Transcript Growth Diagnostics in Guyana

Growth Diagnostics in Guyana
Edna Armendariz, Marlon Bristol
Paloma Baena, Anneke Jessen
Matthew Shearer, Christian Schneider
Competitiveness and Growth in Latin America and the Caribbean
September 20-21, 2007
Outline
 Why the need for Growth diagnostics in Guyana?
 Explanations from the literature…possible hypotheses
 Key binding constraints to economic growth, based on the HRV
methodology
Main caveats – data limitations and the underestimation of GDP of about
30%.
Why the need for Growth Diagnostics
in Guyana?
Volatility of GDP Growth
Table 1. Volatility of Real GDP, 1970-2005
(Annual percent change)
Number of Years with
Growth less than:
Average
Average
Real GDP Standard Coefficient minus 1
less 3
Growth Deviation of Variation percent percent
Source: Author’s calculations based on World Development Indicators and Bureau of Statistics.
-15
Source: World Bank, 2005
Period
2003
-10
2000
-5
1997
p e rc e n ta g e
0
1994
0
3
3
5
2
4
2
1
2
1991
0
0
2
0
1
2
2
1
0
1987
0.5
0.3
0.8
0.8
0.7
0.5
0.8
0.7
0.3
1984
1.4
2.3
2.6
3.2
2.0
2.5
1.9
1.8
1.9
1981
3.0
7.8
3.3
3.8
3.0
4.9
2.3
2.7
5.5
1978
Industrial Countries
East Asia & Pacific
Latin America & Caribbean
Middle East & North Africa
Sub-Saharan Africa
South Asia
Caribbean-8
Heavily indebted poor countries (HIPC)
Lower middle income
5
1975
8
1972
13
1969
4.7
1990 Open Economy
10
1966
4.9
1970 Closed Economy
1963
1.0
15
1960
Guyana
Guyana: R eal GD P Growth R ate
1960-2005
And …. The recent stagnation
Figu re 7
Gu yan a an d S e le cte d Grou p of C ou n trie s :
R e al GD P Growth , 1991-2005
(% )
8
Gu y an a
7
6
Lo w-lo wer mid d le in co me
co u n tries (LA C)
Small States
5
4
A CP Su g ar Pro d u cers
3
2
Co u n tries with th e h ig h es t
emig ratio n rates
1
0
1991-1997
1998-2005
Explanations from the
literature….possible hypotheses

Staritz, et. al. (2006) argue that the collapse of private investment partially explains the
stagnation, which they believe was the engine of growth 1991-97. Other factors also matter
(adverse TOT, institutions) .

Lack of competitiveness as it relates to production costs (energy cost and labor market
rigidities) has also been blamed for poor growth performance in Guyana (Bynoe, 2002).

Khemraj (2002) argues mainly on issue of slow private sector investment, and high
transaction and nominal costs which are associated with uncertainties inherent in the
country.

Thomas and Bynoe (2004) cite a poor borrowing environment, low demand for available
bank credit, or risk aversion.

Qualitative assessments have attributed the peaks and troughs in growth to historical
events and institutions (DaCosta, 2007; WEF, 2006).
The World Bank (2004, 2006) highlighted infrastructure, institutions and bureaucracy.


While they are concerns about skills depletion – high brain drain rates by Docquier and
Marfouq, 2005; and Carrington and Detragiache, 1998 and 1999.

Other consideration mainly, high informality est. by Faal (2003) 47% of the official
economy for the 1990’s
Is it low returns to economic activity?
Social Returns………
There are some problems with Geography but it is not poor…..Why?
 The coastal region is 10% of total land area, is 2.4 meters below sea level and is




