Working Paper
IDS
D1
Institute of Development Studies
The Political Economy of Growth: Why Guyana Fell
Behind? A Growth Analysis of the PostIndependence Period
Dhanraj R. Singh
DECEMBER 2012
University of Guyana
Turkeyen Campus
Guyana
November 2013
1
Singh, Dhanraj R
Honouring the Past, Moulding the Present, Transforming the Future
The Political Economy of Growth: Why Guyana Fell behind?
A Growth Analysis on the Post-Independence Period
by
Dhanraj R. Singh*
*Dhanraj Singh is a Researcher 1 at the Institute of Development, University of Guyana.
This paper was completed as part of the requirements of the MS in Economic History at
the London School of Economic and Political Science.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Published by the Institute of Development Studies,
University of Guyana,
Turkeyen, Georgetown,
Guyana, South America
www.idsguyana.org
November 2013
ISSN 1019- 1305
This paper should be cited as: Singh, Dhanraj (2013). The Political Economy of
Growth: Why Guyana Fell behind? A Growth Analysis on the Post-Independence
Period. Institute of Development Studies, University of Guyana Special Series Working
Paper # 11/12 to commemorate the 50th Anniversary of the University of Guyana.
3
Singh, Dhanraj R
ABSTRACT*
This paper provides empirical evidence on the determinants of the post-independence
growth performance of the Guyanese economy. The estimated model incorporates
determinants from both orthodox and heterodox economics. The evidence suggests that
interactions with Bretton woods institutions, regime changes and the level of democracy
associated with these changes explain Guyana’s growth performance remarkably well.
The continuation of the sharp internal contestation for control of the political economy by
the two major political parties continues to impede economic growth by signaling
economic and political instability, institutional weakness and discouraging investments.
Changes in physical capital accumulation, human capital and the level of technology
were also significant variables explaining the country’s growth.
Key Words: Political Economy, Long Term Growth, Economic and Political Change
*I wish to thank Professor Alejandra Irigoin from the London School of Economics for her huge effort and
valuable insights in guiding me through this paper; Professor Victor Bulmer Thomas for his critical
comments and invaluable advices. Finally, I will never be able to thank Ms. Cynthia Ashraf for her daily
encouragement, numerous reviews and for protecting my sanity throughout this research. All errors in this
paper are solely mine.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
SECTION 1: INTRODUCTION
Economic growth in Guyana since its independence has been disappointing in
comparison to the rest of the Caribbean. As a result social, economic and political
development remains at a stalemate. Having experimented with two diametrically
opposed economic models, the economy experienced longer periods of economic
stagnation, contraction and depression than growth during its forty six years as an
independent nation. The economy is endowed with rich mineral resources, pristine
rainforest, fresh water and abundance of arable lands. Further, there are considerable
untapped economic opportunities in areas of agro processing, oil extraction, light
manufacturing, tourism and intra-regional trade with Latin America and the Caribbean.
Despite these, the country remains the poorest within the Caribbean, apart from Haiti,
with current per capita income marginally above one thousand US dollars. Upon
acquiring independence per capita income for the most part has declined consistently
reaching US$ 609.80 in 1989. Social services deteriorated while extreme poverty and
widespread violence forced many to migrate, in particular, professionals, entrepreneurs,
skilled and semi-skilled labourers and other craftsmen. In addition, the economy was
marred with civil unrest, organized political crimes, strikes, political factionalization,
abuses of democratic rights, racial avulsion, disputed political legitimacy and a
protracted economic crisis lasting for roughly two decades. This was due to a
continuation of the intense internal contestation for control of the political economy that
characterized the pre-independence period.
Against this background, the economy grew at 7% per annum for almost a decade from
1992, that is, more than twice the growth rate of the Caribbean. Accompanying this
growth were successive increases in real incomes, significant improvements in social
services and a return of democracy and private enterprise. This economic prosperity
however was short-lived as the economy plunged yet again into more than a decade of
stagnation. This growth enigma has since confounded policy makers, politicians and
researchers and has encouraged significant research including (Thomas, 1988),
(Ferguson, 1995), (Gafar, 1996), (Khemraj, 2008), (Staritz, 2007), (Bank, 1993) and
5
Singh, Dhanraj R
(Weisman, 2003). Despite the voluminous empirical work, the determinants of long term
growth in Guyana remain unknown as these researches have focused primarily on
shocks and short-term economic performance. Additionally, methodological challenges
and the paucity of data make it difficult to link such performance to the drivers of
economic growth.
The primary objective of this paper is to identify the determinants of long term growth in
Guyana. With a more comprehensive and updated data set, this paper examines
economic performance according to political cycles over the post-independence period.
The empirical approach adopted is informed by both neo-classical and endogenous
growth models. The findings offer new insights for understanding Guyana’s long term
economic growth and social and political changes over the period being considered.
Among other contributing factors, the analysis provides evidence of political economy
factors as critical in understanding the growth performance of the Guyanese economy.
The rest of this Guyana economy; section III examines the growth performance since
independence; section IV discusses the relevant growth literatures; section V discusses
the empirical framework used and section VI presents the findings of basic and
sensitivity analyses. Section VII concludes the paper.
SECTION 2: BACKGROUND AND ECONOMIC HISTORIOGRAPHY
Endowments, Population and Demographic Transition
European colonization in Latin America and the Caribbean was driven by the regions’
rich resource endowment. In the case of Guyana, the country has profuse arable lands
conducive to sugar and rice cultivation and other major crops, as well as mineral
resources such as gold, diamonds and bauxite. With total land size of 214,970 sq. km,
more than 50% of the land is covered in tropical rainforest and less than 20% is
occupied by less than a million people in population, with a spatial density of 2.9 – 3.9
persons per sq. km. As shown in table 1 below, total population in 2010 represented a
34.7% increase from 1960. After growing at a considerable rate until 1970, total
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
population shrunk by 6.8% during the 1980s and has remained stagnant since. This
was due almost entirely to migration. For the USA alone, between 1986 and 1990, total
migrants from Guyana stood at 52,649 i.e. approximately 7.26% of total population in
1990, while between 1991 and 2010 this figure climbed to 150,107 persons
representing almost 20% of current population.
