DRAFT May 21, 1996
Introduction
This Chapter describes measures to sustain the turnaround of the economy as part of government's effort to develop a National Development Strategy. The role of the private sector within the national economic framework has been identified as integral to our country's development process over the medium to the long run planning horizon. In the last seven or eight years, Guyana has experienced a historic process of restructuring its economy, moving away from an overly centralised approach that brought about sustained economic decline toward an open, market-oriented framework that already has given rise to an economic revival. Under the new approach the Government retains a strong commitment to social justice but now expresses that commitment through more focussed programmes of basic services and more selective instruments of economic policy. This approach is more likely to be effective in the long run and it assigns the fundamental role of the engine of growth to the private sector.
In this context, this Chapter in effect provides specificity to the new framework in regard to the respective roles of Government and the private sector and describes a number of measures that will help unleash the economic potential of the private sector.
The development of the Guyanese economy has been influenced jointly by geographic features and government policies. In terms of land area, Guyana is the largest member of CARICOM countries and shares borders with Venezuela, Surinam and Brazil. Guyana historically utilised tariffs and non-tariff barriers and a significant measure of Government intervention to promote industrialisation. These geographic and legislative factors have shaped the evolution of Guyana's economic landscape. Its resource-based economy is reflected in the traditional export of primary commodities, and the weak manufacturing sector is related to the small and tariff-protected domestic markets. While much of Guyana is virtually uninhabited, and its population is largely concentrated along the narrow coastal plain, the population-land ratio is an important part of Guyana's economic development.
Guyana has been recognised as a resource abundant nation. Sugar and rice have been and continue to be dominant outputs. Next in importance come fisheries, timber, mining and quarrying. Shrimp, plywood, gold, bauxite and diamonds are examples of major outputs, in addition to the principal crops.
Non-traditional crops (those other than rice and sugar) are of increasing importance. Over the years, Guyana has always produced a wide range of other crops and will continue to do so in the foreseeable future. See Chapter 27 for a description of the principal non-traditional crops.
Over 75 percent of Guyana's land area is in forests, and the value of forest products has grown very rapidly in recent years. The names and output of selected forestry products are described in Table 36-1. However, not all the forms into which these products are transformed, e.g., plywood and millwork, are shown in the table.
Table 36-1
Output of Selected Forestry Products
(000 of unit measurement)
| PRODUCT | UNIT | 1960 | 1970 | 1980 | 1990 | 1991 | 1992 | 1993 |
|
Greenheart logs
Logs: others Sawn lumber Greenheart pile K/rali pile Wallaba poles Spars Posts Paling stvs Shingles Charcoal Firewood |
Cu.ft
Cu.ft B.M. Lin.ft Lin.ft Lin.ft Lin.ft Lin.ft pcs. pcs. m.t m.t |
3,359 2,002 406 ... ... 94 32 827 435 1,119 5 28 |
3,793 2,628 490 ... ... ... ... ... ... ... ... ... |
2,462 2,527 318 ... ... 488 44 596 935 490 1,302 40 |
1,399 2,015 2,075 306 1.0 245 56 372 464 161 1,224 9.0 |
1,481 2,094 2,923 147 15 245 28 445 692 345 1,551 7 |
1,754 2,116 5,897 444 26 408 47 452 608 68 1,891 6 |
1,869 4,155 8,498 386 .55 450 162 746 970 94 3,150 11 |
Source: Bureau of Statistics, 1995, Table 5.1
Excluding sugar and rice milling and mineral refining, manufacturing is characterised as comprising light industries. The names of some selected light industries are shown in Table 36-2.
Table 36-2
Principal Light Manufacturing Industries
1994
| Sawn lumber | Flour |
| Plywood | Biscuits |
| Other wood and paper products | Aerated beverages |
| Garments | Rum |
| Fabric | Beer and stout |
| Footwear | Pharmaceuticals, other chemicals |
| Copra | Paints |
| Edible oil | Cigarettes |
| Margarine | Matches |
| Copra meal | Stockfeed |
| Soap | Stoves and refrigerators |
| Jewellery | Metal working |
Except for wood products, alcohol and alcoholic beverages, Guyana's manufacturing industries produce for the small domestic market and often operate inefficient plants. Except in the forest-based industries, rum production, copra products, and stockfeed, there are virtually no inter-sectoral linkages, as most raw materials are imported. See Chapter 34 for a more complete treatment of the manufacturing sector.
In describing the industrial structure of the Guyanese economy, economic activities can be classified into three broadly defined groups:
the primary sector, which includes agriculture, fishing, forestry, mining and quarrying;
the secondary sector, which includes manufacturing, engineering and construction; and
the tertiary sector, which includes transportation and communication, commerce, business services, rentals, finance and Government services.
In a typical industrialised nation, the relative shares of total production exhibit structural changes in response to increases in national income. The growth of the secondary sector is expected to rise as value is added in furthering the stages of production. The share in the tertiary sector will increase at the expense of a continuing decline in the primary sector's share. These trends, typical of the experience of economies that have passed through the industrialisation process, are dissimilar to the evolution of Guyana's economic landscape. The manufacturing sector remained relatively constant in its level of real GDP for the period 1988-1992, beginning to show increases in 1993-95. There has been a consistently upward trend of the primary sector since the end of the 1980s.
In 1994, the production shares of the primary, secondary and tertiary sectors were respectively 66, 9 and 25 percent (at current factor prices). The primary sector is unusually dominant. The sugar and rice sub-sectors are dominant in the agricultural sector and, therefore, in the economy. The performance of the primary sector is reflected in the contribution of a few land-based products: sugar, rice, bauxite, gold and timber. Excessive dependence on these products should not be encouraged in this era of globalisation, due to the uncertain and fluctuating nature of their markets in the long run. However, Guyana has undeniable advantages in some of these products.
1. Overview
The evolution of Guyana's development path can be classified into three distinct time phases: 1966-1970; 1970-1988; and 1988 to present.
In first phase, the development strategy followed an open, market-oriented approach. The aim was to attract and retain foreign capital to broaden the manufacturing sector. During this period, the export of land-based commodities continued. There was no systematic attempt to promote industrialisation. However, foreign ownership in all sectors of the economy was predominant.
