Social Cohesion, distributional conflicts and the 50% salary increase

Previous Development Watch columns made the point that the heavy handed and non-transparent manner in which the PPP went about governance often magnified the perceptions of corruption. The reaction was cynicism from the public and non-cooperation from the pre-2015 opposition. Now that there is a new government “PPP businesses” like New GPC appear to be under pressure. The APNU-AFC government sees the multiple sourcing of drugs as much needed diversification to introduce competition. No doubt the government might be responding to the constant nastiness written over at Guyana Times, therefore conflating that newspaper with New GPC. The New GPC, however, is one of the dying breeds of manufacturing in Guyana. A more cohesive society would have seen the potential in public procurement for building and preserving domestic production capacity. Just like the PPP of old, the new government’s procurement system incentivizes imports rather than domestic production, employment, and research and development.

Moreover, the idea of introducing competition in a small domestic market with high average cost of production is problematic. While small businesses have much to offer, it would require a few big ones to achieve the scale of economies needed to penetrate the foreign markets. The large oligopoly corporations, rather than the purely competitive small businesses, tend to earn excess profit that is required for funding research and development and technological innovation. Large companies, therefore, are necessary for promoting economic growth, creating wealth and improving national competitiveness.

Indeed, large companies may not behave in the most socially desirable ways. They might be tempted to capture and control the regulatory authorities, pollute or in the case of Guyana fail to hire in a manner to reflect diversity in terms of ethnicity, gender and age. This is where a cohesive society with an intelligent and strong government can make a difference. Government controls the public purse. It may be tempted to use public funds to reward cronies without requiring any socially desirable actions. In other words, government may be tempted to create a system of patronage instead of being aloof enough to make sure the large companies act in the socially optimal manner. However, public procurement provides an opportunity for government to promote domestic production in return for socially responsible private actions.

This now brings us to the 50% salary increase for Ministers at a time when there is a significant slowdown in the economy. One would think in times of economic uncertainties leaders should demonstrate a willingness to sacrifice. Guyanese Ministers – given their present salary and benefits – are already some of the highest income earners in a low income country, perhaps even positioning them in the Guyanese 1% or 2%. No doubt unions and public servants would reason if government elites can reward themselves with such an increase, then they can pay all other workers same. In other words, a wage-price spiral sparked by distributional conflict can be set in motion. If such a spiral occurs one could expect a great strain on public finances and the fiscal deficit.

The private sector would also need to increase wages to compete with the public sector for talents. This implies higher wages driven by government actions instead of productivity, resulting in diminished national competitiveness in a ruthless global system. Guyana already does poorly on all the competitiveness indexes. Competitiveness is the mother’s milk for a better living standard for all instead of just the 2%. Diminished competitiveness implies a dankey cart economy forever!

Furthermore, the salary increase for ministers at this moment is not consistent with social cohesion. At this time everyone has to make sacrifices given the dire choices ahead relating to the sugar, rice and bauxite industries. Meanwhile, the government announces that it is likely to file civil action over land distribution in Pradoville 2 by the PPP elites. We are now finding out that one of the sources of wealth of the PPP elites is land flipping – buying cheap public lands and selling as high as G$100 million. This certainly explains part of the wealth accumulation given the existing pay structure. In typical tit-for-tat political strategy of non-cooperation, the PPP accuses the government of deflecting from the public’s uproar over the salary increase. The government further responded by reducing the price of gasoline from the state-owned Guyoil, exactly the kind of response one would expect if the government wants to assuage the public’s anger over the salary increase.

However, the reduction in the price Guyoil sells at is likely to further dent the fiscal deficit at a time of great national and global uncertainty. One might argue that the reduction in the price of oil would be beneficial to small businesses, allowing for a wider profit margin given that businesses seldom lower their price when cost declines. However, the higher surplus gained by Guyoil could be invested in blending technology to blend imported gasoline and GuySuCo-made ethanol under a national E10 policy. Such a policy would enhance production capacity and productivity, and set the stage for wage growth from productivity gains instead of wage gains from distributional conflicts.

Exactly how the deficit is financed will have implications for macroeconomic stability and long-term economic growth. We took up this question in a Development Watch column in 2013 titled: “Money, inflation and conflict.” Large salary increases as a system of political patronage also swell government’s current expenditure and subtracts from fundamental capital projects. It will be interesting to see how the new government finances all the salary increases (those offered, those promised and those extracted by labour unions), cuts the VAT, cuts other taxes, subsidizes crossing of the Berbice River, and yet have enough to finance crucial capital projects and a necessary upgrade of the Guyana Defence Force.