Author: ChrisRam

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Curbing Corruption – The Corruption Perception Index

Introduction
Not unexpectedly, the Government has taken issue with the ranking accorded Guyana in the Transparency International (TI) Index for 2008 announced late last month. Of a total of 180 countries surveyed, Guyana was ranked 126 with a score of 2.6 out of 10, the worst score of all the countries in the English-speaking Caribbean. In describing as flawed the methodology through which the organisation comes up with its information, Cabinet spokesman Dr. Roger Luncheon gives the unmistakable impression that he may not have adequately informed himself of the extensive processes employed by TI in the compilation of the Index. Dr. Luncheon offered nothing more for his conclusion than that the report could be the product of the interviewees as “persons of an anti-government stance or who are not employed by government”.

One may regard this as suggesting that the persons employed by the Government including those who run the drivers’ licence process, the ubiquitous traffic cop or the incorrigible customs officer as the paragons of honesty, defenders of the moral soul and supporters of the government, a view that is unlikely to be shared by an overwhelming majority of Guyanese. In fact the very definition of corruption used in the TI and other international indices is an assessment of the persons “employed by the government”, including all its political appointees – high, low and in-between. Effectively dismissing the report and all those who share its conclusions in varying degrees, Dr. Luncheon complacently noted that Government continues its work in the same mode. That attitude of “we don’t care” perhaps explains why Guyana has actually slipped three places over the previous year and why, despite the country being the most heavily taxed in the region, there is not more to show for those taxes.

Definition
The corruption index measures the perceived levels of corruption among public officials and politicians based on different expert and business surveys by responsible and well-placed organisations. That system would not allow and would quickly eliminate the Jean-Louis type who according to a letter in Stabroek News of Thursday October 9, obtained his information from an “obvious lady of the night”. A columnist is not allowed to speculate on the basis for the conclusion about the lady.

The rest of this and next week’s column will explain how the Index is constructed and why and how the attitude of the Government reflected by the cavalier attitude of Dr. Luncheon not only contributes to the perception of corruption but quite likely to actual corruption in Guyana. Those persons who are perceived as engaged in corruption would no doubt find comfort in Dr. Luncheon’s comments as an endorsement of their conduct and an invitation to continue their unacceptable behaviour. We will look at the performance of the relevant political structure, the propriety, accountability and transparency of public spending, procurement, executive behaviour, the capacity and independence of the oversight mechanisms established to identify, punish and prevent corruption such as the Audit Office, the Public Accounts Committee as well as the contribution of civil society. Let us briefly look at the organisation itself.

The organisation
TI is a non-partisan, non-governmental organisation based in Germany. It has chapters in some 100 hundred countries but it does not undertake investigations on single cases of corruption or expose individual cases. It is interesting to note that efforts to set up a group in Guyana were unsuccessful and met with a resigned apathy that nothing will change – so much for the vaunted civil society. TI is financed from private sources and by international and regional institutions. It is best known for the CPI but it also publishes an annual Global Corruption Report, a Global Corruption Barometer and a Bribe Payers Index.

TI has objectives that should be shared by any Government committed to transparency and accountability including:

•  Improving access to and the disclosure of public information,

• Enabling citizens, legislatures, journalists and investigators to ‘follow the money’;

• Cleaning up public procurement and sanctioning violators,

• Maximising development resources and ensuring better public services;

• Strengthening institutions of oversight and engaging civil society,

• Enabling parliament, auditors and civil society to demand accountability;

• Harmonising donor activity to prevent abuse.

Despite its recent origin – about fifteen years – TI is credited for its contribution in putting the topic of corruption on the world’s agenda. International Institutions such as the World Bank and the International Monetary Fund now view corruption as one of the main obstacles for development, whereas prior to the 1990s this topic was not broadly discussed. TI also played a vital role in the introduction of the United Nations Convention against Corruption and the OECD Anti-Bribery Convention.

The Index
The Index is not compiled by some individual or group dropping into the country and speaking with a few disgruntled individuals and feeding that information into some computer that has a bias against Guyana.

Nor does the report measure the extent of corruption among the population as a whole. As the website of TI pointedly notes while the Index identifies Somalia at the very bottom of the ladder in 2008, that does not mean that Somalia is the ‘world’s most corrupt country’ or that Somalians are the ‘most corrupt people’. All it takes for a country to be very corrupt is a few powerful politicians and officials perpetrating corruption on the rest of the population. But that is small comfort to Guyanese who are mocked by their Caribbean brethren as the most corrupt people in the Commonwealth Caribbean.