In an attempt to exert greater Government control over the economy, Guyana was declared a socialist republic in 1970. The second phase can thus be classified as the period of socialist administration. During this period, Guyana's development path was subject to State control and ownership of all the major economic activities, including the financial and transportation services. An import substitution strategy behind high tariff barriers and a controlled exchange rate also was pursued. A regime was also provided to encourage investment and offered generous fiscal incentives. Government further provided infrastructure and institutional arrangements for establishment of industries. It was during that period that the first industrial site was provided at Ruimveldt and the Industrial Development Corporation was created.
In its Economic Development Plan (1972-1976), the socialist administration emphasised the role of industrialisation via import substitution policies. The objectives stated in the Economic Plan for the manufacturing sector were as follows:
increase output of the sector both through the expansion of goods currently manufactured and the production of import replacements;
diversification;
creation of employment opportunities;
promotion of equitable distribution of industries on a regional basis;
intense utilisation of indigenous materials;
promotion of local manpower development, particularly management, technical and professional skills;
to choose projects which possess high forward linkages.
Unfortunately, the development plans failed to achieve their objectives. The strategy failed to initiate new and diversified industries. These failures reflected inappropriate Government policies for the period (1970-1985) and are explained in detail in the following sub-sections.
2. State Ownership
The Government's virtual control of the economy in the 1970s resulted in the proliferation of public enterprises and the miniaturisation of private activity. This situation led to the gradual deterioration of the socio-physical infrastructure and, the increased incidence of institutional, managerial and organisational bottlenecks within the public sector. Weak management and overstaffing characterised State enterprises.
State-owned enterprises often operated below optimal capacity and the increased costs of operation were subsidised by either Government advances or guaranteed credit from the local banking system. In effect, subsidies created an unfair advantage over private firms which produced similar commodities.
This policy of State ownership and control had induced an uncertain investment climate which led to the crowding out of private sector investment, local and foreign.
3. Foreign Exchange Management Policy
The foreign exchange rate was set at artificial levels under the socialist administration, which in the end discouraged Guyana's strongest sector, that of exports. There was no meaningful coordination of financial and trade activities. First, Guyana's trade authorities in 1970 either prohibited or centralised the importation of a number of foreign commodities. While these measures were intended to protect the balance of payments, they were also seen as a broader economic strategy aimed at encouraging local production, without due regard for the competitiveness of those industries which would grow up under such regime. Second, the Bank of Guyana, in an attempt to ensure strict accountability of foreign earnings, instituted measures for the repatriation of export earnings. Third, the commercial banks were severely restricted in their approval of payments in foreign currency. The result of this measure was a serious build-up in commercial debt arrears as importers found it increasingly difficult to pay for foreign inputs. The external payment deposit scheme was introduced by the Bank of Guyana in 1978 with the express aim of assisting the systematic elimination of commercial arrears. Importers were requested to deposit the local dollar equivalent of the value of imports in the Bank of Guyana, well in advance of when foreign exchange became available.
By 1979, however, arrears were again accumulating and the banking system was unable to provide foreign exchange for the payment of even routine imports. As this situation continued into the 1980s, the commercial banks' authority to approve foreign payments was withdrawn and import licenses were granted only on a priority basis which were as follows:
raw materials for the manufacturing of essential items;
raw materials for manufacturers in the export market;
equipment and raw materials for sawmillers;
commodities for hatcheries;
spare parts;
petroleum products;
importation by international organisations and members of the diplomatic corps;
drugs.
As the foreign exchange situation became aggravated in 1983, even those facilities that were being approved were subject to the availability of foreign currency. Implicit in this was the fact that, in many cases, there were delays in the acquisition of imports with the attendant deleterious effect on production.
The raw material inputs to manufacturing were mostly imported and were financed by foreign exchange generated mainly from the exports of sugar, bauxite and rice. The manufacturing sector started as a net user of foreign exchange and remains so to this day. The decline of the sugar, bauxite and rice industries during the 1970s and 1980s obviously led to the virtual collapse of the local manufacturing sector over those two decades.
In the ensuing years, the Bank of Guyana declared a resounding "No" to numerous requests for foreign exchange. This State of affairs induced the development of a black market for foreign currency. This parallel economy operated effectively by offering higher purchasing prices for currency and subsequently subverted the flow of foreign currencies in the institutionalised banking system. Furthermore, the underground economy facilitated local manufacturers to obtain foreign currency to purchase inputs, though at relatively high prices that many of them could not afford at the time.
4. Exchange Rate Policy
During the decade of the 1980s, the local currency was devalued on numerous occasions. The devaluation measures were aimed at reducing:
reducing the financial losses of the exporting corporations and hence encouraging exports;
reducing the deficit of the public sector as a whole by increasing trade taxes;
reducing the need for borrowing from the banking system by the exporting corporations; and
reducing the corporations' financial dependence on Central Government.
These devaluation measures did not help domestic producers because they were insufficient to keep the exchange rate from becoming overvalued, in effect always "too little and too late."
5. Pricing Policy
In the early 1980s, controlled prices were introduced on a wide range of commodities to minimise the rate of price inflation. The market prices of these goods underestimated the true social cost of inputs. This divergence between controlled prices and the opportunity costs of inputs exerted a negative impact on the profits and growth of the manufacturing sector. As a consequence, resources were reallocated from the manufacturing sector to the service sector. The instrument of price controls was being used in a futile attempt to counteract the inflationary effects of the Government deficits.
6. Consumption Tax Policy
The consumption tax was placed on both imported inputs and manufactured goods for the domestic markets in order to increase Government revenues. Measured in terms of world prices, this system of consumption tax policy reduced the international competitiveness of manufactured exports. Also, manufacturers faced unfair competition from the parallel economy in which goods entered illegally. These unfair trade practices also prompted many firms to switch their real resources from the secondary to the tertiary sectors.
In mid 1980s, numerous policy measures were introduced to try to improve the performance of the economy. For example, the Export Development Fund was created to relax the foreign exchange constraints to production; a zero-rated consumption tax was extended to all inputs utilised in the manufacture of goods earmarked for exports; and the Export Promotion Council was established to assist local manufacturers.
Other policy measures included the closing down of uneconomic enterprises and the removal of some price controls and subsidies. Most of these palliative measures, however, failed to exert significant positive impact on the manufacturing sector because the exchange rate remained overvalued and overall economic framework did not change, and hence the sector's growth rate and contribution to GDP continued to decline.