Table 1: Total and Urban Population
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Total Population
560184
640447
720738
748809
776856
751636
724931
727979
733101
746235
754493
Pop Growth rate
-
14.32
12.54
3.89
3.74
-3.25
-3.55
0.42
0.70
1.79
1.11
50.39
48.97
47.86
47.86
53.70
57.02
60.56
59.97
59.31
62.11
162453
187010
211896
224642
236941
225490
213854
211841
209666
210438
215030
-
15.11
13.31
6.02
5.47
-4.83
-5.16
-0.94
-1.03
0.37
2.18
29
29.2
29.4
30
30.5
30
29.5
29.1
28.6
28.2
28.5
(%Δ)
Population Age
60.39
15-64 (% Pop)
Urban
Population
Urban Pop.
Growth (%Δ)
Urban Pop. (% of
Total Pop.)
Sources: Author’s Calculation from World Bank Data
Considering figures 1 and 2 which give a very long term view of population change, the
country has not yet completed its demographic transition. However, the transition is
approaching the end of stage three. This is where the population approaches stability
through a decline in the birth rate.
7
Singh, Dhanraj R
Figure 1: Population Trend of Guyana: 1831 - 2002
Source: Bureau of Statistics
Figure 2: Guyana’s Demographic Transition
Total working age population of 62.11% in 2010 is the highest since independence.
Despite an increased number of urban residents over the years, the level of
urbanization remained low and virtually unchanged since 1960.
The country is multi-ethnic and multi-cultural, housing more than six ethnic populations
practicing freely more than ten religions and speaking mainly English and creoles.
Despite the ethnic diversity, the population has always been dominated by Indians and
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Africans, with Indians accounting for 43.6% and Africans 30.2% as of 2010 (see table
2). The share of Chinese, Portuguese and other minorities declined consistently from
1946 reaching their lowest proportions in 2002. While most ethnic populations fell
between 1970 and 1980, the decline continued only among Indo-Guyanese, Chinese,
Portuguese and other minorities between 1980 and 1991.
Table 2: Population by Ethnic Origin (Percentage)
Race
1946
1960
1970
1980
1991
2002
Black/Negro
38.8
32.8
31.2
30.5
32.6
30.2
East Indian
44.2
47.8
51.8
51.4
48.6
43.6
Chinese
1.0
0.7
0.5
0.2
0.18
0.19
Portuguese
2.3
1.5
0.8
0.4
0.3
0.20
Amerindian
2.8
4.5
4.9
4.7
6.4
9.2
Mixed
10.2
12.0
10.3
11.0
12.4
16.7
Others
1.2
0.7
0.5
1.8
0.05
0.01
Total
100
100
100
100
100
100
Sources: Table taken from Gafar (1998, pp. 366) and updated by author with data from the
Bureau of Statistic, Guyana.
‘Others’ includes Whites and others minorities.
This was a result of the ruthless attack in the form of physical abuses, destruction of
property, political and economic marginalization, and military violation of freedom,
entrepreneurship and democratic rights against the non-black population under
Burnham’s administration (Simmons, 1992).
International Trade
Guyana’s economy depends heavily on export earnings. As of 2011 export earnings
accounted for 49.86% of GDP. However, export income is highly volatile due to a
concentration of primary agricultural commodities and extractive mineral resources. This
creates two major sources of economic vulnerability; (1) adverse terms of trade effects
9
Singh, Dhanraj R
and (2) volatile export earnings as these commodities are subject to commodity, price
and exchange rate cycles.
Figure 3: Total Exports by Major Commodities
In figure 3, four primary commodities account for 85 – 90% of all exports. Sugar’s (the
largest employer in the country) share of export earnings declined from 23-31%
between 1973–2006 to just above 10% in 2011, owing to the loss of preferential market
access in Western Europe around 2008. Rice exports remained stable around 8- 11%
until 2006 but increased to 15.3% in 2011. Bauxite which has traditionally been a major
source of export earnings representing 44% of exports until 1979, has declined
continuously reaching 15% in 2000 and further 11% in 2011. The export of gold and
diamonds surpassed sugar and replaced bauxite as the main export earner
representing 46% of exports in 2011.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Figure 4: Total Imports by Major Classification
The economy is also highly dependent on imports. Total imports in 2011 represented
78.23% of GDP, of which 32% was oil imports. Capital goods remain the smallest share
of imports compared to consumption and intermediate goods.
For any single nation, the USA is by far the most important trading partner followed by
the UK, Canada then Japan. This is because of the proximity between Guyana and the
USA and the availability of transport networks compared to the rest of the world, even
with respect to the Caribbean. However, CARICOM remains the largest trading bloc
with Guyana. Exports and imports from the region was 23.1% and 25.2% respectively in
2011. Despite being on the same continent with Latin America, trade with the region has
been extremely low, ranging between 1.2 and 8.7%. However, there are signs of
improvements as trade with the region rose to 13% in 2011 owing to improved relations
under the Petro-Caribe Agreement.
Economics and Politics
Economic and political change in Guyana and the Caribbean over the past centuries
must be interpreted vis-a-vis the economic and political climate of the global economy at
the time. The region has been part of the arena as well as a victim of the global power
struggle dating back to the 18th century, and more recently as part of the cold war
11
Singh, Dhanraj R
containment strategy. In fact, the region was used by the USA as an arena for
subversion of global conflicts involving non-regional powers, particularly the Soviet
Union (Griffith, 1997). For the Caribbean, this meant that security concerns, geopolitics,
militarization, intervention and instability superseded economic growth and development
as priorities even after independence during the middle of the 20 th century. Throughout
the colonial period (1616–1966) Guyana’s economic, political and social structures were
shaped by the policies of the Spaniards, French, Dutch and British (MacDonald, 2010).
The struggle for political decolonization involved an extreme internal contestation for
control of the political economy involving ideological divergences, racial-ethnic rivalries
and the personalistic ambition of the pre-eminent political leadership (Ferguson, 1995,
p. 18). This always manifests into organized riots, civil unrests, strikes and destabilizing
political demonstration. In 1953, after winning the first ever election in the colony, Dr.