host to 90 percent of the population. Consequently, prone to Flash Floods affect
crops, due to poor drainage and irrigation…..
Long un-navigated borders with Brazil, Venezuela and Suriname that facilitate
smuggling and other illicit activities, which support a thriving parallel economy
Rich in natural resources, but costly to extract….
Proximity to main trading partners 1,622 miles USA, much closer to CSME, a bit
longer to EU main destination of major export-sugar…
However,…………
….Infrastructure poses some problems, in particular,
it raises transport and other costs…
…..
Guyana has the poorest overall infrastructure in CARICOM-8 and only ranked above Bolivia in LAC 26, (WEF: 2006-07). Guyana ranked 109 of 125 scoring
2.2 of 7 where 1=undeveloped, 7=amongst the world’s best infrastructure. Other costs are mainly energy and shipping…
Human capital is not critically low , there is a
problem of mismatch…
•
Coverage is High (gross enrollment)
• Quality fluctuated at various levels(dropout and repetition rates mainly for primary and
secondary)
• Completion rates are high, particularly at primary level
• Brain Drain the highest in the world - Employment creation the lowest in CARICOM-8
• Private returns are low: 4% secondary graduates, below CARCICOM average of 5; 10% for
post secondary and university graduates, averages 18 and 16 percent respectively, World Bank
(2005). Wages are determined by collective bargaining and is very unionized.
• More than 60% of University Graduates from Social Sciences, in an agricultural and resourcebased economy - mismatch
Finance?
High cost and weak access, in the presence of high liquidity
→ low financial intermediation
Guyana: Credit andDeposits, 1991-2005
Small States: Interest Rate Spreads, 1998-2005
(average)
(inpercent ofGDP)
Solomon Islands
100
The Gambia
90
Suriname
80
Mauritius
70
Guyana
Bhutan
60
St. Lucia
50
Belize
40
Antigua and Barbuda
Swaziland
30
Fiji
20
St. Kitts and Nevis
Average small states-16
Barbados
10
Samoa
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Malta
Credit toPrivate Sector
Deposits
Credit toDeposit
(%)
The Bahamas
0
2
4
6
8
10
12
14
16
International finance….not binding, despite no
credit rating(HIPC status) FDI still flows inward…
Guyana: ForeignDirect Investment, 1991-2005
(in percent of GDP)
20
Selected Group of Countries: Foreign Direct Investment
18
16
(% GDP)
16
14
12
12
10
8
8
6
4
4
2
Guyana
Countries highest emigration rates
Small States
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1991
0
0
Lower-Income LAC
ACP Sugar producers
Appropriability?
Macro Risks: Fiscal deficits are a source of concern
F ig u re 1
G u yan a: N o n fin an c ial P u b lic S e c to r D e fic it , 1 9 9 1 -2 0 0 6
(% GD P )
(a fte r g ra n ts )
Guyana: Total Public Debt to GDP Ratio, 1980-2006
18
700%
S u g a r re s tru c tu rin g
15
4.3%
600%
6.2%
12
PC II:
Toronto
PC I:
Classic
Default on
External Debt
PC III:
HIPC D.P.
London
PCIV: Naples
500%
0.6%
9
EHIPC C.P.
PCVI: Ad-hoc
MDRI
HIPC C.P.
PCV: Lyon
400%
6
0.4%
300%
3
200%
0
O v e ra ll fis c a l d e fic it
P u b lic En te rp ris e D e fic it
In te re s t P a y m e n ts
Total Debt to GDP
Domestic Debt to GDP
External Debt to GDP
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
0%
1980
2 0 0 6
2 0 0 5
2 0 0 4
2 0 0 3
2 0 0 2
2 0 0 1
2 0 0 0
1 9 9 9
1 9 9 8
1 9 9 7
1 9 9 6
1 9 9 5
1 9 9 4
1 9 9 3
1 9 9 2
1 9 9 1
-3
100%
Self-discovery.....Diversification on agriculture
and resource-based products
Figure 1. Com position of M erchandise Exports
(Share in total export value, 2003-2005)
O thers
18%
S ugar
26%
W ood 4%
F ish 4%
B auxite
5%
S hrim p
7%
R ice
8%
D iam onds
10%
G old
18%
Source INT/ITD calculations based on UNSD and COM TRADE data, SITC Rev. 2, 3 -digit product
group level.
Export concentration is quite low compared
to that of many other small states
Figure 2. Export Concentration Index 2003
(Small States)
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
o
s
e
n.
ti
n ga
e a d a le s
es and ica
us
da rd
oa me atu ev i
na
ze ag r e
o
i
le
v
a
iu n rb u
l
ou y a riti
l
a
b
e
i
n
b
n
u
m
i
G
n
i
e
a
b
n
d
o
o
N
V
l
u au
B T
an
re
ji
ch
az om
G Ba
Sa u ri
G
T
G
V s&
G ap e M a w
D
t&
ey
q. &
S
&
M
n
S
D
t
S
E t.
e
C
it
ad inc
n
K
d
.
i
A
V
St
rin t.
T
S
Fi
Source: UNCTAD Handbook of Statistics (20005); Herfindahl-Hirschmann index calculated at SITC 3-digit
product level.
ji
B
a
ad
rb
os
“Underachievers” constitute a much larger share of total
export value (68%) than the “champions” (22%)
Figure 4. Competitiveness of Top Exports (1997-2004)
UNDERACHIEVERS
CHAMPIONS
12%
Avg. Ann. Growth in W orld Im ports
Bauxite
8%
Diamonds
Undergarments
Veneers
4%
Fresh Fish
Alcoholic Beverages
Crustaceans
Gold
Wood
0%
-40%
0%
Rice
40%
Sugar
-4%
DECLINING SECTORS
ACHIEVERS IN ADVERSITY
Avg. Ann. Increase in GY World Market Share
80%
Peripheral location in the product space
Guyana 2000
1975
Consequently open forest is relatively low
Guyana’s Open Forest: Comparison with other LAC Countries
A few nearby products, and those that are nearby are
mostly of low strategic value...explains partly lack of
transformation
Guyana’s Open Forest: Proximity versus Strategic Value
Microeconomic risks – there are signs of poor
governance/institutions suggesting appropriability
might be a problem….
Table X. Governance Indicators
Indicators overtime
Governance Indicator
2006
1996
Voice and Accountability
Political Stability/No Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
0.85
-0.05
-0.23
0.28
-0.03
-0.32
0.49
-0.38
-0.52
-0.38
-0.8
-0.58
Range from -2.5 to + 2.5, where 0 is the world average.
Source: Kaufmann D., A. Kraay, and M. Mastruzzi (2006)
Regional/Income Level Comparison*
LOW-MID INCOME
GY
CAR
60.9
32.5
34.4
39.6
26.1
37.9
66.9
67.5
68.9
66.3
65.2
69.6
40
37.3
39.9
39.7
38.6
39.1
* Percentile ranks: percentage of countries
worldwide that rate below Guyana. Data 2005
A key symptom of appropriability – high taxation, Guyana
has the highest corporate tax rate in LAC (a wide variety of
exemptions and tax holidays-discretionary mostly)
Table X. Tax Rate and Revenue (Caribbean, 2003)
Country
Guyana
St. Vincent
Barbados
St. Kitts and Nevis
Suriname
Antigua & Barbuda
Haiti
Trinidad & Tobago
Jamaica
St. Lucia
Dominica
Grenada
Montserrat
Belize
Dominican Republic
Corporate Tax
Rates
Tax
Revenue/GDP
45
40
37.5
37
36
35
35
35
33.3
33.3
30
30
30
25
25
28.9
26.9
29.8
23.5
25.1
17.9
33.2*
23.1
26.8
21.7
24
27.9
24.2
18.3**
14.5
Tax rate is the top marginal rate except for Suriname, where
higher rates apply to bauxite companies and casinos
* 2001 **2002
Source: Dos Santos and Bain (2004)
Estimates of the underground Economy and Tax Evasion, 1970-2000
Year
1970-79
1980-89
1991-97
1998-00
Maximum potential tax collection
(Ave. % of GDP)
10.3
24.8
12.9
12.3
Underground
Economy (Ave. % of GDP)
39.7
76.0
45.6
38.3
Ebrima Fall, 2003, “Currency Demand, the Underground Economy and Tax Evasion: The Case of
Guyana”, p. 16.
…Existence of appropriability confirmed by
Poor investment climate