In mid-1988, market-oriented measures were introduced under the Economic Recovery Programme. These measures involved a fundamental reorientation of Government's economic policies from excessive State control to a market-oriented economy. These measures became operational in the early 1990s. The impact of these structural changes on the private sector was largely positive but with some mixed aspects. The ERP is necessary but not sufficient to stimulate the private sector to provide for increased industrial output. While ERP establishes a market-oriented economy, a set of fine-tuned policies is required to induce accelerated performance in industry and private services. The rapid economic growth that has been recorded over the last four years, on the basis of agriculture and extractive sectors, must be sustained by nurturing the participation of private sector in manufactures and trade-related services. Over the past two decades, private sector activities were mostly restricted to agriculture, small scale enterprises, wood-based industries and more recently, gold production. There has been a renewed interest to create an enabling environment to facilitate private sector expansion by adding value through further processing of primary products. This view stems in part from the evidence that the manufacturing sector plays a relatively marginal role in national income generation through the Caribbean.(1)
The principal changes in policy in recent years have included a freer foreign exchange regime, decontrol of almost all prices, reductions of tariffs and non-tariff barriers, privatisation of some State enterprises, a new framework of monetary and fiscal management, and implementation of a framework for private banking. The changes have been substantial in some resource-based sectors also, as virtually all rice mills have been privatised, rice prices have been decontrolled, and the facilities of a Government fishing enterprise have been sold or leased out. The agency that approved and promoted investments, which had proven to be cumbersome and ineffective in practice, was closed and new office opened for that purpose. Some refinements in the tax structure have been instituted and efforts have been made to strengthen tax collections.
Nevertheless, there has remained a degree of uncertainty in the eyes of the private sector about Government economic policy. The majority consensus in the private sector would call for greater efficiency in Government procedures involving approvals and licences of all types, more decisiveness in privatisations and greater attention to infrastructure needs. Policy is moving to respond to those concerns and this National Development Strategy defines comprehensively the new approaches in all areas related to the private sector.
The principal issues and constraints facing the private sector arise from the legacy of two decades of a declining economy and the absence to date of a definitive national policy on private sector development. Currently, Guyana has no comprehensive national private sector policy aimed at stimulating investments, industrial performance and commercial development. Past attempts at development planning for Guyana met with difficulties for one reason or the other and were subsequently abandoned, in large part for lack of an appropriate conceptual framework. In formulating such a policy, decision makers must incorporate an independent analysis of the issues and constraints facing the manufacturing sector. For simplicity in analysis, this section provides a summary of the key issues and constraints.
1. Industrial Development
Over the past decades, Guyana's development has continued to focus on the export of a few primary commodities: sugar, rice, shrimp, bauxite and more recently gold, diamonds and timber production. Manufacturing, which represents the further processing of primary goods, can provide important linkages (both backward and forward) with the other economic sectors of the economy, in particular, those of raw material base and the commerce sectors. In the absence of increased domestic value-added content, the economy has embarked on a narrow growth path subject to the vagaries of international markets for primary products.
While the economy needs greater diversification, Guyana's greatest comparative advantage in industry lies in those subsectors linked to its vast natural resource endowment: wood products, agroprocessing, and further processing of gold and diamonds. In an international perspective, those smaller economies that are most successful have developed specialised expertise in selected areas of manufacturing, focussing on export markets. Thus Guyana needs to strike a judicious balance between diversification and strengthening its capacity in areas of obvious advantage.
At the national level, a long-term policy should focus on renewed cooperation between the Government and the private sector with respect to industrial space (industrial estates) and location(s), support services (including investment promotion) and technical assistance. The policy should also address other important elements such as training (both managerial and vocational), infrastructural services, long-term financing and research and development.
The success of a sustainable, viable and efficient manufacturing sector depends in good measure on the availability of skilled labour, capacity for research and development, and the availability of adequate infrastructure, including electricity, roads, ports and airports (Chapter 34).
2. Markets and Marketing
In many manufacturing industries, specialisation is limited by the extent of the market. The domestic market size, with an estimated population of less than 800,000, is too small to accommodate output levels of plant at which unit cost is minimised. With firms producing only for the Guyana market, the market structure is oligopolistic for many products.
Guyana's exports are mostly earmarked for CARICOM markets. As a result, only limited inroads have been made into the North American and other foreign markets. While the intra-regional market (CARICOM) is crucial for many small and medium-sized manufacturers, finding new extra-regional markets (North American and other foreign markets) is strategic for overcoming the problems of scale inefficiency.
Other than procuring new markets, export goods must compete with foreign products of international standard and quality. A majority of Guyana manufacturers operate obsolete and depreciated plants. Consequently their output is of substandard quality. The potential for high-quality products necessary to compete in export markets exists in only a small group of manufacturing industries such as furniture and other wood products, garments, industrial diamonds, alcohol and alcoholic beverages, and non-traditional agricultural products.
It should be borne in mind that increasingly the quality question has an environmental dimension. Processed primary products, such as wood products and shrimp, now need certifications that the resource base for their raw material inputs is managed in a sustainable manner or without unnecessary environmental damage, in order to penetrate many of the most profitable markets abroad.
In addition to the need for improvement of quality and standards of products, the information base is inadequate in respect to external markets and market niche structures. Timely information is needed on price, quality, packaging, frequency of delivery and distribution patterns.
3. Foreign Investment
The process of approval of foreign investments is still time-consuming and there is too large a discretionary element as regards which taxes may be zeroed out and other benefits. Standard agreements for key sectors are not available. The process is biased in favour of the processing of primary products and other manufacturing, and knowledge-based enterprises, for example, may not receive the same treatment. The responsibility for investment promotion has been mixed in with that of investment approval, when conceptually the two activities should be separated. A related issue is that foreign investors do not have rights to full repatriation of profits, nor to maintain cash for operating purposes in offshore accounts. Above all, a clear and simplified investment code needs to be published and widely distributed.
4. Company Registration
The existing rules for start-up of companies are too onerous (see Chapter 35 of this Strategy), thus effectively discriminating against small firms that are potentially important sources of employment growth.
