China and India – Reshaping the world economy

Introduction

To be honest, this article was prompted by China’s harsh treatment of the people of Tibet who would just like to live in peace, free from the heavy hand of Beijing and to practice their Buddhist lifestyle. It is taking place in a glory year for China as the Olympics are held in that country whose government will simply not have anyone spoil their party, not even crusaders for human rights or nationalist respect. Even though such consideration and debate do not rightfully belong to this column – the first in a two-part article on the two fastest-growing economies of the world – such consideration is not entirely irrelevant since economics have social and other consequences as economic power sparks other ambitions and attracts fear if not respect. Indeed this perhaps explains why no country is planning to boycott the Beijing Olympics and why human rights abuses in China are discussed in only the most veiled terms.

In Guyana we must never ignore human rights issues anywhere, but an equally important consideration in any discussion on China and India is the importance of the right mix of policies to spur economic growth and development. Indeed the experiences in China and India are not entirely dissimilar to us here where we attempted to practice an extreme form of socialism beginning with the Sophia Declaration in 1973 and ending with Hoyte’s version of Glasnost, his embrace of the IMF and Cheddi Jagan’s continuation of the programme despite his personal and his party’s antagonistic position to the IMF. We too experienced good growth for some years but this fell off amid other conflicts and the economy has survived in great measure because of debt write-offs.

Reclaiming their rightful place

When in 2006 the Prime Minister of India proclaimed that India and China are on the way to reclaiming their rightful places in the world economy, the world did not see that as some idle boast or threat but rather a simple factual statement. America and the West called for globalisation and China and India opened their doors, not completely, but enough to cause huge consternation and fear among segments of the American population at the way these two countries are shifting the tectonic plates of the world economy. What makes the story of China and India is not only their similarities but their differences – ideologically, historically, culturally and economically. One is dictatorial while the other is democratic; the court system of one would be considered too free by the other; China is Communist but pro-business while India is free-market but at times highly suspicious of business; one emphasizes its human infrastructure while the other promotes the low wages of its people; one still operates with a Five-Year Development Plan while the other seems to worship not any omnipotent, all powerful, many handed deity but the invisible hand made famous by Adam Smith.

But it is not the differences that cause leading journalists like Lou Dobbs to worry – rather it is their similarities – up to recently they were considered part of the Third World, too large and too poor to succeed, over-populated and almost unmanageable. Yet before the world could appreciate the release of the latent powers of numbers, India and China have become the fastest-growing economies giving them the claim to superpower status in less, far less than twenty years. It is true that they will never be able to reclaim the position they held in 1600 when their combined economies accounted for more than half of the world’s economic output or even their position in the late nineteenth century as two of the largest economies in the world.

The decline

Several things intervened between then and now, including the meteoric rise of the United States of America, which with a workforce driven by a lust for things material and powered by enterprising migrants escaping from the famine in Ireland and war in Europe grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights. There were too the Marshall Plan in Europe and the rise of Japan and South Korea in Asia.

Yet, the decline in both absolute and relative terms of China and India had little to do with such external forces but was directly the result of inward-looking yet adventurous policies by these countries often on the brink of war, with daggers drawn and guns pointing at each other. For several decades political considerations dominated and shaped domestic policy as the countries were held spell-bound by their history of invasion and colonialism and the philosophies of great founding leaders – Mao Tse-tung in the case of China and Mahatma Gandhi for India, one a revolutionary who believed that power lay in the barrel of a gun the other a believer in the principle of non-violence. What would these great leaders think about the country they either killed or died for?

Ten years after announcing the formation of the People’s Republic of China in 1949, Chairman Mao’s disastrous Great Leap Forward caused the death of 30 million in four years of famine while his Cultural Revolution in 1966 saw the decimation of the intellectual and bourgeois class, the closure of universities and destruction of books. His policies according to the author Robyn Meredith in the book The Elephant and the Dragon, may have succeeded in the creation of a society in which private property was practically non-existent but also in a generally downward spiral in the well-being of the country and the people.

Signal left and turn right

The transformation began with the rise to power of Deng Xiaoping who beginning the reform in the countryside, broke up the collectives and introduced the rudiments of a market economy. Over 125 million jobs were created by 20 million entrepreneurs who rediscovered the capitalist instinct of the Chinese. While significant the changes were not nearly enough and it was time to look outward. Instead of heading to Europe and North America, however, Deng went into his own backyard, Malaysia and Singapore, whose Prime Minister Lee Kuan Yew he admired deeply and with whom several learning visits were exchanged. His “special economic zones” were characterized by employer-friendly labour laws and low taxes all the while formally remaining loyal to socialism. There is the joke of Deng being asked by his chauffeur which way to turn as they reached a junction. Deng, the quintessential pragmatist instructed the driver: “Signal left and turn right.”