Jagan of the Peoples’ Progressive Party (hereafter PPP) became the first Prime
Minister of the colony. As part of its reform programme, PPP legislated a Labour
Relations Act aimed at reducing intra-union rivalries among other labour concerns. This
provoked the British government which responded by suspending the colony’s
constitution until 1957. Following the 1957 elections, Dr. Jagan remained in power,
however, relations with the British was far from good. Fears of a communist takeover
forced the British to hold a close eye on Jagan’s policies, which was viewed as
communist (MacDonald, 2010). The British went even further and changed the electoral
system from constituency-based to proportional representation with the aim of removing
the PPP from government. Consequently, despite winning the 1964 elections, the PPP
was removed from office after the governor approved a coalition of opposition parties
surpassing PPP’s parliamentary representation (Ferguson, 1995). Forbes Burnham was
then appointed the Prime Minister of the colony in 1964 and remained the same after
his party, the People’s National Congress (hereafter PNC), claimed victory amidst
charges of rigged elections in 1968. The same was true for national elections in 1973,
1980 and 1985. Numerous claims of burning of ballots boxes, closing of polling stations
in areas of opposition strong hold and police violence against legitimate voters,
inundated the local media. In 1970, Burnham embarked on widespread nationalization
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
of British and American transnational corporations as part of his economic policy. These
included Demerara Bauxite Company (1971), Reynolds Metal Company (1974),
Reynolds Mines (1975) and Bookers McConnell Ltd (1976) which had owned 85% of
the sugar industry. By 1988, the government controlled over 80% of all investments
(Bank, 1993, p. 3). Upon independence, the country was also confronted with border
issues with Venezuela. In 1966, Venezuela seized part of Guyana’s land along its
western borders and in 1968 claimed a strip of sea on its western coast (MacDonald,
2010).
During the 1970s and 1980s, the Soviet Union maintained close relations with Guyana
during which time the country received enormous military assistance in the form of
accretions of monies, equipment and personnel (Griffith, 1997). With such support,
Burnham’s potency rocketed to the extent that in 1974 he pursued the doctrine of ‘party
paramountcy’ in which his party assumed supremacy over the state and all of its organs
became agencies of his party (Ferguson, 1995). This fueled an era of political
pandemonium as military officials became inseparable from policy makers and private
discontent and any form of opposition forces were suppressed at all cost by the military,
informal paramilitary groups and organized gangs. Classic examples include the
assassination of opposition leader Dr. Walter Rodney in 1980, killing of media
operatives and antigovernment protesters and countless others (Simmons, 1992).
These conditions remained largely unchanged even after Burnham’s reign ended in
1985. Despite the presence of multiple political parties, Guyana is largely a two party
state; the PNC predominantly an Afro-Guyanese party and the PPP, a predominantly
Indo-Guyanese party. In 1992 with the support of the Carter Centre which monitored the
elections, the PPP returned to government. After 1992, informal paramilitary groups and
organized gangs virtually disappeared.
Guyana experimented with two diametrically opposed economic systems, cooperative
socialism from independence to 1988 and a market economy thereafter. The transition
from cooperative socialism to a market economy was not voluntary, but was imposed by
the International Monetary Fund (IMF) and the World Bank (WB) after the country
became virtually bankrupt in 1987 and was forced to implement the Bank’s structural
13
Singh, Dhanraj R
adjustment programme (SAP) in order to access finance. This was due to the nature
and dynamics of Guyana’s external debt. Unlike most of Latin America and the
Caribbean, most of Guyana’s external debt is owed to official creditors instead of
commercial institutions. Starting in 1970 when rising oil prices adversely affected the
balance of payment, the government borrowed heavily to finance imports. Total external
debt on demand to GDP increased from 55% in 1970 to 159.5% in 1981 at which point
the government called a moratorium on all debts. The result was even more debt as
unserviced debts and interest payments compounded. This proved damaging to
Guyana’s economy as its credibility was destroyed in 1983 when the IMF declared it as
ineligible for financial support. Following the Fund, the WB and other international
lenders ceased lending to the country and Trinidad and Tobago severed oil shipments
in 1986 (MacFeeters, 1992). In 1988, external debt to GDP stood at 456% and peaked
in 1991 at 586.5%. Despite the restoration of Guyana’s credit worthiness in 1988, the
debt problem was far from over. External debt to GDP only reached below 100% in
2006 and further 53.7% in 2011.
The extractive nature of both Dutch and British colonial rule and their preference for
particular crops left the state with a land economy designed for the production of sugar
and rice mainly. This severely restricts the diversification of production structures or any
form of production transformation. Consequently, the economy remains agrarian and
depends heavily on agriculture for both income and employment. Agriculture is the
second largest export earner and the sole employer and source of living for the entire
rural population. Throughout the period, output in each sector has been highly volatile.
As shown in graph (3) below, the share of agriculture in GDP fluctuated between 25%
and 31% between 1966 and 1986, except in 1974 and 1975 when it climbed above
40%. This was due to an explosion in sugar output of 400% and 500% in those years
respectively.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Figure 5: Gross Domestic Product by Sectors, 1966-2010
Graph (3): Gross Domestic Product by Sectors 1966 - 2010
.6
% (log Scale)
.5
.4
AGRICULTURE
MANUFACTURING
SERVICES
.3
.2
.1
70
75
80
Source: Author
85
90
95
00
05
10
The removal of ineffective price and exchange rate controls and corrupt marketing
boards under SAP aided a revival of the sector, especially in rice, fishing, livestock and
other non-traditional commodities. As a result, the sector's shares climbed to 50.6% in
1992, and 48.8% in 1995. After this, the sectors declined almost successively, falling
below services and manufacturing reaching a historic low of 20.2% in 2010.
Manufacturing output accounts for the smallest share of GDP over the entire period and
fluctuated almost yearly. Of particular significance are the continuous decline of output
between 1970 and 1975, the collapsing of output from 1981 reaching 10.6% in 1983
and more recently, the prolonged contraction from 1994 to 2006. The nationalization
plan which began in 1971 not only put a halt on manufacturing investment but left
investors across the economy with fear of expropriation resulting in capital flight.