5. Financial Support
Guyanese firms must rationalise their productive capacities and prepare to compete with efficient foreign firms. This re-tooling of productive lines requires access to industrial financial assistance. However, the procurement of such financial support is a complex, time consuming and costly process. In many instances commercial banks are risk averse to micro-enterprises. The time lag involved in processing investment loans is approximately six months or longer. Such a lengthy process often induces entrepreneurs to either abandon projects or seek funding from outside the financial intermediaries. Consequently, the commercial banking system accumulates excess liquidity which is under-utilised, and yet at the same time real interest rates are high. Financial intermediaries sometimes prefer to issue commercial loans for consumption purposes, more often to invest in riskless T-bills. Industrial micro-enterprises are seldom considered for overdrafts or soft loans.
This situation could be improved for many Guyanese firms by better access to U.S. dollar loans. However, while such loans are now available in principle, in practice each one has to be approved by the Central Bank or the Ministry of Finance, a process that is cumbersome and makes the loans in effect less accessible in many cases.
6. Research and Development
The level of R&D is almost non-existent in the manufacturing sector. R&D expenditure has been and continues to concentrate in the traditional agricultural sector under the aegis of NARI. Unlike NARI, there is no equivalent R&D institute in the manufacturing sector. A dynamic R&D programme is mandatory to induce manufactures to develop efficient production techniques, quality control and packaging requirements. This type of activity necessitates continuous appraisals of the market environment to gauge the extent of foreign competition. R&D efforts have to be selective in an economy the size of Guyana's. Presently, they could most effectively be established for forest products, non-traditional agriculture and textiles.
7. Qualified Labour Force
Another long-term issue that requires immediate attention is the constant upgrading of both the educational system and the human resources to match the increasing needs of the manufacturing sectors. A common theme reiterated by manufacturers is the failure to retain skilled labourers who have been trained at the expense of the employers. Once employees have acquired technical skills on the job, they often either migrate or initiate their own business ventures. Furthermore, graduates from the Government Technical Institute are not adequately trained to assume technical positions. Under these circumstances, firms experience increased production costs in upgrading the skills of new staff.
The government has emphasised the correlation between the development needs of the economy and the provision of quality education in order to ensure sustainable, efficient and high-quality performance, and policies in this area are set out in Chapters 20 and 35.
8. The Tax System
Although the tax system has seen improvements in recent years, it still is uneven, with an irregular pattern of exemptions to consumption taxes and import tariffs. The consumption tax, by being applied to imported raw materials and intermediate goods as well as final products, produces a cascading effect that effectively penalises the manufacturer of the final product. In this regard, a value added tax (VAT) would be much preferred in terms of its incentives for production. The high end of the range of income taxes, at 45 percent, is above the corresponding rate for almost all other countries in the region. Tax collection also is a concern inasmuch as it continues to emphasise a relatively small number of larger enterprises, letting the smaller ones escape from the net of the collection system. The customs clearance system still is unacceptably slow. (These issues also are dealt with in Chapter 13.)
9. Property Rights
The mixed legacy of traditions in regard to land tenure, in combination with the antiquated state of the property registries, often results in entrepreneurs being unable to acquire the property rights that they need in order to justify investing in a project. This circumstance impedes the development of many kinds of activities; aquaculture is an outstanding example (see Chapter 31).
10. The Legal System
There is a lack of adequate legal procedures for enforcement of contracts. This lacuna introduces additional (and unnecessary) uncertainty into normal business relationships. The legal system has badly deteriorated over the last two and one half decades, suffering a flight of its best talent to more attractive situations abroad, a deterioration of physical facilities and libraries, and a general demoralisation of staff. The Governments of the 1970s and 1980s made a deliberate effort to subordinate the judicial system to the executive, a policy which in and of itself brought about a massive outmigration of persons with relevant skills and abilities. This loss affects all sectors in society, including the private business sector. Restoration of the legal system is one of the most urgent national priorities.
The private sector has the potential to grow significantly, though constrained by a number of factors as follows:
1. Inadequate and deteriorated infrastructure support; (e.g., electricity, water, road, port and communication facilities).
2. Outdated and over-used technology.
3. Scarce skilled personnel.
4. Poor marketing capacity.
5. The lack of fully articulated policy framework aimed directly at developing a sustainable and economically viable manufacturing sector.
Other major constraints include:
6. The slowness of the bureaucracy in approving investments, licensing firms and taking other necessary actions. Sometimes this slowness is accompanied by arbitrary judgements. Import licensing has not been entirely done away with.
7. Inadequate air and sea transport system. Policy has put a cap on the number of commercial airline seats available domestically and has not encouraged competition in providing the vital international air service. Similarly, port facilities are very inadequate, in terms of depth of harbour and also unloading capacities, for an export-oriented economy. (These constraints are reviewed in Chapter 38.)
8. Outdated legislation for quality assurance and product grading. This legislation needs to be updated as a measure to improve performance in both domestic and foreign markets.
9. Inadequate drainage and irrigation facilities. The two leading agricultural crops, rice and sugar, are produced on the coastal belt 80 miles long and 20 miles wide. This area is one to one-half metres below the sea level and requires continuous protection from the saline water by an integrated network of irrigation and drainage canals. Thus, insufficient expenditure on D&I is an important constraint that has affected productivity improvement in the agricultural sector. This constraint is dealt with in Chapter 38, but it is sufficiently important to the private sector's development that it is worth reiterating here.
Some of the key issues and constraints were very well identified in a landmark report by Clovis Beauregard in 1991(2)
and, it is fair to say, most of the concerns identified in his report are still issues, a least to a degree. Because it gives a recent historical perspective, and also because its insights were acute, it is worth citing here several of his principal findings.
Beauregard's tasks were to:
"a) Inquire into the problems (including bureaucratic procedures) which are inhibiting the Guyana private sector in its effort to expand, assume a more dynamic and dominant role in the economy and make its full contribution to the national objective of sustained economic growth, development and national prosperity.
"b) Make recommendations for dealing with these problems and all matters incidental thereto. . . . "
His findings included the following:
"It was noted that much valuable time was lost in obtaining necessary documentation and/or permission from the relevant government agencies in order to conduct business. The failure of certain government agencies to acknowledge controversial and other correspondence was also noted.
"It was also stated that matters previously dealt with at the level of Permanent Secretaries were now being referred to Cabinet for decision, causing even further delays. . . .
"Lack of managerial capabilities: The view was expressed that deficiencies in this very important field were a direct result of the brain-drain plaguing Guyana. It was noted that the private sector agencies themselves often lacked the necessary expertise.