Now fifty years on, the transformation is like the world has never seen. What makes the situation even more mind-boggling is what has taken place within the past decade. In 2000, 30% of the world’s toys came from China. In 2005 that grew to 75%. One out of every three pairs of shoes made today is the product of Chinese labour and between 1996 to 2004 exports of electronic equipment had increased 800%, from $20 billion to $160 billion. When last did we hear that Small Is Beautiful, the title of a series of books by E. F. Schumacher.

India

Pained by the experiences of colonialism and exploitation in which the masses of India lived in abject poverty while as a colony the country was the gem on the Royal Crown, Gandhi was a great believer and practitioner of economic independence while opposing mass industrialisation, preferring traditional means of production, symbolised by the spinning wheel on the Indian Flag. Even after his assassination in 1948, the Congress Party of India, first under Jawaharlal Nehru and later other members of the dynasty continued the policy of self-sufficiency, shutting India from the outside world, equally difficult for Indian producers to export as for foreigners to invest in the vast country. One of India’s best known companies, the Tata Group, formed in 1868 became a key part of the country’s freedom movement and out of its nationalist commitment built its mills to supply the steel for the country’s successive five-year development plans.

The productive capacity of the country was, however, kept in check by a rigid policy of licensing so that even a manufacturer of motor bikes could only produce as many as his licence permitted. With socialist instincts running through its veins, the government found its finances in perpetual deficit as it made efforts to create jobs which were in turn protected by costly guarantees that were a severe strain on companies. Ironically, it took the cataclysmic second oil shock sparked by the 1991 Gulf War to cause India to awake to the reality that having 330 million people, or 40% of the population, in total poverty was neither moral nor compatible with sustaining its position as the world’s largest democracy. Narasimha Rao who became Prime Minister after the assassination of Rajiv Gandhi, appointed the economist Manmohan Singh, current Prime Minister, as Finance Minister. Unlike China, India took the route of the IMF, devaluing the currency, removing import and export restrictions and expensive bureaucracy.

It is the result of the vision of these leaders and the number and energy of their people that is causing such consternation among Westerners and Americans in particular who see their solo superpower role under threat from the rapid growth of these two economies. For China the growth rate has been averaging 10% per annum while India’s at 6% may seem modest except when it is compared with the 3% in the US and other western countries. Indeed the admired has become the admirer and Lee Kuan Yew told a Forbes Conference in 2006 that he has been visiting China “every year and each time he is surprised at the rapid changes”.

These two countries both have young populations, high Asian saving rates and have put in place measures which barring some catastrophe can keep growth in the high single-digit range for decades. Admittedly they have come from a low economic base but with the substantial catching up they still have to do, there is no reason for them to slow down.

To be concluded next week.

On the line – Demerara Tobacco Company Limited and Guyana Bank for Trade and Industry 2007

Introduction

Over the course of the next two days corporate Guyana will come alive with annual general meetings scheduled to be held by two of the country’s public companies. Demerara Tobacco Company Limited (Demtoco), a subsidiary of the British American Tobacco, plc. will have its meeting on March 31 and one day later on April 1, the Guyana Bank of Trade and Industry (GBTI), a 61% subsidiary of Edward B. Beharry and Company Limited, will have its annual general meeting. The Companies Act 1991 allows companies six months to hold their AGMs and the companies are to be commended for their early meetings.

GBTI reports a 57% increase in after tax income for 2007 coming after a 51% increase in 2006 while Demtoco has had more modest increases, 34% in 2007 and 14% in 2006. By any measure these are extremely impressive results which are reflected in the performance of the companies’ share prices over the past three years and provide returns that ironically make bank deposits seem correspondingly unattractive. The average deposit account at the GBTI yielded a return of 3.5% while an investor in the shares of the bank earned 33% (26% of which represents capital appreciation) on his shares.

With inflation close to 15% in 2007, the depositor would have seen the real value of his/her deposit decline by about 12% while the investor’s return, which includes cash income by way of dividends and the increase in the market price for the share, amounts to a healthy 16%.