All sources measure the overall extent of corruption (frequency and/or size of bribes) in the public and political sectors. Evaluation of the extent of corruption in countries is done by country experts, non resident and residents. In the CPI 2008, these were: Asian Development Bank, African Development Bank, Bertelsmann Transformation Index, Country Policy and Institutional Assessment (CPIA), Economist Intelligence Unit, Freedom House, Global Insight and Merchant International Group. Additional sources are resident business leaders evaluating their own country. The exact definition of “corruption” may vary but they all agree touch directly or indirectly on the misuse of public power for private benefit, for example bribing of public officials, kickbacks in public procurement, or embezzlement of public funds while some including the Asian Development Bank, the CPIA and the World Bank ask for ineffective audits, conflicts of interest, policies being biased towards narrow interests, policies distorted by corruption, and public resources diverted to private gain.

To be assessed and included in the Index required that a country have at least three surveys and assessments. Indonesia and India, now among the fastest growing countries in the world, had the largest number with ten while a small number had just three. It is tempting to state that Guyana’s low rating results from having only four surveys and assessments but that is also true of all the CARICOM countries which received much more favourable ratings, and of scores of other countries some of which received lower and others higher ratings. St. Lucia, St. Vincent and Dominica rated 21 and 28 and 33 respectively had three such surveys and assessments while Barbados rated 22 had four, Suriname and Trinidad and Tobago both rated 72 had four each and Jamaica rated 96 had six. While the CPI has been tested and found by both scholars and analysts as a reliable measurement tool of perceptions of corruption, that reliability differs across countries. The higher the number of sources and smaller the differences in the evaluations provided by the sources, the greater the reliability in terms of the countries’ score and ranking.

Perception and reality
It also means that if all the surveys and assessments were conducted using the same interviewees, errors can indeed creep in and no doubt some of that does take place. But that is also true of the other countries in the Caribbean some of which are infinitely smaller than Guyana. In any case perception does matter and as the cliché goes, perception becomes reality. For the Guyanese that perception is reinforced when it supports empirical evidence and reckless disregard by those in authority.

While investors would include a country assessment in making their investment decisions, that assessment includes a strategy for dealing with public officials who have a reputation – deserved or not – as being corrupt. Careful investors including those who are bound by home country laws on bribes paid to officials abroad are usually reluctant to become involved in countries perceived as corrupt. We lose those investments to start with. For the determined who consider Guyana as a destination anyway, a cost for corruption including bribes and kickbacks is factored in which can result in the investment also being ruled out.

At a practical level, corruption has a direct cost. Some commentators estimate that procurement costs may be higher than they should be in the range of 10% to 20% as bids are inflated to take account of bribes and contributions to political causes. Where the corruption takes place in the revenue collecting agencies the amount of tax lost is absolute and direct so that those who bring in suitcases of commercial material paying not to the state but to corrupt customs officers, the effect is direct and total. Then there is the metaphysical and what corruption does to the soul of the nation and the impact on the morality of the people but that is perhaps outside the scope of this Page.

To be continued

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Died on a Monday, exhumed on a Wednesday and born on a Friday: The rescue of a rescue package

It takes going back to the childhood nursery rhyme to capture the events of the past week in the United States of America. It was a week that began with Congress voting down a US$700B rescue package on the first working day of the week followed swiftly by the largest one day stock market decline (in points term but not in percentage terms), a high level, high voltage CPR carried out by the United States Senate on Wednesday and a volte-face by Congress two days later. And this is no hyperbole – no less than the US Chamber of Commerce, which represents business leaders, said: “With the American economy on life support, Congress took the necessary step to stop the bleeding.”

Even the lame-duck President George Bush took time off from his laid-back schedule, appealed to the American people who by an overwhelming majority think he is doing a bad job but who used all the powers of the “most powerful man on the planet” to sway the votes of Congress that a few days earlier had voted on the basis of instructions from back home.  Conventional wisdom after all was that it was mainly Wall Street’s greed that causes the problem in the first place so why should they be bailed out. By the end of the week however, no longer was the sky falling down considered the mere fantasy of Chicken Licken; everyone suddenly realized that things were worse than predicted and getting worse. In fact President Bush’s description that the situation was extraordinary was considered an understatement as credit dried up, banks balked at lending to each other and the job numbers nose-dived. Timing is everything and the coincidental release of employment data showing that some 159,000 jobs were lost in September, the worst in five years, was enough to make even a Congressman/woman ignore the advice of their constituents and to change their minds. For them just getting through 2008 without any further shocks would be not only a release but an achievement.

Poisoned chalice
The reversal of 58 no votes on Monday prodded by the Senate’s overwhelming support for a modified package was enough to see the bill’s passage in the Congress by a comfortable margin of 263-171.

Bush did not hesitate and within two hours he had put his signature on the largest financial rescue package since the Great Depression some eighty years ago. Welcomed by politicians including the two Presidential contenders vying for the most poisoned chalice in the world, the law failed to impress the US stock market which ended down 157 points after being up by more than 300 points before the voting began,. At 10325.38, the decline capped the worst week for the Dow Jones Industrial Average in more than six years, and left the market trading where it was nearly three years ago.