Nonetheless, the sector shows some signs of recovering from 2006. Services for the
most part accounts for the greatest share of GDP. However, throughout the period
service output has been highly cyclical. From 1966 its share of GDP increased reaching
almost 60% in 1983. However, from 1983 services contracted almost consecutively
reaching 25% in 1995, after which it returned to a steady positive growth rate reaching
50% in 2010. In the absence of strong growth this is but a prologue for economic
collapse especially since service output is dominated by intermediation with weak
infrastructures and poor institutions and, unlike agriculture and manufacturing output, is
15
Singh, Dhanraj R
subjected to the Baumol’s effect1 (Baumol, 1993). Further, these changes are
compositional and do not necessarily reflect changes in real output.
SECTION 3: ECONOMIC GROWTH IN GUYANA SINCE
INDEPENDENCE
Figure 6 below depicts economic growth in Guyana’s economy since its independence.
The shaded regions divide the entire period into electoral cycles and the labels above
the curves indicate the period in which each regime controlled the economy.
Throughout the independence period, GDP growth recorded a disappointing annual
increase of 1.1% and displayed a high level of volatility. Under the PNC regime the
economy grew on average at -0.14% per annum, while under the PPP economic growth
stood on average at 2.84% per annum. Growth displays a higher level of volatility under
the PNC than the PPP judging from a standard deviation of 4.5 and 3.8 respectively.
Figure 6: Economic Growth in Guyana: 1966-2010
1
The Baumol’s effect refers to a situation where the wages of workers in certain sectors increased without any
increases in productivity as opposed to wage increases in other sectors that are accompanied by increases in
productivity.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Upon independence, the economy contracted repeatedly reaching – 1.48% growth in
1968. During this period, agriculture output and private investment fell as political
violence and demonstrations were overwhelming prior to the 1968 elections. Growth
nevertheless revived in 1969 at 4.68% largely due to an increase in sugar output and a
14.3% increase in debt financed by current public expenditure. This however was
unsustainable and the economy contracted by a total of 4.11% by 1972. Private
investment in 1971 and 1972 plummeted by 37.2% and 24.1% respectively from 1969
as investors were forced out of the market due to the 1971 nationalization plan and the
dirigist economic policies of Burnham’s government. In 1973, despite the oil crisis, the
economy recorded positive growth although miniscule in magnitude, but in 1974 and
1975, economic growth climbed to 7.1% and 7.7% respectively. Ironically this was as a
result of private investors who scrambled and liquidated their assets to cut their losses
from expropriation, particularly McConnell Bookers then owner of the sugar industry.
The company harvested as much sugarcane as there was standing that sugar output
increased by 272% in 1974 and 398% in 1975 from 1973. This however did not prevent
its nationalization in 1976. Nevertheless, sugar output in 1976 was still high by historical
levels despite being 43% lower than in 1975. This prevented growth from declining to
negative in 1976, but could not stop the collapse in 1977 which lasted until 1979. During
this period growth fell by 3.57%, 2.71% and 2.5% correspondingly. Once again
17
Singh, Dhanraj R
investors responded to increased uncertainty and political upheaval after the
government postponed general election which was due in 1978 until 1980. As a result,
total investment fell by 31.76%, 43.06% and 23.53% accordingly (World Bank, 2012).
This severely affected agriculture and manufacturing output.
The final term of Burnham’s reign and economic policies was even more devastating.
Against average growth of 1.5% in 1980 and 1981, the economy contracted in
succession at a catastrophic 12.73%, 6.1% and 4.2% in 1982, 1983 and 1984
respectively, i.e. a cumulative decline of 23%. Private investment shrunk further by
45.5% and public investment by 23.8% in 1982. Manufacturing output slashed by 40%
and sugar by 30%. This had widespread and devastating ripple effects across the
economy as both private and public consumption fell dramatically. The situation
worsened even further as there was no increase in private investment in 1983, while
sugar output tumbled by another 37% from its already low level in 1982. The economic
depression continued until 1984. The eventual term of the PNC rule (1985–1991)
commenced with a 3.3% growth, but once again the economy continued to fold as poor
macroeconomic management and a soaring external debt continued to impair growth.
By 1988, import cover was less than two weeks, international reserves depleted and
there were little domestic or foreign investments and the government controlled over
80% of all imports and exports. Such pernicious economic performance brought
significant
increases
in
poverty,
widespread
political
instability,
increased
unemployment, mass migration and incessant deterioration in the provision of public
services.
The end of statist policies came in 1988 when the government implemented the WB’s
structural adjustment programme in order to avoid declaring sovereign bankruptcy.
Implementation was rapid and instantaneous, the Bank noted “few countries have
undertaken such a dramatic turnaround in economic policies, and few have
implemented such a programme with such speed and determination” (Bank, p. 5).
Notwithstanding this, the economy went into another severe depression until 1990,
contracting on average at 3.29% yearly. Devaluation of the Guyanese dollar against the
US dollar of 171%, 47% and 65% in 1989, 1990 and 1991 correspondingly, severely
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
limited private and public consumption as the local currency became almost useless.
Nonetheless economic growth returned in 1991 at 6.2% with a doubling of public
investment.
During the principal term of the PPP administration (1992 – 1997) the economy grew on
average 7.32% yearly. Private investment increased by 143% in 1992 and public
investment by 22.47% yearly during the term. These were accompanied by significant
increases in agriculture output. While the privatization of public enterprises began in
1989 the process lacked transparency, accountability and proper management. It wasn’t
until the PPP tabled and implemented the Privatization Policy Framework Paper in 1993
that implementation improved significantly and received support from the Bank (G.o.G,
2001, p. 9). A reorientation of the national budget led to broad based economic growth
reflected by key socioeconomic indicators. Poverty which was estimated at 86% in 1989
fell to 46% in 1993 (Guyana, p. 4). Adult literacy increased by 3.21%, infant mortality
declined by 16.8% and the level of democracy improved by 78% between 1992 and
1996. Public expenditure on education as a percentage of the national budget increased
from 1.9% in 1991 to 4.8% in 1992 and 7.3% in 1997. Economic growth during the 1997
– 2003 period was far less remarkable and stable compared to the 1992 – 1996 period
despite a 6% growth in 1997. Also, economic contractions in 1998 and 2000 of 1.8%
and 1.5% correspondingly were offset by a 2.8% growth in 1999. Consequently, there
was no deterioration in living standard and socioeconomic development, poverty fell
further reaching 35% and education spending rose to 11.9% in 2000. Similarly,
economic growth between 2001 and 2007 averaged 0.4% per annum notwithstanding
positive growth of 3% in 2004 and 4.8% in 2006. Again there were moderate declines in
private investment, slowdown in agriculture and manufacturing output and a sudden
stop of economic activities for almost two weeks due to massive flooding along the
coastal belt. From 2008 the economy registered four consecutive years of successive
increases in positive growth reaching 5.4% in 2011. Growth during this period was
accompanied by an expanding service sector.