The lesson is that it is far more attractive to own shares in a reasonably profitable company than to put money in a bank account. The Guyana Stock Exchange (GSE) has not had the desired effect of increasing the number of public companies and with most of Guyana’s public companies being held by controlling shareholders the options for investment in Guyanese companies are limited. But with the removal of exchange controls, the operation of the CARICOM Double Taxation Treaty and the introduction of the CARICOM Single Market and Economy (CSME), there is no reason for limiting the options to Guyana.

It is true that the GSE has outperformed the regional exchanges since its inception in 2003 but much of that is due to what are called market corrections which are unlikely to continue unless all the companies on the Guyana Exchange can match the 2007 performance of Demtoco and GBTI.

Graph of share price movements

Source: The Guyana Association of Securities Companies and Intermediaries Inc., weekly trading reports

Demtoco

Turnover has barely managed to keep abreast with inflation increasing by 16% but the increase in the profit after tax is due to a 30% increase in gross profit – sales less cost of sales – as a result of two price increases in the year which unlike the increases in the price of rice and flour hardly earned a comment in the national press. There is little analysis offered by the Chairman in his one page report or by the Managing Director, neither of whom commented on any impact VAT may have had on the company’s product and performance. The company paid three interim dividends in 2007 amounting to $21.38 per share and is proposing to the shareholders a final dividend of $15.85 making a total of $37.23 giving shareholders a return of 17% on the average market price of the share during the year.

The group gets more however, having charged the company more than $600 million dollars for management services, royalties and technical and advisory services to what it is now no more than a marketing company. The company continues to justify a royalty for a product that can be bought almost anywhere outside of Guyana and seems able to justify exorbitant management services when all the company does is bring in a product sold mainly through at most a handful of distributors.

The balance sheet of the company shows a healthy situation with the company being able to make available to its fellow group companies more than $400 million dollars at the end of the year of which only 60% earns interest at the rate of 4% per annum.

Once again the company does not disclose the number of employees nor does it include anything on corporate governance. Readers will recall one past Country Manager publicly proclaiming defiance to any suggestion that it should comply with Corporate Governance Guidelines until these become legally binding prompting a rejoinder that corporate governance is not a matter of law but best practice (Stabroek News 22/5/04).

Financial Highlights

2007 2006

Change

G$M G$M G$M %
Gross turnover 4,574 3,933 641 16
Cost of sales (1,906) (1,880) (26) 1
Gross profit 2,668 2,053 615 30
Other operating income 20 18 2 12
Operating expenses (920) (772) (148) 19
Profit before taxation 1,768 1,299 469 36
Taxation (895) (648) (247) 38
Profit after taxation 873 651 222 34
Ordinary shares in issue (‘000) 23,400 23,400
Earnings per share (in dollars) 37.29 27.82
Dividends declared per share 37.23 27.75

GBTI

The report by GBTI is far more comprehensive than Demtoco’s, running to 86 pages of material and lots of pictures including two Ministers of Government. Unlike Demtoco the Bank produces a full page Statement on Corporate Governance and eye-catching Financial Highlights although the reader has to go through nineteen pages before s/he finds these.

All the indicators are positive in favour of the shareholders if not the depositors in the bank. Shareholders receive a return of 33% in dividends and capital appreciation, while depositors of interest bearing accounts earned 3.5% (3.4% in 2006) and the average of all depositors 2.6% (2.5% in 2006). Share prices during the year increased by 26% on an increase in earnings per share of 57% and if the bank’s outlook for itself and the economy is shared by investors, then it is quite possible that there will be a further movement in share prices over the next few months.

The company reports accumulated provision for loan losses amounting to 96% of its non-performing portfolio, having written off $831 million in 2006 but only $20 million in 2007. From a profit and loss account perspective the provision for loan losses declined by $70 million which has augmented the profits for the year.

Another contributor to the substantial after tax profits of the Bank is the reduced effective rate of tax it pays for the year – at 18% it is half the effective rate paid in 2006 and results from more than $300 million in interest earned being “not taxable”. The normal rate of corporation tax is 45% and if the effective rate had remained at 36%, after tax profits would be $170 million less.

Loans

A bank’s contribution to national development can be measured by its lending to key sectors of the economy. The sectoral analysis of the bank’s loan portfolio shows agriculture accounting for a mere 7.64%, a further reduction from the 9% in 2006. By contrast the share of the portfolio to the services sector has increased from 38% to 43%. Nationally agriculture accounts for approximately 25% of GDP. While the Bank was once considered the rice farmers’ bank (other than GNCB), some operators in the sector lament that the Bank has been taking a very harsh line on borrowers in the rice sector. Indeed this makes it somewhat paradoxical that the Bank won a bid to manage the EU G$1.6 billion facility to increase the efficiency and sustainability of the rice sector.