Notwithstanding these realities some commentators actually wondered aloud whether the passage marked the best of Washington – bipartisan agreement made in the interest of the country rather than in the interest of the voters back home. In fact the bill would probably not have passed without some genuine improvements such as a 150% increase in the guaranteed amount of bank deposit from $100,000 to $250,000 per depositor. The bill which grew from a three page document by Treasury Secretary Henry Paulson to some 450 pages also includes a tax provision, which will shield more than 20 million middle-income households from the alternative minimum tax.

But keeping with Washington’s tradition of pork-barrel politics, support was also bought at a heavy price. The sweeteners will amount to some US$150 B and include a 39 cent tax break for an Oregon company that makes children’s wooden arrows, tax breaks for commuting cyclists and provisions to help film and television production companies as well as renewable energy firms. Of course these will simply increase the huge deficit and debt of the US government. Bush seems willing to pass that problem to the next administration which will be headed by someone whose knowledge of economic matters is at best rudimentary. To meet one of Barack Obama’s conditions for support is the hugely popular limit on pay to senior banking executives.

Profit or loss
The rescue can result in several financial institutions making profits on the toxic loans they off-load under the bill if the price they receive is higher than the book value of the loan. In any case having liquidated those loans they can now switch the funds to other income earning loans and investments, resulting in higher profits. There is doubt in some circles as to how much the rescue will cost, if it will cost at all. Some see the government as actually making a profit on the loans − depending on the price at which the mortgages are taken over and the influence of politics on how strictly repayment conditions are enforced. There is also some doubt on whether the real outlay is the $700B we have been hearing about. The treasury has admitted to some arbitrariness in the figure of $700B while the respected Forbes magazine has quoted a treasury spokeswoman saying that it was not based on any particular data point: “We just wanted to choose a really large number.” Sounds like the equivalent of shock and awe made famous by Vice President Cheney and Donald Rumsfeld.

The bill takes a slightly more cautious approach. It allows Mr Paulson to spend $350B immediately buying up the mortgage-related assets from the stricken US financial sector and another $350B with the approval of Congress. But this is unlikely to take place immediately as the institutional arrangements have to be made, people recruited, pricing mechanisms agreed and transactions concluded. If the Treasury pays too much for the assets it can lose big-time while if it pays too little the whole objective of the scheme will be defeated.

Ideally this can take several weeks but time is surely a luxury which they cannot afford.

What next?
Despite the cold reception of the market to the bill, everyone agreed that to do nothing in the circumstances was simply not an option, that haemorrhaging would exacerbate and the collapse of the largest economy would no longer be a matter of if but when. While there are many who take satisfaction in the pain and humiliation of the US, it is still the world’s largest economy, largest buyer of goods and services, borrower, contributor to the United Nations and the country from which the developing world including Guyana receives its largest remittances. It is in no one’s interest for the US economy to collapse.

A weak US economy poses a real threat to the rest of the world. Therefore anything that prevents a catastrophe in the US will help the rest of the world, which after all is now interconnected not only by the internet, but by globalisation of which banking is perhaps the most integrated example. Not only will the package allow the US to fix some of the fundamental problems of the economy, but it should help to restore confidence to the markets and give a short-term fillip to stock markets around the world while allowing banks to carry out one of their most essential and routine functions – lending to each other.

But the problem is as much a structural one as it was a cash flow question. Bigger and more fundamental changes are necessary not only in the US but abroad as well. It is naive to think that the mortgage and financial crisis is a peculiarly American thing. The US’s soul brother, the UK has its own crisis. Having nationalised and guaranteed the deposits of the bank Northern Rock and the mortgage company Bradford and Bingley, the state now has a combined burden of public sector debt and exposure to the housing market resting on the shoulders of the UK taxpayer to almost £1 trillion.   In all of this small countries have little say, although we in Guyana cannot be unmindful of the real danger to us as a commodity producer in a world economy which according to the UN Conference on Trade and Development (UNCTAD) is teetering on the brink of recession. A world financial system that seems to falter fundamentally almost with the predictability of the holding of the Olympics must be fundamentally flawed. Not too long ago it was the Asian crisis and then there was the near collapse in Mexico to which President Clinton lent a helping hand. It is perhaps a measure of the size of the US economy or those of the rest of the world that there is no one willing or able to lend to America a helping hand.

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A look at the Trinidad and Tobago Budget 2008-09

Introduction
It was like a baptism of heat for new Minister of Finance Karen Nunez-Tesheira of the twin island state of Trinidad and Tobago as she presented the first budget of the re-elected Patrick Manning government and more personally, her first since her surprise appointment as the country’s first female Minister of Finance.

Surprising because despite being the holder of an Executive Masters of Business Administration from the Arthur Lok Jack School of Business of the University of the West Indies, Nunez-Tesheira is better known as an attorney at law who has spent more than twenty years at the Hugh Wooding Law School as Senior Tutor and writer of two recommended books on the syllabus of the school.

