godfrey Statia was compelled to take a notice out in the newspaper in which he said some importers had actually been falsifying invoices (a criminal offence) to adjust the dates so they fall within the grace period. He finished by imploring them to kindly pass the savings on to the consumer. Good luck with that!

This incident also demonstrates the prevalence of white collar crime among the Guyanese business community. This is not based on mere anecdotes. A 2015 Global Financial Integrity study estimated that lost revenues from under-invoicing, smuggling and other tax evasion practices were calculated to be five times the education budget. Deductions from employee wages not passed on to the National Insurance Scheme (also a criminal offence) run into the hundreds of millions. Tax arrears, VAT arrears (or just plain siphoning off of collected VAT, another criminal offence), rate arrears….the list goes on.

The problem is that the private sector organisations have so captured the commanding heights of the political landscape that this government has been relegated to being their gopher. They have even volunteered to repaint State House. This coziness is not unique to Guyana but is a natural outcome of the convergence of Western democracy and capitalism, which cultivates a sordid symbiosis between politicians and corporations at the expense of the working class.

Giving tax breaks to businesses is simply not a reliable and efficient mechanism to keep consumer prices low and to raise living standards of the working poor. More effective are some of the initiatives already undertaken by the government including the one-time waiver of GPL bills for households consuming less than 75Kwh, the one-time payment to pensioners, and to some extent the Covid and schoolchildren cash grants. However as A New United Guyana (ANUG) pointed out last week the rules and parameters of such cash transfers “should be available for all to see, and should be implemented through the National Insurance Scheme (NIS) and other structural government institutions, with real accountability and less scope for corruption, favouritism and politicizing.”

Government needs to set up systems that reliably buttress the incomes of ordinary Guyanese on a reliable basis as part of a bottom up economy. Trickle-down economics will never eliminate poverty in Guyana. Feed the sparrows first. The horses can look after themselves.