The economic discontents of the masses
News coming out of Guyana over the past two and a half years point out that money is not being circulated, the expression often used by the man and woman on the street to describe their economic feelings. People are not buying like before, they say. Vendors cannot sell all their fruits and vegetables. The stores are experiencing less traffic. The discontents of the masses are real and should not be trivialized.
This does not mean, however, that the economy is about to fall over the cliff. The economy grew at an annual rate of around 3% in 2016 in line with the higher growth rate since 2006 when the national accounts statistics were rebased. The export of gold in 2016 amounted to US$831 million. Just to put things into perspective, projections coming out from the Ministry of Finance expect Guyana to earn around US$500 million in oil revenues from 2020 to 2023 (this is quite optimistic in my opinion). Of course, this forecast could be realized if there are more discoveries and there is a significant increase in the price of oil in 2020 and beyond. Unfortunately weakness in demand and nimble fracking will keep oil price low for the foreseeable future, assuming no major geo-political event.
However, the success of the gold sector is not shared by the masses. Gold still does not employ as many people like the sugar industry or the civil service. The gains are shared mainly by miners, some of whom are largescale foreign miners, and a relatively small number of workers and support services. Gold extraction also does not have the kind of knowledge spillovers to other sectors like we know comes from manufacturing and certain high-end services. It also comes with negative environmental consequences. Furthermore, only a small percentage of the foreign currency earned by the large-scale miners re-enter the Guyanese economy or foreign counterpart bank accounts that can directly service Guyanese imports.
The success in the gold sector is outweighed by the decline in two historically important production sectors. The crisis in the sugar industry is well known and has long historical roots. An academic paper by Sir Eric Williams, published in 1945, anticipated the inevitable decline of the sugar. The decline was accelerated by the rancorous politics after nationalization of the mid-1970s and by the glaring economic policy failures of the Jagdeo-Ramotar administration.
There have been six Development Watch columns directly or indirectly focusing on the problems and possible solutions for the sugar industry. These can be found under the headings (i) “Historical policy choices and Guysuco’s present-day financial predicament,” (parts 1 and 2) (ii) “Saving Guysuco,” (iii) “Sugarcane and antidesma versus sugar,” (iv) “Three constraints,” and (v) “The viability of the sugar industry”. We will not repeat the points made in these columns, except for one point: the present government incorrectly sees the solutions solely at the industry level. The solutions have to come from a strategic vision at the level of central government (and macroeconomic planning) as well as the present focus on industry-level and firm-level operations.
The rice sector is on a downward trend. The industry recently experienced a short-lived revitalization by entering into a barter agreement with Venezuela, which we all know spuriously claims 5/8 of Guyana’s land. Just like the sugar industry, there is no short-term fix for bauxite since aluminum can be recycled indefinitely, thereby reducing the demand for this basic raw material.
Moving towards alumina production would require an investment of at least US$1.8 billion. Production of aluminum would require a capital investment of about US$4 billion, at least.
The only industry that has a relatively cheap medium-term fix – if a balance of ownership and financing can be structured – is GuySuCo once sugarcane can be processed into different agro-industrial applications.
The economic discomforts people are feeling have very long structural historical origins. Nevertheless, six recent Development Watch columns explained the recent economic pain has a downward cyclical component that that has been shocked into existence by the political struggles between the PNC and PPP since 2011 as well as the ambivalence of the APNU + AFC government towards investors. Remittances have also curiously declined in 2016, but the six columns alluded to have kept quiet on this matter. We have to wait until some other data emerges before saying something more concrete on remittances. For now we know the amount received in 2016 has declined.
Business cycle trends, however, would suggest after a decline must come a trough and eventual expansion. Therefore, we should see an improvement in “money circulation” over the next 18 months to two years, barring of course the coming recession in the American economy. The United States is due for a recession, possibly in about two to four years. That will further prolong the pain for the common people until the oil revenues start to flow. One reason why we can expect more money to circulate is because the government is likely to increase capital spending back to pre-2015 levels and higher.
The oil revenues will no doubt ease their short-term and medium-term discomforts. But their very long-term living standards will depend on getting their politics right as it relates to their pro-ethnic vote. It would also depend on appropriate sequencing of economic policies. Given 50 years of history and recent reports of government priorities, I anticipate a significant percentage of the oil revenues will be wasted, regardless of which side wins the 2020 general election. But waste can deliver short and medium term highs.
Most people will say the medium-term highs are evidence of development.