The loans to deposit ratio has declined slightly from 28% to 26% despite having won the bid and having received $825 million interest free under the Scheme. The Scheme comes to an end in June of this year but the annual report is unclear whether interest will then become payable on the amounts drawn down.

Highlights

2007 2006

Change

G$M G$M G$M %
Net Income before taxes 976 788 188 23.86
Net Income after taxes 796 506 290 57.25
Total assets 42,981 35,742 7,238 20.25
Total deposits 37,408 31,326 6,082 19.41
Loans and advances 9,745 8,745 1,000 11.43
Return on Average Assets % 2 1
Return on Average Equity % 66 42
Earnings per share $ 19.89 12.65

In their outlook for 2008 and beyond, the Chairman and the CEO were both upbeat about the prospects for the country, reflected in the extension of their branch network and new Head Office to be constructed during the year. Neither mentioned the events in Lusignan (January 26) or Bartica (February 17) and the consequential threats to the economy. It would be interesting to see which one of our two companies would be impacted more directly if the country does not solve events of that nature.

Finally, the results for both entities show how the tax system can be worked in favour of corporate taxpayers with the range of “tax shelters” that are available. Individuals, bound by a single personal allowance and a tax rate of 33⅓ %, can only read with envy.

Recession in the US: impact on Guyana

Introduction

If nothing else President George Bush is an incorrigible optimist. And on this occasion it is not about the Iraq War that defies costing in the sense that by the time this column appears two days after its submission the cost has gone up by more than US$650 million dollars, or by that much more than the half a trillion spent in the five years since the US invaded that country. It is about the state and outlook of the US economy which some say is already in a recession while others say in language more suited to diplomats that the economy is “moving sideways.”

What effect does the state of the US economy have on the rest of the world and more directly how will it affect us in Guyana? The answer to these questions is complicated by one further uncertainty – the presidential elections later this year. All the signs point to a race involving Senators Barack Obama for the Democrats and John McCain, a seasoned campaigner and maverick, for the Republicans. Obama is relatively new to foreign policy and his external connections have been mainly Indonesia where he spent part of his early life and Kenya, the country of his father.

Obama v McCain

Obama has made exit from Iraq a major plank of his campaign commitment, and assuming that he wins, getting out of Iraq may be far more complicated than he believes and resolving that may very well take the better part of a year. Any policy towards the Caribbean will be wrapped up in the wider Latin American question and the Free Trade Area of the Americas (FTAA). For all the support he has received from the Caribbean, he is unlikely to give our region any kind of priority.

John McCain, on the other hand, has strong foreign policy credentials but these have been manifested mainly towards Europe, Asia and the Middle East, including his unwavering support of the Iraq War. Regardless of who wins, unless that person appoints someone with clout and a genuine interest in the Caribbean, the region will not receive much attention in the first year or two of the new presidency.

Exchange rate

Yet what happens to the US economy is important to us mainly for two reasons – the Guyana dollar is largely measured in relation to the United States dollar and second, the Guyana economy benefits heavily from remittances from Guyanese in the United States. In 2007 the Guyana economy grew faster than that of the US and our international reserves did not deteriorate, yet counter-intuitively the rate of exchange of the Guyana dollar to the US fell, albeit slightly. To make matters worse, because the US dollar was falling against the other major international currencies, those declines were reflected in the rate of the Guyana dollar against those currencies, resulting in increased prices for imports from those countries.

Another major imported product – fuel – is priced in United States dollars and a significant part of the increase in the price of a barrel of oil is attributable to the fall in the rate of the US$. In passing, it should be noted that Guysuco and other exporters to non-US currency destinations would have benefited from the fall in the rate of the US$ and by extension of the Guyana dollar.

Remittances

The second major reason for the relevance of the outlook of the US economy to Guyana was shown in an article in this newspaper earlier this week referring to a report by the Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB) that Guyana leads the Latin America and Caribbean region in remittance receipts in 2007 as a percentage of GDP, with US$424M or 43 per cent of GDP received. These are truly staggering numbers and warrant a response by way of an analysis from the Bank of Guyana and our academics.

