Deconstructing Dubious Growth

SEPTEMBER 25, 2011 | BY KNEWS | FILED UNDER AFC COLUMN, FEATURES / COLUMNISTS
By Dr. Tarron Khemraj

INTRODUCTION
The PPP government – or most likely the Jagdeo loyalists – has been making a lot of noise about the half-year GDP growth rate, which Minister Ashni Singh claims to be 5.9%. This number is in itself interesting because typically the Bureau of Statistics does not release quarterly GDP statistics. It has never been done. Suddenly before the election we are told about an estimated half-year GDP growth.
If this data is indeed available why only Minister Ashni Singh has access to them? The Bank of Guyana (BOG) ought to be using the quarterly data in its monetary policy forecasts and implementation. This kind of quarterly breakdown will indeed make it easier for the central bank to manage the nation’s money supply and meet its various monetary targets.Several Caribbean countries – Jamaica, Belize, Trinidad and Tobago and Barbados – do have quarterly GDP compilation. We call upon the government to give the Bureau of Statistics the necessary resource to do the same in Guyana.

THE JAGDEO RATE OF GROWTH
The average rate of real GDP growth under President Jagdeo has been 1.95% from 2000 to 2010. This is hardly spectacular. Even if we assume the one-time 5.9% rate of growth for the entire of 2011, the Jagdeo period realised an average rate of growth from 2000 to 2011 of 2.3%.
To put things into context, the Guyana economy grew at an average of 6.8% from 1992 to 1999. The PPP has a habit of telling Guyanese how well Guyana is doing in spite of the global crisis and problems. What it does not want to face up to is the fact that when the world economy achieved a boom from 2000 to 2007, Guyana grew at a meagre 1.45% in the pre-crisis period. Why has this been the case? This column explains some reasons for the mediocre growth performance under the Jagdeo Administration.

PRIVATE INVESTMENTS
A country must have investments if it is to continue growing. Growth, in turn, is critical because it leads to employment creation for citizens. If investments are zero then there will be no growth. We particularly value private investments given the private sector’s ability to generate growth. When analysing private investments we must take the private investment rate (PIR), which is calculated as the dollar amount of private investments divided by GDP. If we look at the PIR since 1992 it has declined continually. It continued to decline into 2010 as data released by the BOG show. Therefore, it is a mystery how growth has picked up given Guyana’s declining PIR.

Government investments have however increased while PIR is declining. Government investments have two main facets: (i) a non-tradable aspect such as construction of roads, schools, bridges, etc; and (ii) a tradable component such as investments by GuySuCo and GuyOil – notable state-owned enterprises.

The problem is government investments have been very inefficient to date. The Skeldon sugar factory is a disaster, while infrastructure works continue to break up after a few months of being constructed. Only recently we learnt major design flaws were found in the Fip Motilall road. It is therefore a mystery how Guyana can achieve 5.9% growth with grossly inefficient public investments and falling domestic private investments. If we are to believe this growth rate then it cannot result from productivity gains but most likely temporary good luck in sectors such as gold. This kind of “good luck” growth is never sustainable and has nothing to do with shrewd policies in the Jagdeo years.

JOBS
While the Minister appears keen to report half-year GDP we still do not have regular statistics on the Guyana labour market. The unemployment rate continues to be a mystery and it is a number typically subjected to political abuse. We also need to know what the rate of labour force participation is, which is calculated by dividing the labour force by the population.
Regular labour statistics – as quarterly GDP – are critical for the proper management of the economy. In the United States, for instance, they even know the ethnic and gender profile of unemployment. The AFC will be a government of transparency and every effort will be put in place to see these data get collected and reported regularly. We are serious about managing the economy in as scientific a manner as possible. Therefore, we need regular quality statistics.

UNDERGROUND ECONOMY AND REMITTANCES
These two have served as an important source of consumption. Guyana receives approximately 40% of GDP in remittances each year. This is one of the highest percentages in the world. Remittance inflows are stable and altruistic. Even when the North American economies enter into recession, Guyanese abroad still remit funds home. Remittances have served as an important pressure valve and have propped up family consumption for years.

The inflows have also created a false sense of success among government Ministers. From an economic growth perspective, remittances could contribute to a reduction of labour supply and willingness to work. Remittance is the dual of migration of Guyanese – itself a symptom of the failed policies of the PPP since 1992. The World Bank reported that 89% of skilled Guyanese migrate. It is difficult to achieve sustainable economic and productivity growth when a society is haemorrhaging skills at this rate.

The illegal underground economy has been particularly destructive in terms of security and has made it difficult for legitimate businesses to compete. Drug trafficking and money laundering lead to corruption of at all levels of the society. The WikiLeaks revelations are bringing these out clearly. However, we must note that these illegal activities do not contribute favourably to long-term GDP growth and prosperity. Drug dealing increases the cost of doing business among legitimate business investors.

One consistent pattern of the Jagdeo economic framework is to allow the illegal underground economy to flourish. The WikiLeaks have revealed Roger Khan, the notorious and convicted drug lord, leaving the Office of the President. Another WikiLeaks cable reported that Khan built housing schemes without bank financing. This is not the way to run an economy. This is not only morally wrong, but also makes it difficult for legitimate businesses to compete. It corrupts the public officials who must lay the foundation for private investments. Therefore, the narco-economy crowds out the official economy. Hence, we question the 5.9% GDP half-year growth and its sustainability.