Indeed as she announced measures inherited from or incomplete from earlier years she was teased with perhaps the most damaging accusation against an academic – plagiarism. Uncomfortably for the Minister, one opposition front bencher closely followed her speech, shouting out the page and paragraph number if she repeated something which was in the previous speech.

For Budget 2008-09 it was all about billions of TT dollars which at today’s rate of exchange is approximately US$1 = TT $6.24. The budget was presented against rapid developments in the financial sector in the US − the bail-out of Bear Stearns a few months ago, more recently of mortgage giants Fannie Mae and Freddie Mac and insurance titan American International Group and public disquiet at a call by the Bush administration for US$700 billion to buy what is now being referred to as toxic mortgage loans. The Minister had earlier said in a statement issued by her ministry that it was difficult to anticipate exactly how the ongoing turbulence in financial markets would impact T&T but that the country’s central bank was examining the developments on the economy of T&T.

In that statement the Minister indicated that the Governor of the central bank had informed her that the bank has no holdings of paper issued by any of these institutions and that the very small proportion of the bank’s foreign assets managed by US institutions are “ring-fenced” and were not on the balance sheets of these institutions.

The PNM government has however announced a number of measures to amend various acts, including the Financial Institutions Act and the Securities Act to strengthen the regulatory framework.

Budget highlights
Total revenue is estimated at $49.465B of which $20B (40%) is expected to come from the energy sector with the remaining coming from other taxes on income and Value-Added Tax.

Total expenditure net of capital repayments and Sinking Funds is projected at $49.445B giving a surplus of $19.5M. As a percentage of total expenditure, education receives some 14.4%, infrastructure 13.3%, health 8.78%, security 9.6%, agriculture 4.5% and housing 3.3%.

External reserves have increased to US$8.5B or the equivalent of eleven months of import cover while the Heritage and Stabilisation Fund has some US$2.4B representing 10.2 % of GDP and higher than the level of the country’s external debt which stands at 6% of GDP.

The growth in the economy was 3.5 % which − despite the substantial increases in energy prices – saw the non-energy sector growing faster than the energy sector.

Inflation has taken a hit with commodity food prices and headline inflation rate having risen to 11.9% over the twelve months to August 2008 which makes the sustainable inflation rate of 6 % a formidable challenge.

Increases for senior citizens, those on public assistance and disability and retired public servants.

Other positive features by the Minister include free access to textbooks and other school material, free meals and transportation for students, 2% mortgage interest rate for low income earners, no VAT on all basic food items, one of the lowest rates of personal income tax “anywhere in the world” (25% after an allowance of US$10,000 per annum).

Developed country status
As would be expected, the Minister was upbeat about the medium-term prospects for the country that aims to achieve developed nation status by 2020. The Minister was not bashful in announcing that her government was putting in place special arrangements to bring benefits to the country beyond the tax take and added that they propose to increase the government’s ownership of assets in the natural gas market.

One of the measures attracting the most comment is the announcement of an increase in tax on premium unleaded gasoline which the Minister controversially predicts “will affect the high end of the market.” This measure will require those affected to pay $4 a litre for premium unleaded gasoline — an increase of $1 or 33 per cent, a move which some see not as a revenue matter but one to ease the traffic congestion that sees jams in the morning, at noon and nights and choking entry and exit points not only in Port of Spain but in the other major urban areas such as San Fernando and Chaguanas.

The government’s long-term plan is the reintroduction of a rail system involving two express train lines covering 105 kilometres while more immediately the government-owned Public Transport Service Corporation is expanding and modernizing its fleet of vehicles to 400 while the Coastal Water Taxi Service project will, beginning in phases from December 2008, connect by boat the principal cities cutting travel time from 2 hours to 45 minutes in the Port of Spain-San Fernando link.

Guyanese and Colombians
Aided by increased revenues from the export of oil, LNG and petrochemicals, unemployment has fallen to a historic low of less than 5 % and the construction industry is now using increasing numbers of nationals from non-Caricom countries including Colombia and as far away as Nigeria. Guyanese would therefore feel justifiably aggrieved that so many of our hugely productive nationals are turned away by immigration officials when they try to enter the country. I understand that part of the reason for the difference is that many of the Guyanese try to do it on their own while others are brought in mainly by international contractors.

Apart from its willingness to remain involved in the economy the government also plays a leading role in the housing sector though some critics see the not too thinly disguised hand of politics involved. Many of the schemes are located in marginal seats (T&T has the constituency system), and the distribution pattern can shift the electoral balance significantly in favour of the ruling party even as the opposition continues to founder for any strategic line of challenge on the Government’s Achilles Heel such the markedly arrogant and autocratic style of the Prime Minister, corruption, crime, weak governance and failure to deal with inflation.