The obvious question is whether such levels can be maintained. If the US economy continues to under-perform causing a loss of jobs and a fall in income, it would be difficult for Guyanese in the US to maintain the level of remittances they have been sending back home. It is true that increasing numbers of Guyanese are taking their chances in the Caribbean – with Antigua, Barbados and Trinidad and Tobago being the more prominent countries – and that so far the economies of these countries have been steady. This should mean that remittances from those countries should not be affected and may even increase as more Guyanese head in their direction. The real fear therefore lies with respect to the US economy.

Recession or not? – OECD

The Organisation for Economic Co-operation and Development (OECD), a grouping of 30 mostly developed democratic countries, including the three powers of North America, most of Europe and Asian Pacific members Australia, Japan, South Korea and New Zealand, in an assessment released in Paris last week was only prepared to say that the US economy is “teetering on the brink of recession” – defined as two consecutive periods of negative growth. The US economy is expected to grow 0.1 per cent in the first quarter, a sharp reduction from the 0.3 per cent estimated in December, and to show zero growth in the second, a sudden halt compared with the 0.4 per cent projection given previously. Despite the sharp downward revision, acting chief OECD economist Jorgen Elmeskov is of the opinion that “it may be premature to declare a recession” in the United States.

For the year as a whole, 2008 is projected by the OECD to grow 1.4 per cent, down from the December estimate of 2.0 per cent, Given the recent swings in the economy it would be surprising if this estimate is not subject to a number of revisions as the quarters progress.

IMF

The assessment is likely to be confirmed by the IMF in its twice-yearly World Economic Outlook, a leaked draft of which shows that it also believes that the US economy “remains very weak, certainly close to a possible recession.” Despite the dollar’s recent steep losses, the draft also suggested that the IMF saw its present value as still “rather strong.”

US businesses

The Conference Board, a major and influential US business group in a report released within the past 48 hours has reported that its index of future economic activity dropped for the fifth consecutive month in February, suggesting that the weakening American economy could, indeed, be slipping into recession. The index is designed to forecast where the nation’s economy is headed in the next three to six months.

Businesses and think tanks attribute the situation to rising gas prices, falling home prices and tightening credit markets which have begun squeezing consumers and businesses, forcing them to cut spending.

Billionaire US investor Warren Buffett dismissed the theoretical definition of recession saying that it is not a question of whether the American economy was in a recession but how far it will go. The legendary billionaire investor expressed concern about the declining wealth, purchasing power, employment and income and does not rule out the possibility that the country’s economic woes could worsen.

More positively, however, Buffett does not consider current conditions as bad as the downturn of 1973 and 1974 when Americans were also battered by skyrocketing oil prices, and he expressed optimism that the economy would rebound strongly in time. Buffett also repeated his belief that the US dollar will continue weakening for as long as the United States maintains a hefty current account deficit, particularly with China and the countries of the Middle East from which it imports oil.

Conclusion

These fears are not without merit. The dramatic meltdown and bail-out of Bear Stearns, one of the US’s largest underwriters of mortgage bonds resulting from the collapse in June of two of their internal hedge funds that had been heavily invested in mortgage securities, emphasises the continuing crisis in the housing sector which is affecting not only the pockets but the psyche of American consumers, who could always count on having some equity in their homes (the value less any debts owed on the house). Even the proverbial dream is evaporating to such an extent that illegal migrants are now voluntarily going back to their homes, something which would have been considered unthinkable one year ago.

The collapse in the US housing market coincides with rising food, energy and raw material costs, raising the spectre of inflation for consumers, but making it more difficult for central banks facing a choice between cutting interest rates to spur growth and keeping them high to curb prices.

As the US braces for troubled waters, those remittances may indeed be in doubt.

Spending those billions (conclusion)

Introduction

Last week I began looking at the capital expenditure of the central government comparing it with the rate of growth over a five year period. The conclusion was that despite the government having spent over US$800 million dollars over that period and more than US$1 billion over the last seven years, this expenditure has not been reflected in matching growth in the economy. One person commenting on that conclusion considered that I was ignoring the extent of the underground economy which is estimated to range between 30% and 60%. While there is merit in that criticism it is hard to fault anyone for using official statistics but more important is whether the substantial sums spent on capital expenditure by the government are for the benefit of those who under-declare their businesses’ performance and engage in tax evasion and money laundering or for those who struggle to survive in very challenging circumstances and yet try to abide by the laws and the rules.