"As a consequence, with respect to human resource development, there was a widespread call for the establishment of an entrepreneurial training centre that would be managed by the private sector. . . .(3)
"It was the general view that the 'punitive taxes' and 'high interest rates' were among the major deterrents to the growth of the manufacturing sector. . . .
"Private sector representatives pointed out that Government revenues from income taxes need not suffer as a result of a lowering of taxes if efforts are made to extend the tax net to include the various entrepreneurs and businesses operating outside the formal economic sector. In fact, it was strongly emphasized by certain important groupings that it was grossly unfair to expect a 'handful' of companies to bear the brunt of taxation while scores were allowed to act with impunity.
"The Guyana Small Business Association . . . . suggested that in order to trigger such voluntary movement into the formal economic sector, taxes would not have to be viewed by small businesses as punitive, and hence would have to be reduced.
". . . a strong case was made for the introduction, as a replacement tax [for the consumption tax] of a value added tax (VAT) on general consumer expenditure, on business transactions and on imports.
"The value added tax, established thirty years ago in Europe, is now successfully in operation almost everywhere, in about fifty countries, including Trinidad and Tobago.
". . . because of the unreliable power supply, private sector companies often have to pay workers a full day's wages even when they are not producing; also they are often unable to meet production deadlines. An irregular electricity supply, including voltage fluctuations, had damaged the machinery of companies and caused spoilage of food products, resulting in severe losses.
"As far as transport is concerned, it was said that difficulties in this field were hampering the export of organic products.
". . . the Association of Non-Traditional Exporters of Guyana (ANTEG), identified inadequate cargo transportation (shipping and air-cargo services), the lack of storage facilities, the unavailability of proper packaging materials and excessive bureaucratic procedures, as the major constraints facing exporters of primary agricultural products.
"It was said that unlike other Caribbean countries, Guyana had no pre-cooling and cooling facilities to be used for the export of primary agricultural products. This situation, combined with high freight costs and unreliable air cargo services, caused these local products to be 'uncompetitive' in overseas markets.
"General reflection: . . . Priority will be given more and more to the market and private enterprise, which will thereby increase considerably the role and responsibilities of the private sector. Henceforth the rules of the game will be:
- Competence in management
- Increased productivity and production of goods and services through largely export-oriented investments
- Quality
- Competitiveness
. . . . "
In light of the discussion in Chapter 2 of this National Development Strategy, the broad national objectives for the private sector are:
1) That the private sector continue to play a leading role in the growth of the economy, as it has been doing so far in the decade of the 1990s, thereby contributing fundamentally to the transformation of our economy and living standards; and
2) That the private sector be the major engine of employment creation, thereby assisting materially to the alleviation of poverty in our society.
These objectives are posited out of conviction that only the private sector can play these roles adequately, and that the development of the private sector in this sense is critical to the attainment of our national aspirations for substantially improved living conditions. The achievement of these objectives requires the development and implementation of a complete policy framework for the private sector, along the lines that are set out in the succeeding section.
The more operational sub-objectives in regard to the policy framework for the private sector are:
3) Improving the legal framework for private productive activities, including better enforcement of contractual provisions, simpler company registration procedures, and more secure property rights.
4) Improving the taxation system so that its disincentives to production are minimised and the inefficiencies associated with variations in total taxation rates across subsectors are eliminated.
5) Improving the efficiency of governmental services and procedures such as those relating to investment approval, licensing and approval of certain classes of financial transactions.
6) Improving the nation's productive infrastructure.
7) Improving the educational and training system.
8) Improving the nation's capacity for industrial research and development.
9) Continuing the programme of privatisation of productive capacity.
Prior to discussion of the policies for achieving these objectives some strategic orientations are reviewed.
As discussed above, our current reliance on a few major export products exposes us to significant economic risks, especially those of the international marketplace. The shutdown of Omai Gold Mines Limited for part of last year, and its consequences for the economy, well illustrates the dangers inherent in this over-dependence on a limited number of products. Therefore economic diversification is needed at least to a degree. Chapter 35 sets out the concept of an export processing zone which undoubtedly would provide a substantial assist for moving in the direction of diversification.
However, as also noted, diversification cannot be arbitrary and it should not be linked to "footloose" industries that may leave as quickly as they come. The logical places for our diversification to start are those industries linked to our resource base, and those in which we previously had a strong base. The former category includes gold refining and working, industrial diamond processing, non-traditional agriculture, aquaculture(4)
, and forest products such as millwork and veneers. The latter category includes textiles and, to a lesser extent, metal working. These types of industry should form the core of our export processing zone for the next ten years.
In addition to appropriate diversification, the second strategic concept is that of export orientation. This orientation becomes essential for us because of the small size of our home market and the corresponding difficulty that firms have in reaching the minimum efficient size for production, on the basis of sales to this market alone. The intense competitiveness of world markets for manufactures is acknowledged, but it also must be recognised that under the CET Guyana has a natural overseas outlet in the form of the CARICOM market. Production for sales on that market (of, e.g., textiles) could be a useful preparatory step to mounting a strategy for penetrating more distant markets.
The third strategic concept is that Guyana's diversification should be based on light industries and selected services, with the obvious exceptions of mineral refining, some wood processing and sugar milling. Guyana has strong current or potential advantages in areas like millwork, jewellery, simple metal working, textiles and food processing. These are industries that hold the promise of creating considerable amounts of domestic value added even though their development could benefit from foreign investment and technology. Recent investor interest in the gold-working sector and in processed fruits confirms these potentials. Ecotourism, aquaculture and knowledge-based industries should not be overlooked in the quest to identify sectors with important growth potential. Within the service sector, international trading activities would be expected to grow in importance as our country's export base expands, more especially so when the road to Lethem is completed and a deeper-draught port is available, to facilitate entrepot trade from the Brazilian savannah.
Although the private sector is expected to be the main productive force in the economy and the predominant source of employment creation, the Central Government will play a major role in the implementation of this Strategy through its role as facilitator. The Government will continue to provide the infrastructural support to the sector along with an appropriate policy and legal framework.
Since education and training are crucial to maintaining an economically viable and sustained manufacturing sector with high level of efficiency, the government will continue to focus constantly on upgrading the human resources of the economy and will contribute to and encourage the private sector to become involved in manufacturing research and development activities. Through its consulates abroad, the Government will also provide valuable marketing access support to the sector as well as the mounting of trade fairs abroad.