Crime and inflation
In fact with Trinidad and Tobago challenging its sister countries for the title of crime capital of the Caribbean, it remains a mystery why more attention was not spent on measures to address the out of control crime situation in the country. Deputy leader of the main opposition party Kamla Persad-Bissessar’s comment that “the programmes the government has put in place will continue to overheat the economy” was shared by some of the TV commentators in the hours after the presentation of the budget. Not many people would agree with her that the country was heading for a meltdown.

While the Minister announced that the government was trying to deal with increased food prices by treating agriculture as a priority sector and therefore dealing with high food prices from the supply side, Persad-Bissessar lamented that the low allocation to agriculture hardly reflected this priority status.

As a part-time visitor to the country, my observation is that T&T’s economic challenge is how to tame the inflation tiger with the depreciation of the TT dollar in line with the US dollar against non-US dollar currencies adding cost pressures to inflation fueled by sharply escalating food prices. Bank governor Ewart Williams has advised that the only way to reverse food price inflation on a sustainable basis is by increasing domestic agricultural supply and containing demand. There is an obvious contradiction between this objective and the government’s policy of buying political and public support by increasing the amount of money pumped annually into the economy.

Agriculture
Last year, as Finance Minister, Partick Manning announced an agricultural policy following a two-day national food consultation that fourteen agriculture initiatives, involving the conversion of sugar lands to food crops, were earmarked to be implemented at a total cost of $1.2 billion.

Minister in the Finance Ministry Chartered Accountant Mariano Brown has told the public that only four of these have come to fruition, attributing the blame to the private sector for not taking up the challenge. That those have not succeeded in making a dent in prices obviously raises the question as to the prospects for success of the initiative in the light of more money being put into the economy by the government. Another initiative which may be instructive for us is the bulk purchase by the National Flour Mills of staple products in non-traditional international markets and selling those items at cheaper prices locally. This was abandoned after NFM racked up huge losses.

Rating and comparison
Despite the challenges the country received a good review by the International Monetary Fund which last year described its economic performance as “remarkable in a regional context and in comparison to other energy producing economies.” More recently, the country’s credit rating has been raised making it more attractive to investors who seem unmindful of the crime situation that plagues T&T.

I have consciously avoided any comparisons or contrasts between Guyana and Trinidad where there are both similarities and differences, but for me some do stand out. The first is the willingness of the government in Trinidad to engage in the economy while in Guyana we are prepared to leave it to the private sector that has but one motive only. The second is the take of revenue that comes from natural resources.

In Trinidad it is 40% while in Guyana, as a result of a range of tax incentives our share is negligible, if not negative in economic terms. We tax the salaried and the poor in the form of income tax and VAT at punitive rates, while those are considerably less in Trinidad. The Audit Office in Trinidad has already published its report on the 2007 Accounts of the Government while in Guyana the 2006 has only just been released with warts galore.

Like Guyana, the government in Trinidad is not hesitant to use the economy for political causes and we share places of dishonour with Trinidad on the Transparency International scale of corruption. We are 126 while Trinidad is 72. Trinidad and Guyana both believe in big governments and political favours are not unknown. We also share similarities of demographics and the penchant of our nationals to migrate. Do I need to go on?

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Crisis in the USA: Is America too big to fail?

Introduction
September has been a disastrous month for the US whose leading presidential candidates like to refer to it jarringly as the greatest country on earth. Natural disasters with hurricanes coming one after the other pale into insignificance compared with the meltdown in that country’s housing and financial sectors. The country that boasts of the triumph of the free market is now adopting some of the most extreme forms of government intervention normally associated with the socialist system – the very antithesis of the free market. In fact, haunted by the ghosts of the Great Depression, the US government is considering bailing out the entire banking system as one by one the banks and other financial houses collapse like a pack of cards.

While it may have originated in the mortgage crisis that has been brewing for the past two years, the wave of nationalisation in the US began on September 8 when the Treasury took over Fannie Mae and Freddie Mac, two companies which hold or guarantee more than half of the US mortgage debt, together owning assets of over $5 trillion or five million million!

In a month when it seemed that Usain Bolt could break just about any record, Lehman Brothers overtook WorldCom as the largest bankruptcy filing in US history. The firm which was founded in 1850 and boasts that its growth in having over $600 billion in assets and 25,000 employees parallels the prosperity of the US, describes itself on its website as “an innovator in global finance,” serving the financial needs of corporations, governments and municipalities, institutional clients, and very wealthy individuals worldwide. To understand the scale of this bankruptcy, consider that WorldCom’s assets prior to bankruptcy were just over $100 billion.

A week is a long time
Then earlier this past week the US central bank, the Federal Reserve, took a 79.9% share in American International Group (AIG) in exchange for a two-year, $85 billion credit facility at the penal rate of LIBOR plus 8.5%. AIG has assets of over $1 trillion and over 100,000 employees worldwide – bigger than either Lehman Brothers or Fannie Mae. And just announced is an ambitious plan for the government to buy seven hundred billion dollars of illiquid debt from ailing American financial institutions to save the sector from further shocks. Those in this region may well recall a similar approach by Jamaica government when in response to the financial sector meltdown of the 1990s that country’s government established FINSAC “to guide the banking sector through the recovery process.”