I concluded last week with a commitment to look this week at the significant items in the capital expenditure budget for 2008 of G$40 billion dollars. Of that amount, four ministries account for $26.6 billion or 66% (See following table). Compared with the preceding year however this was approximately 0.16% over 2007 during which the official rate of inflation was close to 15%.

Table 1 – ($million)

Agency/Ministry 2007
Revised
2008
Budget
Office of the Prime Minister 3,003 5,053
Ministry of Finance 8,419 8,767
Ministry of Public Works and Communications 9,562 8,049
Ministry of Housing and Water 5,160 4,696
Total 26,144 26,565

Source: Estimates of the Public Sector, 2008

The Ministry of Finance itself does not within its own portfolio expend the capital expenditure it allocates itself but spends this in a number of areas. A more direct breakdown of the $8.8 billion it will spend in 2008 is as follows:

  1. $4 billion to the Guyana Sugar Corporation;
  2. $575 million providing for institutional strengthening and purchase of equipment under the IDB funded Fiscal and Financial Management Programme;
  3. $998 million for support to community roads, drainage and irrigation projects; and
  4. $674 million providing for poverty alleviation and community development projects.

Of the $8,049 million to be spent by the Ministry of Public Works and Communications:

  1. A total of $6.2 billion has been budgeted for roads ($5 billion) and bridges ($1.2 billion) of which a substantial portion ($1.8 billion) is for ongoing expenditure on the New Amsterdam to Moleson Creek Road and $980 million budgeted to complete the access roads to the Berbice River Bridge and the rehabilitation of 54 bridges along the Timehri-Rosignol corridor;
  2. $2.2 billion to continue construction, rehabilitation and maintenance of sea defence structures;
  3. $395 million for the docking of ferry vessels and dredges, acquisition of spares, and rehabilitation of stellings and navigational aids;
  4. $108 million is budgeted for the construction of two new airstrips at Wakenaam and Leguan and the rehabilitation of the Baramita Airstrip.

Operators in the domestic airline sector to whom I spoke claim not to have been consulted on this extravagantly unaffordable proposal for the two airstrips. Access to many of the established airstrips is only available at prohibitively expensive charter service affordable to only a few. Not only will these new airstrips be badly under-utilised but operating and maintenance will run into millions each year. This is what I have referred to as cost-added rather than value-added expenditure from which only government ministers are likely to benefit.

Security

Mainly security expenditure in the Central Government Budget falls under the Ministry of Home Affairs which includes the Police and the Guyana Defence Force. These are the capital expenditure allocated in the 2008 Budget:

Table 2 – ($million)

Agency/Ministry 2007
Revised
2008
Budget
Ministry of Home Affairs 1,048 1,334
Guyana Defence Force 153 699
Total 1,201 2,033

Source: Estimates of the Public Sector, 2008

Included in the capital expenditure budget for the Ministry of Home Affairs is an allocation of $660 million for the Citizens Security Programme and $430 million for the Guyana Police Force.

Despite having announced that the government would be spending some $900 million on acquiring equipment including two helicopters for the Army in 2008 the allocation is considerably less which can only mean that the government was planning to have Supplementary appropriation even as the Minister of Finance was delivering the 2008 Budget!

Social Sector

Table 3 – ($Million)

Agency/Ministry 2007
Revised
2008
Budget
Georgetown Public Hospital Corporation 35 137
Ministry of Health 2,486 2,765
Ministry of Labour, Human Services and Social Security 1,297 372
Ministry of Education 2,799 2,280
Total 6,617 5,584

Source: Estimates of the Public Sector, 2008

The Ministry of Labour, Human Services and Social Security has the largest reduction from 2007 in the capital expenditure budget of all the ministries, departments, agencies or regions while education has also dropped by about 20% which may be due to a levelling off of programmes – the allocation to UG-Turkeyen fell by $360 million while the IDB-Funded BEAMS programme fell by $220M, primarily the School Performance Component (provision for numeracy and literacy programmes).

House lots instead of housing

Although substantial sums are to be spent via the Ministry of Housing and Water the allocation for housing ($1.5 billion) is mainly $850 million to provide infrastructure in low income settlement schemes and $420 million to complete roads, drains and structures in various areas. While the government has abandoned any attempt at providing any housing for the really vulnerable who cannot get a mortgage because for example they are either too old to work or simply cannot find jobs the number of new homes has risen substantially as a result of the house lots policy of the government since 1992.

