Growth Diagnostics in Guyana

Growth Diagnostics in Guyana Edna Armendariz, Marlon Bristol Paloma Baena, Anneke Jessen Matthew Shearer, Christian Schneider Competitiveness and Growth in Latin America and the Caribbean September 20-21, 2007

Outline • Why the need for Growth diagnostics in Guyana? • Explanations from the literature…possible hypotheses • Key binding constraints to economic growth, based on the HRV methodology Main caveats – data limitations and the underestimation of GDP of about 30%.

Why the need for Growth Diagnostics in Guyana? Volatility of GDP Growth

And …. The recent stagnation

Explanations from the literature….possible hypotheses • Staritz, et. al. (2006) argue that the collapse of private investment partially explains the stagnation, which they believe was the engine of growth 1991-97. Other factors also matter (adverse TOT, institutions) . • Lack of competitiveness as it relates to production costs (energy cost and labor market rigidities) has also been blamed for poor growth performance in Guyana (Bynoe, 2002). • Khemraj (2002) argues mainly on issue of slow private sector investment, and high transaction and nominal costs which are associated with uncertainties inherent in the country. • Thomas and Bynoe (2004) cite a poor borrowing environment, low demand for available bank credit, or risk aversion. • Qualitative assessments have attributed the peaks and troughs in growth to historical events and institutions (DaCosta, 2007; WEF, 2006). • The World Bank (2004, 2006) highlighted infrastructure, institutions and bureaucracy. • While they are concerns about skills depletion – high brain drain rates by Docquier and Marfouq, 2005; and Carrington and Detragiache, 1998 and 1999. • Other consideration mainly, high informality est. by Faal (2003) 47% of the official economy for the 1990’s

There are some problems with Geography but it is not poor…..Why? The coastal region is 10% of total land area, is 2.4 meters below sea level and is host to 90 percent of the population. Consequently, prone to Flash Floods affect crops, due to poor drainage and irrigation….. Long un-navigated borders with Brazil, Venezuela and Suriname that facilitate smuggling and other illicit activities, which support a thriving parallel economy Rich in natural resources, but costly to extract…. Proximity to main trading partners 1,622 miles USA, much closer to CSME, a bit longer to EU main destination of major export-sugar… However,………… Is it low returns to economic activity? Social Returns………

….Infrastructure poses some problems, in particular, it raises transport and other costs… ….. Guyana has the poorest overall infrastructure in CARICOM-8 and only ranked above Bolivia in LAC 26, (WEF: 2006-07). Guyana ranked 109 of 125 scoring 2.2 of 7 where 1=undeveloped, 7=amongst the world’s best infrastructure. Other costs are mainly energy and shipping…

Human capital is not critically low , there is a problem of mismatch… • Coverage is High (gross enrollment) • Quality fluctuated at various levels(dropout and repetition rates mainly for primary and secondary) • Completion rates are high, particularly at primary level • Brain Drain the highest in the world - Employment creation the lowest in CARICOM-8 • Private returns are low: 4% secondary graduates, below CARCICOM average of 5; 10% for post secondary and university graduates, averages 18 and 16 percent respectively, World Bank (2005). Wages are determined by collective bargaining and is very unionized. • More than 60% of University Graduates from Social Sciences, in an agricultural and resource-based economy - mismatch

Finance? High cost and weak access, in the presence of high liquidity → low financial intermediation

International finance….not binding, despite no credit rating(HIPC status) FDI still flows inward…

Appropriability?Macro Risks: Fiscal deficits are a source of concern

Self-discovery.....Diversification on agriculture and resource-based products

Export concentration is quite low compared to that of many other small states

“Underachievers” constitute a much larger share of total export value (68%) than the “champions” (22%) Figure 4. Competitiveness of Top Exports (1997-2004)

Peripheral location in the product space Guyana 2000 1975

Consequently open forest is relatively low Guyana’s Open Forest: Comparison with other LAC Countries

A few nearby products, and those that are nearby are mostly of low strategic value...explains partly lack of transformation Guyana’s Open Forest: Proximity versus Strategic Value

Microeconomic risks – there are signs of poor governance/institutions suggesting appropriability might be a problem….

A key symptom of appropriability – high taxation, Guyana has the highest corporate tax rate in LAC (a wide variety of exemptions and tax holidays-discretionary mostly)

…Existence of appropriability confirmed by Poor investment climate • GY ranks 112 out of 125 countries in recognition and protection of property rights (GCI)→ Property rights are recognized and protected under Guyanese law → problems in implementation of the legal framework • GY ranks 119 out of 125 countries in Contracts and Law sub index (GCI) → enforcement of commercial contracts takes an average of 661 days, above the region´s average (Doing Business) • Crime levels have increased by 70% since 1996 → GY ranks 125 out of 125 countries in reliability of the police force → GY´s ranks in the highest position versus the world in cost imposed by crime • GY ranks as the most difficult country to do business in LAC after Haiti and Venezuela : 136 out of 175 countries for the ease of doing business

Political instability (Polity IV), found to be weakly correlated with real growth, but Government decisions or the perception thereof matter • Centralization of decision making is high (GY´s ranking 117/125 countries in centralization of policy making, WEF) • Formal oversight institutions lack autonomy in their functioning (informal oversight institutions lack strength, Freedom of Press scores 3.9 out of 7 , below regional average , WEF) • Polarized political environment weakens social cohesion → country risks and policy sustainability → discourage investment decisions

What has been the most binding constraint to economic growth in Guyana, despite all the potential candidates? The diagnostic revealed 2 key problems in Guyana: Poor appropriability of returns on private investment, the primary culprit being micro risks, mainly weak institutions. Low self-discovery due to low sophistication of Guyana´s export basket and peripheral location in the product space. This is exacerbated by micro risks and low financial intermediation Infrastructure problems, and fiscal risks (and external vulnerability as a small state) are future potential candidates

Policy Recommendations • Strengthening micro-level institutions: contract enforcement, taxation reduction, regulatory burdens, red tape, land tenure allocation • Strengthening broad institutions: oversight institutions, transparency, and accountability, in the longer term. • A more proactive policy to stimulate productive transformation, technological dynamism and the emergence of new areas of comparative advantage - development of new products • Better access to finance will require innovative lending instruments, while complying with risk management systems

Growth Diagnostics in Guyana