Government also will endeavour to upgrade the provision of other basic social services, especially health and potable water but also housing and other essential amenities. It must be recognised frankly that the deteriorated state of the health and educational systems is one of the main impediments to attracting back Guyanese professionals who have successfully established themselves abroad. Thus improvements in these services are essential not only to the well-being of the present population but also to be able to recapture some of our out-migrated human capital.
In its new role as a facilitator, the State is expected to provide the necessary supportive networking of institutions and institutional framework which aid, promote and foster economic development. Examples of supportive networks include the maintenance of law and order, the training system, and the other basic services mentioned above. The overall administration is weak throughout the public sector and requires complete overhaul, e.g., the Customs Department. More resources are required for this process and the State should involve the private sector in developing mechanisms to deal with shortcomings.
The State should encourage industrialisation via the provision of industrial space (e.g., industrial estates) support services (including investment promotion and marketing) and technical assistance. The State should interface with the private sector as follows:
To relate more with the private sector in information sharing in negotiations at the international trade level and with international and multilateral donor agencies.
To pass expeditiously information on matters relating to the availability of developmental aids and technical assistance from foreign missions and donor agencies to the private sector.
To provide the private sector with opportunity to contribute to national decision-making. This is essential to the strengthening of the democratic process. It also affords Government the opportunity of drawing on certain resources of which the private sector is endowed with, e.g., management.
1. A Simplified, More Equitable Tax Regime
While considerable progress undoubtedly has been made in simplifying the system of import tariffs and eliminating unjustified tax holidays (for income taxes) for foreign investors, investors still are dismayed by the considerable variations in the consumption tax, as applied in practice, and similarly by the uneven pattern of exemptions to the import tariffs. It is fully recognised by the private sector that both these taxes are crucial to the fiscal equilibrium of Government; nonetheless, the private sector's planning for production and investment would be facilitated by rates that were more uniform and relatively low. As long as the consumption tax is necessary (see below), economic and business efficiency would be promoted by establishing a single rate, universally applicable without exemptions whatsoever, except for items vital to life itself such as selected medicines. The same argument is advanced in respect of the structure of import tariffs: preferable a low but non-zero minimum rate to a combination of higher rates and zeroed-out rates.(5)
The recommendations of Chapter 32, for a mining fiscal code point in this same direction of simplicity and relative uniformity. Such an approach removes a burden of uncertainty from the potential investors and makes it less likely that the success of the project would be dependent on their negotiating skills with the Government. It also makes incentives for resource allocation more uniform across sectors, thereby allowing the market to play a greater role in nurturing industries, guaranteeing enhanced growth prospects for the economy.
Another principal concern of the tax regime is the high level of the upper end of the range of income taxes. The rate of 45 percent is currently out of step with that of most other countries in the region and puts Guyana at a competitive disadvantage. It also increases the difficulties of tax collection. Reducing the rate, perhaps in two steps, to approximately 35 percent could well improve collections.
The tax base has been discussed on many occasions. Recent efforts to broaden the base are necessary and laudable. Policy should continue to move in this direction to permit a fairer sharing of the tax burden.
2. The Adoption of Value-added Tax
This section examines the merits of a proposed value-added tax (VAT) to replace the current consumption tax. VAT is simply a tax levied on the value of goods and services at each stage of the production-distribution chain. It is the responsibility of the vendor to record and submit the taxes, on an incremental basis, to the Central Government. The incremental amount is the residual over and above the amount collected after each taxpayer received his/her refunds for taxes already paid. The amount of taxes collected is equivalent to t{ Y-X} dollars where Y and X respectively represent sales volume and input costs, and t denotes the VAT rate. The VAT system is currently being used in more than 50 developing countries, including some CARICOM countries, such as Trinidad and Tobago. It has been instrumental in widening the tax base and reduce the amount of tax evasion. The eventual introduction of VAT in Guyana could provide additional revenue to reduce fiscal deficit and promote industrialisation. While a VAT could not be introduced immediately, the preparatory steps, including an educational campaign, should be commenced as quickly as possible.
a. Equity and Efficiency
In considering the adoption of a VAT system, the issues of equity and efficiency on resource allocation are the foremost considerations. The question of equity is related to the distributional impact of the tax on consumers of different income levels. Efficiency is concerned with the impact on production, consumption and on resource allocation. Like the consumption tax, the VAT is regressive. It is borne by consumers who spent a high proportion of their income on basic goods and services. However the regressivity of the tax can be mitigated by granting exemptions to necessities or offering lower rates. With the exception of those exemptions, a VAT is applied to all goods and services, including imports. The system ensures that VAT is paid on imports even if the border price excludes it. The tax is collected at a later stage when each taxpayer substantiates the amount due with receipts on input costs for refunds. Hence VAT is considered relatively neutral in the sense of minimising price distortion, and it avoids the cascading effect of accumulation of taxes paid at each stage in the industrial processing chain.
b. Administration
The collection of VAT is made at each stage of the production and distribution chain and down to the consumer level. Each taxpayer has a built-in incentive to ensure that the payment of taxes is recorded accurately for the purpose of tax refunds. The amount of refunds for purchased inputs is computed upon the submission of tax receipts. The system is self reinforcing. This incentive to insure that the amount is correctly recorded will minimise the extent of tax evasion in Guyana.
c. A Useful Preparatory Step
A logical way to prepare for the introduction of the VAT is to initiate a programme of allowing tax rebates to traders who sell inputs to registered manufacturers. By itself this measure would reduce the cascading effect and its administration would foreshadow that of the VAT.
3. Export Processing Zone
In recent years, export processing zones (EPZs) have become popular in promoting industrialisation in the Caribbean and Central American countries, including Jamaica, Barbados, the Dominican Republic and Honduras. Under EPZs, firms cater exclusively for external markets on conditions that all taxes on inputs and outputs are waived including duty on imported inputs. It is essential that such a zone in Guyana be located within close reach of a deep water harbour, for transportation cost is one of the disadvantages we must overcome to be competitive. Conceived properly, there are both static and dynamic gains from EPZs, and the creation of at least one EPZ is a major pillar of this National Development Strategy.
a. Static Gains
The immediate short term benefits from EPZs are job opportunities and the earnings of foreign exchange. Over the past two decades, these direct gains are quite impressive for some of the Caribbean countries. In the Dominican Republic, for example, employment in the EPZs increased from 500 in 1970 to 165,000 in 1993. Chapter 35 has emphasised the employment benefits of EPZs in spelling out the new policy to promote them, and Chapter 34 also considers them vital.
b. Dynamic Gains
In their attempt to satisfy external markets, firms continuously require the services of the primary and tertiary sectors. It is expected that firms will continue to be attracted to explore the possibilities of utilising indigenous materials in their export-oriented activities. The creation of an EPZ could contribute to dynamic gains through linkages to mining, forestry, fisheries and agriculture.