Water gets $3.7 billion for projects which include the completion of two iron removal plants at Sophia and Central Ruimveldt ($500 million); upgrade of transmission and distribution lines ($331 million); completion of a treatment plant at No. 56 Village ($90 million); design and commencement of construction of three water treatment plants at Lima, Vergenoegen and Cotton Tree ($1 billion) and $58 million to improve water supply services to communities in the hinterland regions.

In agriculture an Agricultural Export Diversification Programme for US$20.9 million will be launched and for the privilege of hosting CARIFESTA for which Guyana was the only taker we will be forking out $300 million in the first instance while in electricity $220 million has been allocated for the purchase of a diesel electrification system for Port Kaituma, to construct distribution systems for Orealla and Siparuta and install solar panels in hinterland communities.

Depressed Communities

There is little in the 2008 Budget that can give any hope to some of our most depressed communities and even the billions that are being spent annually on roads and other infrastructure cannot be enjoyed by the large number of unemployed, pensioners and single parents – overwhelmingly women – who have no jobs to go to and who struggle daily to put some food on their children’s plates. In fact the lack of any attention in the Budget to women and the unemployed and depressed communities is particularly striking.

The major beneficiaries of the capital expenditure are a handful of contractors and suppliers many of whom provide extremely shoddy goods and services including construction of roads, bridges and the Conservancy and many of whom are themselves that group of self-employed that even the Guyana Revenue Authority complain so bitterly about. In fact by their performance and conduct they have raised the question whether the shift in the policy of contracting out ought not now to be revisited. With the margins by some contractors and suppliers being as high as 50%, the country will save tens of billions from having the work done by the government.

Many will consider this too radical but with the substantial savings it would be possible to employ better staff and pay better wages, reduce the level of corruption and still provide a better quality of work than is now obtained from some of our contractors.

Conclusion

When Dr. Ashni Singh was appointed as Minister of Finance there was hope that the quality of budgeting, accounting and financial controls in the government would be improved and that the country would start receiving value for money. That hope has receded and it is now questionable whether he has the courage or the scope to change significantly the system of weak controls and largely tax-and-spend policy he has inherited, even if he was so inclined.

The way a government seeks to tax its people and how it spends the billions so derived best reflect its values, interests and policies.

It is clear that what we have had for close to two decades is a mindset that embraces IMF-style traditional growth rather than pro-poor policies, and which in practice is compromised by poor economic management and equally poor governance.

What would be very useful is for the opposition political parties or economists to come up with a new set of policies and build an alternative budget to reflect those policies.

Spending those billions

Introduction

In detailing the government’s capital expenditure budget of $43 billion in 2008 the Budget Speech gave a troubling indication of how vast sums are expended year after year with scarce regard for basic principles of economic and financial investment decisions. Capital expenditure is distinguished from recurrent expenditure which includes the normal operating annual expenses such as wages and salaries and maintenance of roads, bridges and buildings while capital expenditure would include the cost of constructing those roads, bridges and buildings. By principle, convention and practice, capital expenditure is expenditure the benefit of which accrues to one or more future periods while recurrent or operating expenditure is consumed in and benefits one period only.

Of the budgeted expenditure of $119 billion dollars announced by the Minister of Finance in his 2008 Budget Speech, capital expenditure accounts for $40.9 billion, roughly US$205 million dollars. This compares with a budget of $37 billion in 2007 which was overspent by some $6 billion, in commenting on which the Minister indicated that this was a 21% increase in the public sector investment programme.

Individuals, companies and governments invest in capital expenditure for many reasons including enhancing their earning capacity by expanding the income potential or reducing expenditure.

Capital expenditure and growth

The table below shows the capital expenditure and growth in the economy for the past five years. During that period, the government spent close to G$160 billion or US$800M in capital expenditure while the economy has on a simple average grown by 1.54% per annum – a poor return on investment by any measure. Why with all the investment expenditure by government (and we must not ignore recurrent expenses like wages and salaries which by putting money into consumers’ hands should also stimulate economic growth) has growth been so anaemic? The explanation is not straightforward but with a rational approach by the decision-makers in selecting investments there would certainly be a better chance of higher economic growth.