Optimistic estimates based on the current growth trend suggest that growth in 2012 and
2013 would be around 6.4% and 7.5% respectively. On the contrary, these estimates
19
Singh, Dhanraj R
are unlikely due to recent changes in the political economy. After the 2011 general
elections, the country has for the first time a minority government and a majority
opposition. While this development can breathe a new era of political cooperation
between major parties, it also creates the opportunity to stifle public policies and
reforms as the combined opposition dominates the legislature. The latter seems more
likely already opposition organized protests are rampant given recent reforms proposals
by the government resulting in extensive destruction of public property and crucial
infrastructures. Historically these have had devastating impact on economic stability,
private investment and crime resulting in economic distress and loss of physical capital,
and human capital due to migration.
An examination of changes in per capita income in level further puts into perspective the
growth performance discussed above. The graph below shows GDP per capita in level
since 1966. Per capita income increased almost consecutively from US$ 705.49 in 1966
to US$ 777.88 in 1971, i.e. an increase of 10.3%. Further after contracting by 5% in
1972, income continues to increase reaching US$ 865.11 in 1976.
Figure 7: GDP Per Capita Income: 1966-2010
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
However from 1976 income fell just about every year until 1990 reaching its lowest
since independence at US$609.91, a total decline of 29.5%. In 1982 alone, income fell
by 12.7%. On the other hand, the period beginning from 1991 stands in distinction as
income rose consecutively for seven years reaching US$ 978.38 in 1997, an increase of
60.41%. Over the following decade income stagnated with a net increase of just 1.9%.
Nevertheless from 2007 income climbed each year reaching its highest level of US$
1089.28 in 2010, an increase of 9.25% from 2007.
Guyana and the Caribbean
Guyana’s growth performance as an independent state is unique when compared to the
rest of the Caribbean. The table below depicts economic growth of CARICOM
Caribbean over the past five decades. The most striking observation in table (4) is the
continuous decline of growth in the region. During the first three decades, economic
growth in Guyana was significantly below the region. Guyana was one of two countries
to record annual growth of 1% or less between 1960 and 1969, while it was among
Bahamas, Dominica and Jamaica to record to record the same performance between
1970 and 1979. Even worse, during the 1980s the economy, together with Trinidad and
Tobago and Suriname shrunk by more than 2% per annum while the region as a whole
grew in excess of 2.5% per annum.
Table 4: Economic Performance of the Caribbean (CARICOM)
GDP Per Capita Growth (Average %)
Countries
1960 - 69
1970 - 79
1980 - 89
1990 - 99
2000 - 09
1960 - 10
Antigua & Barbuda
-
5.59
8.09
1.26
2.13
3.63
Bahamas
5.01
0.02
1.97
0.46
-0.97
1.19
Barbados
6.01
2.9
1.8
0.55
-0.08
2.16
Belize
1.99
4.37
2.88
2.82
1.71
2.75
Dominica
-
-4.33
6.79
2.45
2.55
3.33
Grenada
-
6.67
4.09
3.04
1.9
3.11
Guyana
0.99
0.76
-2.2
4.75
1.67
1.24
Haiti
-
-
-
-2.05
-0.73
-1.58
21
Singh, Dhanraj R
Jamaica
3.19
-0.05
0.05
1.34
0.65
0.75
St Lucia
-
-
4.27
3.93
0.98
2.99
St Kitts & Nevis
-
8.34
6.45
4.08
1.09
3.85
St Vincent & Grenadines
-0.41
2.95
5
3.47
3.18
2.82
Suriname
-
2.12
-2.26
-0.71
3.26
0.34
Trinidad & Tobago
3.5
3.54
-2.54
2.09
5.92
2.43
ALL
2.89
2.74
2.64
1.96
1.66
2.07
Source: Author; Montserrat Excluded - No Statistics Available. All Data taken from the World Bank Database
Even at the regional level, economic growth during the 1990-09 period remains
outstanding. Growth of 4.75% per annum is not only the highest across the region but is
more than double the average growth rate of the region. By the turn of this century, the
region continued to record positive economic growth but at a marginal rate. Despite
these, Guyana remains the poorest country within the Caribbean, excepting Haiti, which
has current per capita income of US$ 371.42, see graph (5) below. Belize and St.
Vincent and the Grenadines whose incomes were 35% and 88% respectively above
Guyana in 1960 have increased to 225% and 347% greater than Guyana in 2010. In
spite of a customs union, there is significant income disparity within the region. The
Bahamas, Antigua and Barbuda, Barbados, Trinidad and Tobago and St. Kitts and
Nevis are in the high income bracket with current per capita income above US$ 9,000.
Guyana and Haiti are in the low income range with per capita income of less than US$
1,100, while the rest of the region falls in the middle income bracket ranging between
US$ 3,000 and US$ 6,200. Current per capita incomes of those countries in the middle
income bracket are 325% to 566% greater than income in Guyana, while those
countries in the high income bracket have incomes of 835% to 1,489% above Guyana.
Interestingly, each economy in the high income bracket relies almost entirely on tourism
compared to those in the middle and low income brackets which depends largely on
agriculture.
Even though average growth rates across the region slowed the past five decades, per
capita income in each economy increased tremendously except in Guyana, Haiti and, to
a lesser extent, Suriname. While graph (5) suggests that the rate of growth between
Guyana and the region seems to be converging, graph (6) confirms that such
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
convergence remains conditional as the gap in per capita incomes starting from the late
1970s is widening. This is true for every country within the region barring Haiti.