GY ranks 112 out of 125 countries in recognition and protection of property rights
(GCI) → Property rights are recognized and protected under Guyanese law → problems
in implementation of the legal framework

GY ranks 119 out of 125 countries in Contracts and Law sub index (GCI) →
enforcement of commercial contracts takes an average of 661 days, above the
region´s average (Doing Business)

Crime levels have increased by 70% since 1996 → GY ranks 125 out of 125 countries in
reliability of the police force → GY´s ranks in the highest position versus the world in
cost imposed by crime

GY ranks as the most difficult country to do business in LAC after Haiti and Venezuela
: 136 out of 175 countries for the ease of doing business
Political instability (Polity IV), found to be weakly correlated
with real growth, but Government decisions or the
perception thereof matter
 Centralization of decision making is high (GY´s ranking
117/125 countries in centralization of policy making,
WEF)
 Formal oversight institutions lack autonomy in their
functioning (informal oversight institutions lack strength,
Freedom of Press scores 3.9 out of 7 , below regional
average , WEF)
 Polarized political environment weakens social cohesion
→ country risks and policy sustainability → discourage
investment decisions
What has been the most binding constraint to
economic growth in Guyana, despite all the potential
candidates?
The diagnostic revealed 2 key problems in Guyana:
Poor appropriability of returns on private investment, the primary culprit
being micro risks, mainly weak institutions.
Low self-discovery due to low sophistication of Guyana´s export basket
and peripheral location in the product space. This is exacerbated by
micro risks and low financial intermediation
Infrastructure problems, and fiscal risks (and external vulnerability as a
small state) are future potential candidates
Policy Recommendations
 Strengthening micro-level institutions: contract enforcement, taxation
reduction, regulatory burdens, red tape, land tenure allocation
 Strengthening broad institutions: oversight institutions, transparency, and
accountability, in the longer term.
 A more proactive policy to stimulate productive transformation,
technological dynamism and the emergence of new areas of comparative
advantage - development of new products
 Better access to finance will require innovative lending instruments, while
complying with risk management systems