With Guyana external debt in excess of 2.3 billion US dollars, the Government should encourage foreign firms to invest in building and EPZ in Guyana under an agreement to build, operate and transfer. Under this investment scheme, the foreign company would operate the enterprise for a specified time period until all costs are recovered or a percentage of profit is made. This type of venture has been adopted in the Philippines and was successful in saving considerable amounts of foreign exchange for the country.
4. Savings and Capital Formation
There exists an urgent need to accelerate the rates of savings and of capital formation. One of the main methods by which economic development proceeds or accelerates is through the gradual but definite accumulation of both the nation's physical and intangible capital stock.
Intangible capital stock includes technical and academic skills and scientific tradition that are conducive to economic progress or economic development. These intangible assets enhance the productivity of the physical capital. In this regard, the more vigorous educational and training policies set out in Chapter 20 and 35 are absolutely vital to the private sector's expansion and to the entire country's prosperity.
Savings are essential for growth of both kinds of capital stock. One of the factors that most influences the national rate of saving is a stable, clear and growth-oriented framework of economic policies in which productive investment opportunities can be perceived. Savings above all are a statement of confidence in the future, and the policy framework needs to foster such a sense of confidence. Another factor conducive to saving is strengthened financial intermediation, with sound bank management and attractive real interest rates for depositors (see Chapter 15).
Foreign savings also are vital to the investment process, and in this regard policy needs to improve the procedures for reviewing and approving foreign investments. A true one-stop investment approval office needs to be created, with emphasis on much faster approval of applications, and the efforts at investment promotion should be carried out by a separate entity that includes leading representatives of both public and private sectors. Perhaps most importantly, as emphasised above, a clear foreign investment code should be published, along the lines of that which is recommended in this Strategy for the mining sector (Chapter 32).
5. Monetary and Banking Reforms
The banking sector has improved its capacity very significantly in the last three years; in effect a private banking sector in the proper sense of the term has been created. Notwithstanding this advance, monetary and financial reforms are urgently needed to address questions of access to credit for investment and production, especially on the part of small and medium-sized firms. Their competitiveness in export markets is considerably hampered by the difficulties of access to financing. Indeed, foreign investors who wish to operate in the Guyanese small market have a competitive edge over local investors because of their ability to access capital at a relatively lower rate in foreign capital markets.
Policy needs to reduce Government borrowing on the domestic financial market, which only serves to drive up interest rates and offer banks a relatively risk-free option (T-bills) to commercial lending. By the same token it is very important to take measures to make foreign exchange more freely available (at the going quotation) through the banking system and to ease the restriction on access to loans in US dollars. The latter should no longer require approval from the Ministry of Finance, now that this class of loans has been authorized on principle.
6. The Procedural and Regulatory Framework
A central thrust of this National Development Strategy is making Government more efficient in the provision of public services. This is crucial for the development of the private sector. Efficiency in this context not only refers to cost-effectiveness but also embraces the concepts of timeliness and reliability of the proffered services.
An area where it is important to apply this concept is the procedures for registration of new companies, which is directly related to the prospects of micro-enterprises, which in turn have a bearing on the rate of reduction of poverty. Such procedures should be drastically simplified and speeded up, and personal and business taxes should be merged for smaller firms. As pointed out in Chapter 35, improvements of that nature in Peru have been responsible for dramatic increases in the number of new companies registered. By the same token, procedures for registering NGOs need to be simplified drastically.
This spirit has to be applied to investment approvals and all other areas of interaction between the public and private sectors. Within Government, decision-making needs to be made quicker, delegating many more matters to the levels of the responsible officials rather than reviewing them at Cabinet level. It is necessary to inculcate a vision of Government as a system that functions according to prescribed rules and procedures, and not a structure driven from on top by the decisions of a few personages.
Export licensing requirements are still unnecessarily burdensome in many cases. They have little justification for being retained. A useful option that should be pursued is to make export licensing automatic upon presentation of proof of having paid taxes.
7. Research and Development
A prominent explanation of high production costs in the agricultural sector is the lack of R&D in cropping techniques that could improve productivity. The National Agricultural Research Institute (NARI) and GUYSUCO are respectively responsible for research on crops (other than sugar) and sugar products. Over the past few years, the capacity of NARI to develop new varieties is constrained by insufficient expenditure on R&D. Efforts at R&D in selected manufacturing areas, such as wood processing, textiles and non-traditional agriculture, need to be greatly strengthened, utilising mechanisms of cooperation between the public and private sectors and the university. An integral part of such an effort would be the development of legislation governing patents.
8. Land Tenure Security
In the past a major disincentive to investors has been the inability to obtain secure title to land. This has occurred basically for three reasons: a) the reluctance of Government to grant long-term leases or freehold; b) the consequently limited nature of the land market; and c) the woeful state of the property registries, where many records are in disarray. The policies set out in Chapter 29 of this Strategy in regard to land tenure mark a very important step forward in the area of land tenure. The long-term freely tradeable land leases will improve the collateral value of land and otherwise encourage investments for increasing its productivity. The acceleration of freehold titling and the relaxation of restrictions on land rentals will have similar beneficial effects.
Another aspect of the question of property rights concerns long-term concessions for utilisation of natural resources (timber, minerals): the way in which they are awarded and managed and their transferability. In this regard, the policies established in Chapters 30 and 32 are a vital part of the framework for the private sector.
9. The Judicial System
As a matter of national priority, a large-scale programme is being launched to restore the integrity, independence and capabilities of our legal system. The once-strong system has deteriorated to a point of being one of the weakest in the Caribbean, but Government has made a commitment to reverse its decline. This is essential for the security of contracts, without which a market economy cannot function well, and of course, it is vital for the well-being of our society in broader senses as well.