Capital Expenditure for past five years and budget 2008:

Year 2008 2007 2006 2005 2004 2003
Capital expenditure ($Mn) 40,853.8 42,892.5 41,806.4 35,143.2 22,416.7 17,292.5
Real Growth in GDP 4.8% 5.4% 5.1% -3.0% 1.6% -0.6%

Source: Budget Speeches

The drivers of government capital expenditure may be obvious in certain cases such as the expenditure on sea-defences or to mitigate the consequences of natural disaster. In other cases the decision may be made entirely on social considerations such as whether an area should have a supply of electricity or water. These still, however, leave a considerable amount of capital expenditure which do not fall in such categories and should therefore be subject to more careful analysis. And even with respect to social expenditure not generally considered susceptible to the economist’s or accountant’s return on investment criteria, and using electricity to a hinterland community as an example, the issue is not whether the community should have electricity but what is best of a range of options to provide that service. The decision-maker would have to consider whether it is better to build a generating plant and transmission and distribution system requiring on-going fuel, maintenance and technical support which would be difficult to deliver to those communities or to encourage the use of solar power by fiscal initiatives and financial support to householders to enable them to make their own arrangements?

A dollar is a dollar

Of recent investments, only the Berbice Bridge and to a lesser extent the Guysuco Skeldon Modernisation Project were subject to any independent analysis. We all recall the process that preceded the final decision on the Berbice Bridge, the studies and analyses that were conducted and the debate generated for and against the investment. It may be argued that this was because that is largely privately funded which is not entirely correct since the government had to invest heavily in related infrastructure necessary to support the Bridge investment.

Now if such a process was necessary for the Bridge how come it does not apply to fully publicly-funded expenditure or the decision, literally out of the blue, to spend over one hundred million dollars mainly to build two airstrips on the islands of Essequibo and Wakenaam? A dollar is a dollar and public investment in the final analysis comes from the people of the country. Taxpayers’ money is no less important than shareholders’ money and therefore warrants the same level of care in how it is spent.

I do not recall any Minister of Finance of the PPP-C Finance Ministers, including the incumbent ever giving an indication of any criteria for investment decisions undertaken let alone any rigorous analysis of specific investment. Indeed so often the nation is treated to expenditure decisions being taken literally on the road. This is dangerously improper from a governance perspective and irresponsible and unprofessional from a capital investment decision perspective. Under the Constitution only Parliament has the authority to approve expenditure and a responsible Finance Minister would surely want to justify any request he takes to Parliament for money for capital expenditure. Just think of the crisis we would be in if after the unbudgeted expenditure of substantial sums by the executive, the Parliament voted against any request for supplementary funds.

Cost-added rather than value-added expenditure

The decision to host the World Cup brought with it a commitment to provide hotel rooms which in one particular case were partly financed by a loan to the investor, the payback of which is now being financed by using the very rooms which may not have been chosen had we not made an irrational decision in the first place. The 2008 Budget includes $300 million for CARIFESTA-related expenditure, a decision that was largely made without any regard for cost implications. Given the tendency and history of overspending there is no guarantee that we will not repeat our questionable experience of instead of having value-added expenditure having cost-added expenditure.

The other side of VAT

VAT has been more than a fortuitous break for the government in 2007, not only allowing it to spend far more than Parliament had approved in the 2007 Budget but to absorb significant declines in the performance of public enterprises. From a surplus of $3.4 billion in 2006, those enterprises declined to a deficit of $415 million, mainly from Guysuco which had a decline of $2.7 billion and GPL, $802 million. Interestingly while both corporations had the same chairman, he was removed from the corporation which performed relatively better and from all appearances for reasons unrelated to financial performance.

In fact those very corporations received substantial capital injections in 2007 during which $3 billion dollars was put into GPL for improvement in the unserved and underserved areas while Guysuco received $863 million for its Skeldon Power Plant and $2.9 billion to accelerate completion of the factory, preparations of land to facilitate mechanical harvesting and infrastructure to support and promote private cane farming.

A new Justice Improvement Programme involving US$10.2 million began with the setting up of a Justice Sector Reform Steering Committee and the setting up of a Secretariat. But what about the truly fundamental changes that require not large sums but decisions such as the setting up of the Law Reform Commission to update the laws last done in 1973 or the introduction of new Rules of Court which have been in circulation for years now. New Rules were introduced for the Commercial Court with considerable success, and revised Rules for the other courts have been in circulation for several years. These new Rules embody what is called Case Management and introduce court-driven processes replacing the current system which in practice is largely directed by the lawyers, their time-wasting practices and endless demands for adjournments. As this column has pointed out before Guyana is the only CARICOM country not to have adopted the new Rules.

Next week we look at some of the other capital expenditure in 2007 and those proposed for 2008.