The one underlying reason with all the failures or near failures in the US was their inability to attract or retain further financing. Fannie Mae and Freddie Mac were set up as the bedrock of the housing market to guarantee mortgages meeting certain conditions. To do this they issued debt effectively backed by the government. But they were poorly regulated and went over the line when they bought securities secured by what has come to be known as subprime mortgages. Clearly the government could not allow them to collapse and ended up taking them over. In Lehman’s case, it was rolling over some $100 billion in short term-debt each month − more than it could bear; its borrowing costs increased and its share price fell to a record level following a massive write-down and credit losses occasioned by the financial crisis.

AIG too was the victim of the subprime crisis writing down some $57 billion of insurance contracts with the real possibility of further losses if the housing market did not improve. AIG’s credit rating was downgraded making it all the more difficult for it to borrow.

Begging the question
Now all of this begs the question what caused the subprime crisis in the first place? Identifying this is the easy part. The explanation is harder and takes us back to the early part of this decade. During that time there was an unrealistic increase in house prices and the belief by prospective and existing homeowners that the prices of their homes would keep rising allowing them to continue borrowing. With their risks creatively reduced, lenders eased their standards and permitted borrowers to buy more expensive homes than they could afford. There was also the phenomenon of adjustable mortgage loans which in simple terms transferred the greater part of a risk from the lender to the borrower. Greed stepped in as brokers found they could charge excessive commissions on such loans. A combination of a flagging economy, deregulation, poor oversight and equally, carelessness by banks and other lending institutions meant that borrowers were unable to carry and could not refinance their debt. This resulted in a mounting number of foreclosures and an extreme decline of house prices.

The subprime loans meanwhile were packaged into “derivatives,” part of creative but unreal wealth which the smart guys in Wall Street conjured up as assets which were sold and resold among the banks and financial institutions. Readers will recall from the series I did on Enron in 2002 that such “derivatives” were equally prominent in the demise of that giant. Sadly such assets are hardly regulated by the central bankers and are far too complex for the simple minds of the accountant to understand, let alone value for purposes of accounting. No wonder the investor guru Warren Buffett describes these as “financial weapons of mass destruction.” Players engaged in this game are as likely to succeed as the optimist in the Casino – yet they still play.

Darwin questioned
That was capitalism at its creative best or destructive worst, depending on whether you are the recipient of millions of the new wealth created by the free market or the victim of just another in the long line of bubbles. But an integral part of such a market is the Darwinian principle – the survival of the fittest, promoted with the usual American arrogance to the entire world since the end of WWII. The question is whether the fundamentalist adherence to such dogma excludes any interventionist action. The US government which has been preaching the mantra of liberalisation, lecturing the Asians and the Europeans to abandon their own economic model and adopt the US’s New Economy in which the ‘D’ word was not the dreaded ‘depression’ but ‘deregulation’  has found itself once again in a dilemma. It ignored the fact that the savings and loan crisis was sparked by the same deregulation and weak accounting standards, as was the Dotcom bubble which took with it not only Enron and WorldCom but the accounting giant Arthur Andersen well.

Too big to fail
Why then are some allowed to fail such as Lehman Brothers but not Bear Sterns, AIG, Freddie Mac and Fannie Mae? There is the principle, ‘too big to fail,’ that if the consequence of failure is too great it must be avoided at any cost. With their stake in the mortgage market so huge, the collapse of these institutions would threaten the whole system of finance for American housing, endangering those American banks that put money into the housing market and precipitating a catastrophic fallout across the world.

Globalisation means that the central banks of China and Japan have indirectly invested billions of dollars in the US housing market through Fannie and Freddie’s bonds, while commercial banks from South Korea to Sweden hold investments linked to American mortgages. Not only would there be huge worldwide losses if the credit crunch in the US escalated, but the very global financial system could be imperilled. In the process of looking at all of this an even more visceral possibility has been raised by Peter Goodman in the International Herald Tribune – is America too big to fail? With the USA being by far the largest economy in the world, the mere thought of that is spine-chilling.

Paradoxically the very decision to save the financial sector can lead to reckless conduct by dealmakers knowing that there will be a safety net sometimes referred to by critics such as Alan Greenspan as “moral hazard.”

Guyana
There is also the irony and the glee of many Guyanese (and Hugo Chavez) that America is being humiliated by it all. For decades the USA and its surrogates like the IMF and the World Bank have used their preeminent position − particularly since the fall of the Berlin Wall and the triumph of the West − to dictate the conditions for accessing assistance, loans and capital. The first item on the prescription was the surgical removal of weak companies as we saw with our own Development Bank and GNCB, among others. The double irony for us is that we were proud to be paraded by those countries and institutions as “success stories,” even as our economy has continued to sub-perform.