10. The Privatisation Programme
The pace of the privatisation programme has slowed in recent years. It is recognised that there may have been problems in regard to the financial capacity of the general public to participate as shareholders in the newly privatised enterprises, as attested by the difficulties in placing all the share offerings of DDL. However, there also are doubts concerning the realism of the valuations of some of the assets on offer. Whatever the merits of the past experiences may be, it is essential to move the privatisation programme forward, both to ensure improved management and capitalisation of the concerned enterprises and also to restore the general confidence of the private sector in economic policy. Chapters 39 and 32 indicate very important steps in this regard, in the scheduled privatisations of GEC and bauxite mines. Chapter 33 proposes the same route for GUYSUCO, under compelling arguments that this is the only way to ensure the future viability of the exceedingly important sugar sector, in light of the almost certain weakening of the real levels of sugar prices now received by the industry. These measures would confer very substantial economic benefits on the sectors concerned and at the same time would do more than anything else to convince international donors and investors that our economic policy is now decisive, clear, and oriented to the private sector as regards production.
11. Social Roles for the Private Sector
In a strengthened community of NGOs, the non-governmental sector can play increasingly valuable roles in many areas, including poverty alleviation, health care, improving the situation of women, working with Amerindian communities, and helping reduce the incidence of environmental problems. It should not be overlooked that the private business community also can make important social contributions. Given sufficient access to land, it can construct more housing to ease the national shortage in that area. Under contracts, with Government oversight, it can provide a greater volume of health care services. It can become an important provider of educational services when the new educational policies described in Chapter 20 are implemented. Under the guidance of the Tripartite Council recommended in Chapter 35 it can provide relevant kinds of vocational training. These examples, important as they are, illustrate only a part of the private sector's potential in the social area. This potential must be borne in mind continuously as policies are reviewed and redefined over the years.
In any economy it is the Government's responsibility to articulate a vision of national development, foster a consensus around it, and to formulate policies and programmes to address issues that the economy is not dealing with through its own momentum. At the same time, worldwide experience of the last fifty years has abundantly demonstrated that the private sector is far more efficient in carrying out activities of production, commerce and finance, and that lack of efficiency in these areas hurts development prospects by holding back the growth of incomes and employment. Therefore a central challenge of a development strategy is to find the most appropriate ways of combining the power of market forces, as the primary impulse to development, with the role of the State in providing the development framework, monitoring the process, and providing special assistance to target groups and issues.
Under the concept of this National Development Strategy, the following list describes well the functions of Government. It also is quite consistent with a review of international experience in all regions of the world.
a. Establishing a regulatory and policy framework covering primarily the areas of finance, trade, taxation, investment, the environment and public health and safety. The purpose of such a framework is to establish clear and balanced rules of the game which protect the legitimate interests of consumers, workers, retirees and children, and depositors, investors and producers, whilst assuring a maximum of economic opportunities for all and safeguarding the environment.
b. Defining legal jurisdictions and property rights in an unambiguous fashion, to facilitate production, investment and conflict resolution.
c. Undertaking or guaranteeing the provision of specified public goods, such as national defence, education and health services. These goods can include improved seeds for agriculture and other technologies whose benefits should be widely distributed among users.
d. Assuring the availability, directly or indirectly, of basic physical infrastructure such as transport facilities and fresh water supplies.
e. Developing special programmes to assist poor households, both to meet their immediate basic needs and to improve their own income-earning capacities.
f. Carrying out the functions of taxation, budgeting and programme implementation for the above purposes.
g. Establishing and strengthening the country's judicial and electoral systems.
h. Continuously endeavouring to improve the quality of public administration at all levels.
i) Participating as a partner in selected few production activities, normally as a transition measure.
These are examples of areas in which the community or nation may decide to act jointly, as a collectivity, through the agency of Government. The remaining areas of consumer choice, production, investment, trade and finance are normally carried out on the basis of decisions by individuals or small agglomerations of individuals (corporations, cooperatives, associations, etc.), and therefore are most appropriately left to the private sector defined in its broadest sense, including non-profit organisations and associations. Lack of clarity in the definition of the Government's roles and policies in these areas can undermine incentives to invest and produce and therefore limit the country's economic development. Both clarity and stability over time of the rules of the game are essential ingredients of an economic development strategy, along with an unambiguous commitment that production, finance and commerce are activities in the domain of the private sector.
The policy framework for the private sector presented in this Chapter would require a number of modifications to the existing body of legislation in order to facilitate its full implementation. In summary form, those modifications would include the following:
1. Revision of the Companies Act to ease the registration requirements for new firms.
2. A code for NGOs that incorporates new, simpler requirements for their registration.
3. A new tax code to put into effect the changes described in this Chapter, including the introduction of a value-added tax.
4. Legislation to lay the foundation for an export processing zone, with close access to deep water harbour.
5. An overall revision of the legislation for GOINVEST, separating the investment promotion function from that of approval of applications. The revised approval process should incorporate deadlines with automaticity, e.g., requests of specified kinds not acted upon within two weeks are automatically approved.
6. A new investment code for both foreign and domestic investors, including all relevant tax provisions.
7. A restatement of export licensing requirements to simplify them, including the provision of automatic granting of such licences upon presentation of proof that income taxes have been paid.
8. Legislation establishing rules for patents.
1. 0Country Department III, Trade, Finance, Industry and Energy Division, Latin America and the Caribbean Region, Caribbean Countries: Policies for Private Sector Development, the World Bank, Washington, D. C., April 29, 1994.
2. 0 Commission To Inquire into the Problems Facing the Private Sector in Guyana and To Make Recommendations Therewith and on All Other Related Matters, Report and Recommendations, Clovis F. Beauregard, Sole Commissioner, Georgetown, July, 1991.
3. 0 A recommendation for a tripartite council that would govern training programmes was formulated independently and expressed in Chapter 35 of this Strategy.
4. 0 In respect to aquaculture, and fish processing in general, it may be observed that not all the activities of an export processing zone necessarily have to take place in the same locality. For ease of administering the zone and enforcing its rules, it is helpful to have most of the activities at one site, but exceptions may be made in obvious cases such as fisheries products for which timely cold storage and transport are essential considerations.
5. 0 The practice of zeroing out tariffs has resulted in an average collected tariff rate of only 4.5 percent, vs. total merchandise imports. In contrast, the unweighted mean tariff for most other developing countries in the hemisphere ranges from 11 percent to 20 percent. (See World Bank, Guyana: From Economic Recovery to Sustained Growth, Washington, D.C., 1993, p.47.)