Figure 8: CARICOM Caribbean GDP Per Capita: 1960-2010
23
Singh, Dhanraj R
The economic performance of the Caribbean over the past five decades reflects the fact
that despite acquiring political independence, the region remains dependent on foreign
investment and aid to finance development imperatives and the importation of food to
meet basic consumption. Internal and external constraints prevent these economies
from diversifying production, developing new industries, and creating a stable political
environment. Production structures, institutions, general infrastructures and land
economy under colonial rule were all designed to support the production of either monocrops or bi-crops. For example, transport systems and agricultural lands were designed
to produce mainly sugar and rice in Guyana and for banana only in St. Vincent and the
Grenadines. Further, weak exports sectors, colossal external debts and substantial
balance of payment deficits inhibit the region’s ability to attract foreign investment.
SECTION IV: LITERATURE REVIEW
The most prominent explanation for poor economic performance across developing
countries during the latter half of the 20th century, especially in Latin America and the
Caribbean, is that of economic dependency. While this might not always be the case as
often claimed, it was certainly the case for Guyana. Upon independence, Guyana’s
production structure and social order was that of a classical underdeveloped economy,
solely dependent on imported fuel, technology, foreign investment, aid and much food
items. In spite of its heavy reliance on export earnings, Guyana did not confirm to the
typical Export-Oriented Third World Model (Thomas, 1988, p. 387). Thomas argued that
the poor economic performance and subsequent economic collapse by the end of the
1980s was due to a domestic production crisis and declines in productivity as a result of
economic mismanagement and not to falling prices, shrinking export markets or a world
economic crisis, see also (Gafar, 1996). There were frequent and sizeable contractions
in agriculture output in the 1970s in spite of increases in export prices. However, during
the 1980s declines in export prices were sizable and continuous and therefore
economic growth was constrained due to falling export earnings.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Similarly, Ferguson maintained that the economic collapse of the 1980s rests solely on
the adoption of IMF conventional demand management policies embodied in its SAP. In
1978, Guyana was forced to implement wage restraints, high import duties and
increases in real interest rate in order to secure a one-year stand-by agreement with the
IMF as external balance deteriorated (Ferguson, p. 51). As a result of these policies
firms were forced to cut production as much as 50%, since access to essential imported
inputs became exceptionally restrictive and international credit too expensive. Further
wage restraints suppressed consumer spending and aggregate demand inducing
another round of economic contraction. Ferguson’s conclusion is consistent with
economic literature. IMF SAPs are generally associated with improvements in current
account balances, reduction of fiscal deficits, money growth and inflation, real growth
tends to decline over a long period due to lack of policy space and direct squeezing of
aggregate demand (Bordo, Mody, & Nienke, 2004). In comparison SAPs under the WB
are generally associated with positive growth as they are often accompanied by real
investments especially in infrastructures. Further, negotiations with the IMF for
assistance harms long term economic growth by signaling economic failure,
discourages investment and access to international finance (Bird, 2009).
The almost precise correspondence of the implementation of IMF SAP in 1978 and the
beginning of the economic downturn compared to the implementation of WB SAP in
1989 and the economic growth that succeeded, provides a strong prima facie evidence
of Ferguson’s argument, see Graph. 1. Anecdotal evidence also suggests that there
was an adjustment illusion and to some extent the presence of debt overhang in
Guyana’s economy. With respect to the adjustment illusion, public debts rose
successively since 1972 despite fiscal austerity under SAPs implemented in 1978, 1979
and 1980. Subsequently, the country received a bridge loan from its major creditor
enabling it pay off arrears and also a debt reschedule for a significant part of it external
debts from bilateral creditors (Bank, p. 5). This helped to restore international financial
support and encouraged foreign direct investment. Notwithstanding this access to
adequate and affordable capital remains a challenge for local businesses as local
financial institutions invest excess liquidity in risk free foreign assets (Khemraj, 2008, p.
25
Singh, Dhanraj R
2). Further, Khemraj argued that the size of Guyana’s real economy presents a natural
barrier to financial deepening which further constrains growth.
Studies also suggest that the economic stagnation post 1997 was due to declines in
factor accumulation and total productivity. According to Manring (2007), total
productivity in both capital and labour fell despite increases in gross fixed investment
and the labour force. Also, Staritz (2007) argued that annual growth of the labour force
declined from 0.6% during 1991 – 1997 to -0.4% during 1998 – 2004, and capital
accumulation fell from 5.8% to below 2% annually during the same periods respectively.
On the contrary, total labour forced actually declined by 5.13% during 1992 – 1997 and
0.2% during 1998 – 2004 (Guyana, p. 4). If anything the contractionary effects of a
decline in labour should have been greater during the 1991 – 1997 period. Additionally,
the World Bank in its forecast study recommended annual investment of at least 42% of
GDP until 1997, or at least until 1995, in order to achieve a forecasted annual growth
rate of 4.4% (Bank, p. 32) with the benefit of hindsight, actual investment to GDP during
1991 – 1997 averaged 45% annually corresponding to average annual growth of 7%.
This ratio fell to an annual average of 37% during 1998 – 2004 corresponding to
average annual growth of 0.51%. With the likely presence of excess capacity given the
decline of labour during the latter period, it is less compelling that a drop of 8% in
investment to GDP would have induced such a fall in growth.
Some also maintained that the factors responsible for Guyana’s economic performance
are more social and political than economic (Gafar, 1996), (Manring, 2007). In
particular, the prevalence of fear for life, electoral frauds, human rights abuses, political
and social unrest and ethno-racial avulsion and discrimination under Burnham’s regime.
These resulted in capital flight, economic informalization and mass migration of
professionals, skilled labourers and local entrepreneurs. Estimates indicate that in 1983
and 1985, capital flight was 110.7% and 104.3% of reported GDP respectively, while in
1986 it was around 86.3% (Bennett, 1995, p. 10). The loss of skilled workers and
entrepreneurs led to dramatic decline in total productivity. These studies also
acknowledged the impact of adverse weather conditions on growth given the
importance of agriculture output in gross domestic product. In particular, the intrusion of
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
saline water into prime agricultural lands following extensive breaches in the protective
coastal seawall in 1989 and massive flooding along the coastal belt in 2005 (Bank, p.
5).