According to the Governor of the Bank of Guyana the current crisis in the US is not likely to have any direct impact on Guyana. Our banks are all very liquid and profitable and for the first time Guyanese may have to concede that the ultra conservatism of the local banks has had one good effect. I am only aware of one company that has direct insurance placed with AIG, but it is quite likely that indirectly some of our insurance companies’ reinsurance business is placed with AIG.

Remittances will be one of the immediate casualties as the cost of the bailouts of the American banks and financial businesses are borne by the rest of the economy and taxpayers, among whom would be members of the Guyana diaspora. Investment flows into Guyana are likely to reduce and high value projects like hydroelectricity would find financing hard to come by and therefore very expensive. The international and regional financial institutions will have less soft money to lend and further justification to stall support to Guyana if the government is perceived as having little interest in regulation and accountability.

Our larger exporters may also be impacted because the uncertainty over jobs overseas will ultimately lead to a contraction in spending, so those who export consumer items will feel the squeeze. Any of our major industries which must necessarily tap into overseas markets for large sums of US dollar financing may have to shelve any major expansion plans. What this signifies for the power and agricultural sector is yet to be determined, but it does not look good. We must be thankful that Guyana does not have the kind of creative financing as the US. Tax evasion and money-laundering are the preserve of the privileged and the connected while regulations are seen as things to be ignored and resisted. The Companies Act 1991 is honoured more in the breach while even our more prominent companies feel that they are at liberty to challenge the Securities Council and the insurance regulator at will.

But it would be foolhardy to be complacent or to try to predict the outcome of all of this over the next year or so, when a week seems such a long time. The most we can do is fasten our seatbelts.

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Coping with the EPA

Introduction
Over the strident objections of President Jagdeo the Caribbean countries and the Dominican Republic will sign the Cariforum-EC Economic Partnership Agreement (EPA) some time within the next few weeks. The record will show that Guyana stood alone in its last minute efforts to have the region pause “to scrutinise further the trade services aspects of the deal.” After an unusually strong exchange involving the leaders of Barbados, Jamaica and Guyana, Guyana is in the most isolated state it has ever been for close to forty years. During that period and not least because of the grand vision of Forbes Burnham and the efforts and impact of Sir Shridath Ramphal and a long line of talented foreign ministers, Guyana was among the leaders of not only CARICOM but the Non-Aligned Movement, the commemoration statue of which is proudly displayed at Company Path Gardens in downtown Georgetown. We were respected by the much more powerful ACP group of countries with a generation of outstanding personalities like Mrs Gandhi, Manley and Kaunda, offering hope to the hundreds of millions of their people. And let us not forget at this sombre hour that the very seeds of the Lomé Convention were sown on the lawns of the Prime Minister’s Residence in Guyana in 1972.

The first Lomé Convention (Lomé I) came into force in April 1976 and provided a hard-won framework of cooperation between the then European Community (EC) and developing countries of Africa, the Caribbean and the Pacific regions, in particular former British, Dutch, Belgian and French colonies.

Lomé had two main aspects. It provided for most ACP agricultural and mineral exports to enter the EC free of duty. Preferential access based on a quota system was agreed for products, such as sugar and beef, in competition with EC agriculture. Secondly, the EC committed ECU 3 billion for aid and investment in the ACP countries.

The fiction of free trade
It was not a perfect agreement – General Gowon of Nigeria had earlier told the Heads of the Commonwealth that “it is a fiction to speak of a free trade area between developed and developing countries,”  but for a quarter of a century Lomé remained the cornerstone of trade and aid between Europe and the developing world. It was, however, affected by major developments in the configuration of states and their economies in the European Community  necessitating changes in the economic relationships between the countries of the Europe and those of the ACP.

Another major shift in the world paradigm was the dramatic enlargement of the World Trade Organsation (WTO) which was the club from which all, rich and poor, market based and state-driven, North and South, would consider exclusion akin to being an international pariah. In theory, the WTO is strongly committed to creating a level free-trade playing field, promoting trade without discrimination and fair competition among the countries of the world through rules to prevent unfair behaviour like dumping. If there was a sign of things to come, however, the WTO provided that sign with several major violations by the rich countries in areas where they mattered most to the poor and undeveloped countries. In agriculture, textiles and clothing protectionism, subsidies and unfair practices persisted in the developed countries while the poorer countries were compelled to open their economies in a liberalisation frenzy and remove subsidies on their products.

In 2000, Lomé was finally replaced by a new trade and aid agreement known as the Cotonou Agreement, transforming the previous convention into a system of trade and cooperation pacts with individual nations. The signs were already surfacing that ACP solidarity was being weakened and with the IMF’s influence and dominance, one by one under-developed countries were picked off and brought into the fold of the capitalist world against which they had railed for decades. Even those countries that had shaped their foreign policy along socialist lines soon spent their time and measured their success by how much development assistance they received and the amount of debt write-off they obtained.

Long gestation
How did we in the region and Guyana fare? No question that we should have been better prepared to avoid the embarrassing contretemps earlier this week in Barbados over the EPA. As long ago as 1997, even before Cotonou, CARICOM had set up its Caribbean Regional Negotiating Machinery (RNM) to handle the post-Lomé trade negotiations not only with Europe but with other countries as well. The RNM was initially headed by Sir Shridath who had presciently noted that “we have to be prepared in our minds for a world in which our markets will be open increasingly to competition and not only at the level of goods but also of investment and services.” I am not sure whether President Jagdeo, then Finance Minister was listening, but it is more than passing strange that these are some of the very issues (as well as government procurement) that are now being objected to by him as President and as a leader of CARICOM.

Arguing that it is unlikely that we would be afraid of banks and insurance companies entering our small markets, one  cynic suggested that President Jagdeo’s main objection to any EPA with a services component was in relation to government procurement which as we have seen over the past several weeks is treated as a closed shop by his government. Would an EU pharmaceutical company with a right to bid to supply drugs to the government have sat back as idly and watched the government break the law to help its friends? I doubt it. At the very least therefore President Jagdeo needs to tell the nation exactly what his concerns are, not in politically charged language but in a way the people and the private sector and civil society in particular can understand. He needs to tell us whether the support we receive from the EU as a body and the United Kingdom will come to an end and what might now be the opportunities in the EPA for our own services sector.

The lone national voice
The EPA has been on the table for several years and although President Jagdeo now claims that he has always been opposed to the deal which he will now have to sign “involuntarily” as he puts it, there is nothing in the communiqué coming out of the December 2007 meeting of CARICOM heads at which the decision to sign was made, indicating that he was opposed to signing. His major public rumbling on the EPA was voiced in an exchange with Carl Greenidge of Guyana and the RNM at the GBTI Business Forum 2008 (see Business Page of June 8, 2008, ‘President, scraps and concessions’) but any further discussion had to wait until the Carifesta party was over.

Professor Clive Thomas had for months in his Sunday Stabroek column laid out a compelling case against several features of the EPA but no one in the government took any notice and it was left to a few letter writers to join whatever little debate there has been on this issue which we are now told would affect our country’s very future. A scheduled two days “consultation” that comprised mainly speeches but little information and lasting less than one day was attended by representatives from the private sector and civil society, who clearly knew little or nothing about the EPA on which they were being consulted. The seriousness of the consultation was surely compromised by the PSC which the day before had met with the President and announced their support for his stand. It was no surprise, therefore, that  they along with civil society felt comfortable enough to give Jagdeo the mandate to tell the regional heads that Guyana would only be prepared to sign a “goods only EPA.” The problem for the President was that his mandate was too narrowly defined and it was success or failure – no win-win.

But more ludicrously he could not sign a goods-only agreement simply because none was on the table and the President must have known that.

Neglect
The years of neglect by the government of the reports coming out of the RNM whose head had ministerial rather than ambassadorial rank, the government’s abandonment of diplomacy as a main tool of regional and international negotiations and its failure to have meaningful consultations both at home and abroad now leave us in perhaps the weakest state we have been in since independence.

Machismo may make good domestic politics but our stance would have caused us some loss of face and respect among colleagues and donors. Whatever may be our views and prejudices, the EU representative did not deserve the discourtesies he received at the consultation, not only because he is a guest of our country but also because the EU is still a big donor to Guyana as successive Budget speeches would testify.

Instead of boasting about standing tall we need to take a serious look – if that is not being too optimistic − at whether our policies and actions are developmental in nature. While abusing the EU our country and economy continue to depend on rice, rum and sugar sales to that region. Our forestry and bauxite resources are exploited by foreigners in uneven investment arrangements and little returns to the country, not even with development assistance from the source countries. We have abandoned the National Development Strategy that embraced increased trade with our South American neighbours and have downgraded our diplomatic efforts to boost trade. Only this week the President announced that he is replacing one of the country’s last career diplomats with another pastured minister of the government in what could and should be our largest trading partner, Brazil. The President pleaded with his regional counterparts to wait until a meeting of the ACP Group of States in Ghana before making a final decision, but undermines the seriousness of that plea by his decision to send a junior minister to that meeting because he has a speaking engagement in China.

Let the consultations begin
If the EPA will be as disastrous for Guyana as President Jagdeo asserts with such passion and certainty, then he needs to tell the nation what steps we can and should take to counter those eventualities. Clearly our relations with CARICOM need to be reviewed and rebuilt and if, as both Jagdeo and Ramphal fear, the CSME is in further jeopardy (there is sufficient and justified uncertainty about the commitment of many of its members), then as a regional country we have to contribute to reducing that danger even as we seek to widen our trade relations with non-EU countries.

A useful framework for ascertaining the views of Guyanese and incorporating such measures would be a new Development Strategy based on the earlier version that is accumulating dust on the shelves. Let the (real) consultations begin.