The notable economic performance between 1991 and 1997 also warrants closer
examination as it is at risk of statistical bias resulting in overstating the actual growth
rate. Under SAP in 1988, the government was required to reduce its role in productive
activities, paving the way for private enterprise and redirect its policy on expanding the
tax base and increasing formalization of economic activities. Formal sectors have
undisputedly record increases in output; these include sugar, rice, bauxite etc. The
informal economy is estimated at 22.7% in 1988 (Bennett, p. 6). Thus output during
1991 – 1997 would include; (1) output of economic activities previously taking place in
the informal economy and; (2) output of economic activities in the underground
economy due to the legalizing of some activities, e.g. private extraction of gold and
bauxite. As such, depending on the size of (1) and (2), the low growth rates recorded
post 1997 need not be interpreted as dramatic, when compared to the previous period.
An Overview of the Literature on Determinants of Long Term Growth
The Neoclassical growth model, building on the Harrod-Domar model of investment,
addresses the problem of arbitrary restriction on the parameter on which the latter is
premised. Solow argued that aggregate output of the economy is a function and not just
a proportion of basic inputs, physical capital and labour, (Solow, 1956). Therefore, the
capital to labour ratio is endogenously determined. The assumptions of this model are
constant returns to scale and diminishing returns to individual factors.
These
assumptions imply that increases in output can result from either (1) an increase in
physical capital per worker or (2) an improvement in the level of technology. However,
capital accumulation by itself cannot sustain growth indefinitely. This is because of the
diminishing returns to capital. In the presence of diminishing returns, increasing output
per worker over time requires more and more capital for each additional unit of output.
In other words, society would have to sacrifice more and more units of present
consumption in the form of savings. This is not realistic beyond a certain point, therefore
27
Singh, Dhanraj R
increasing the savings and investment rate will increase the long run level of output per
worker and the economy will grow temporarily. Hence, the main determinant of long
term growth is technological progress. The Neoclassical model however offers no
explanation on how to change the level of technology.
The Augmented Solow model extends the basic Solow model to include human capital
as another input into the production process, (Mankiw, Romer, & Weil, 1993). In this
version of the model, investment in human capital would also increase output and the
growth rate. But this effect would also be short term since the diminishing returns
property of the original model remains. As such, the main determinant of long term
growth remains exogenous. On the contrary, long run data for many countries showed
that even when technological progress ceased positive per capita growth can persist
over long periods without a tendency to decline, (Barro, 1997). It is on this primary
modeling deficiency that the endogenous growth theory seeks to provide further insight.
Endogenous growth theorists argued that long term economic growth and technological
change is a function of economic actions within the economy and thus the rate of
economic growth is endogenous, (Romer, 1986), (Lucas, 1988). In particular they
argued that the accumulation of human capital and the ‘public good’ nature of
knowledge produce massive spillover effects. The mechanisms of learning-by-doing
and the acquisition of skills through education and training increase the returns to both
physical and human capital and augment labour efficiency. The breakthrough of this
model is that while investment in human capital at the agent (firm/individual) level
exhibits diminishing returns, at the aggregate level increasing returns exists due to the
spillover effects thus escaping the inevitable fate of the neoclassical growth model. The
problem however, is underinvestment in human capital at the society level as individual
agents make investment decisions on private returns and not on social returns. To
address this problem, public policies which encourage investment in activities with
positive spillover effects should be implemented. In practice this implies that policies
affecting the channels through which new ideas and technologies flow, such as
international trade, capital flows, direct transfer of technology, investment into research
and development etc., become important determinants of long term growth. Further,
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
policy variables such as provision of public goods, social and legal norms, copyright
laws, social policy etc., affect the growth rate and not just the level of per capita income
as is treated in the neoclassical model, (Durlauf, 1996, p. 3). In other words, these
variables have direct and indirect effects on the rate of investment in both physical and
human capital, creation, adoption, transfer and use of new technologies thereby
affecting the rate of long term growth.
A well established and growing literature also points to the importance of institutions in
determining the rate of long term economic growth, e.g. (North, 1990), (Acemoglu,
Johnson, & Robinson, 2004), (Bardhan, 2005), (Greif, 2000). These include; formal
political and legal structures, degree of democracy, property rights and the extent of rent
seeking among others. The more favourable these institutions, the more mutually
beneficial economic activities would take place, more widespread economic
participation and an overall improvement in the investment climate.
SECTION V: EMPIRICAL FRAMEWORK
The empirical specification in this paper is derived from a general production function
with output as a function of physical and human capital, labour, macroeconomic
policies, openness, external factors, democracy and technological change. The
production function at time t:
Yt = At F( PHYSICALCAPITALt, HUMANCAPITALt, LABOURt, ECONOMIC POLICYt, OPENNESSt,
EXTERNAL FACTORSt, DEMOCRACYt)
(1)
Taking the total differential (1), dividing through by Y and rearranging the terms
produce;
dlogyt = dA/At + φ1dlogpkt + φ2dloghkt + φ3dloglabt +φ4dlogecnpolicyt + φ5dlogopent +
φ6dlogextfactorst + φ7dlogdemt
(2)
The lower case variables dlogy, dlogpk, dloghk, dloglab, dlogecnpolicy, dlogopen
dlogextfactors and dlogdem have been transformed into differences in logs of their
29
Singh, Dhanraj R
original values. Policy variables and democracy affects output through their effects on
technological change. As such, the term dA/At can be written as an independent
variable which is a function of polices or a disturbance term µt. By allowing a separate
term for technological change, the disturbance term µt reflects unobserved factors
affecting output. These factors are assumed to be uncorrelated over time. This
produces the following estimating equation;
dlogyt = dA/At + φ1dlogpkt + φ2dloghkt + φ3dloglabt + φ4dlogecnpolicyt + φ5dlogopent +
φ6dlogdemt + φ6dlogextfactorst + φ7dlogtecht + µt
(3)
The specification above assumes no limitations on the returns to scale or the degree of
competition. Therefore, the sum of the individual coefficients need not equal to one. The
inclusion of policy variables is essentially a test of their effects on technological change,
which is growth in output after controlling for increases in the use of resources,
(Harrison, 1996). See Appendix A for detailed explanation on how each variable is
calculated. Given that the production function above is a neoclassical growth model
modified to include policy variables, in estimation I experimented with defining physical
and human capital and labour in level. Migration represents a significant loss of human
capital. As mentioned in earlier sections, Guyana suffered from massive outward
migration of entrepreneurs and professionals particularly during the 1970s and 1980s.
As such I included net migration as an independent variable. For the economic policy
variable, several macroeconomic variables are used as independent variables in
estimating the regression; these are the inflation rate, external debt, fiscal deficit, private
investment and the official exchange rate. Openness in this paper is restricted to the
extent to which international trade in goods and services is permitted by the government
and does not reflect the ease/restriction in the movement of labour and capital. In
estimation, I experimented with alternative measures for openness (see Appendix A:
A.7.). Given that Guyana is a price taker in the world economy, under external factors I
included a composite price index using world market prices for the major export
commodities (sugar, bauxite, rice and gold) and also the price of crude oil.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Additionally, I included separate measures for net bilateral aid and net overseas
development assistance.
The ongoing debate on the effectiveness of aid in less developed countries and the
availability of data encouraged the inclusion of separate variables for official
development assistance (ODA) and bilateral aids (AID). This is to determine (1) the
impact of each on the rate of growth and (2) whether the impact of each on growth is
significantly different. In order to isolate the impact of different political economy factors
on the rate of growth, in particular the different institutions associated with each regime,
separate dummy variables are included in the regression. I also included dummies for
IMF and WB programmes in Guyana. These variables are motivated by the ongoing
controversies of whether IMF/WB programmes are aiding or undermining long term
growth in developing countries.
Finally, I utilized annual rainfall data to control for changes in weather conditions and
also included year fixed effects in the regression in order to control for unobserved time
invariant factor affecting the growth rate.
A variety of specification tests are done
ensure robust results. Taking these into operation produces the following estimating
equation:
dlogyt = dA/At + φ1 dlogpkt + φ2 dloghkt + φ3 dloglabt + φ4dlogmratet+ φ5inflratet + φ6dlogdeficitt +
φ7dlogpivnt + φ8dlogextdebtt + φ9dlogexcratet + φ10dlogopent + φ11dlogaidt + φ12dlogodat +
φ13dlogexppindext + φ14dlogoilt + φ15dlogdemt + φ16dlogtecht + π1 PNCt + π2 PPPt + π3 IMFt + π4
WBt + µt
…… (4)
Data Quality and Sources
The usual concerns with annual time series data applies, especially that of
measurement errors and coverage. In terms of coverage, data is not available each
year for some series and interpolations are used to estimate the missing values. Over
time the quality of data has improved from earlier periods due to improved
accountability. Depending on the magnitude of these changes they can, in principle,
bias the estimates. These should be taken into consideration when interpreting the
31
Singh, Dhanraj R
results. Although measurement errors remain a threat to the results it is not likely to be
significant as each series is carefully calculated using data from primary and secondary
sources. The choice of variables and the periodization in this paper are constrained by
data. Notwithstanding these, the dataset used in this study is a tremendous
improvement from those used in earlier studies both in terms of coverage and number
of variables. Several sources have been used to compile the database used; these
include the WB, IMF, Freedom House, British Petroleum, Bank of Guyana, US
Geological Surveys, Guyana Bureau of Statistics, University of Guyana, Guyana
Meteorological Station and Guyana Private Sector Commission.
SECTION VI: RESULTS OF THE REGRESSIONS
Table (5) below presents the first set of regression results. Each column represents a
separate regression. Columns (1) to (3) are identical, except for the measure of
openness which I alternated in each regression. The Augmented Dickey Fuller unit root
test shows that each variable is stationary at conventional levels of significance. The
results suggest that after controlling for changes in the weather and time invariant
effects, physical capital accumulation; human capital, in particular infant mortality rate;
technology; interaction with Bretton Wood institutions and changes in political regimes
are the significant determinants of long term growth in Guyana. In each regression,
physical capital stock and infant mortality rate remain positive and significant at the one
percent level. Infant mortality rate at the dawn of independence fell consistently,
particularly during the post 1992 period, reaching 25.3 in 2010 from 63.4 in 1966. In
spite of the insignificance both life expectancy and education have negative coefficients.
I experimented with defining human capital as a composite index of mortality rate, life
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
expectancy and education, and re-estimated equation one (column 1). The coefficient
did not yield any significance; as such the results were not reported.
Even though
labour is not significant at any conventional level, it maintained a positive impact on
growth in each regression.
Technology or (Total Factor Productivity) is the most
significant determinant of growth in Guyana. In light of the significance of physical
capital stock, it is not surprising that technological change is a critical factor. Ceteris
paribus, increases in capital accumulation increases the capital-labour ratio which
augments total factor productivity. This confirms Thomas suggestion that the protracted
economic crisis was driven by a domestic production crisis and declines in productivity.
The weak relationship between domestic private investments and growth suggests that
capital accumulation and perhaps technological change is driven by foreign direct
investments. To merit this, I interacted technology with domestic private investment as
well as public investment, and also included public investment into the regression and
re-estimated regression (1). The coefficients were highly insignificant and as such were
not reported. Even though foreign direct investment is not operationalized due to
extreme lack of data, anecdotal evidences provide strong support for this proposition.
Throughout the post-independence period the largest firms/investments in each industry
were foreign direct investments, even in the sugar industry which for the most part has
remained under state control, e.g. Omai Gold Mining, RUSAL, McConnell Bookers,
CARICOM RICE, etc.
Columns (1) to (6) also provide evidence of a positive and
significant relationship between growth and programmes implemented under the World
Bank. This variable remains significant in each equation. As mentioned earlier, this is
due to the project base nature of the Bank’s programme, which often results in massive
infrastructural development and other major projects.
The most striking result from table (5) is the distinct relationship between different
political regimes and economic growth. There is a significant negative relationship
between growth and the PNC administration. This confirms the conjectures of economic
mismanagement, personalization of state enterprises and dirigiste economic policies of
the said administration.
33
Singh, Dhanraj R
Table (5): Basic OLS Regression Results
Dependent Variable: Growth Rate
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Physical Capital
0.2266***
0.2261***
0.2284***
0.2266***
0.2261***
0.2284***
0.2265***
0.2263***
0.2263***
Stock
(6.306)
(6.185)
(6.405)
(6.306)
(6.185)
(6.405)
((6.921)
(8.013)
(8.012)
Mortality Rate
1.1026***
1.0922***
1.1289***
1.1026***
1.0922***
1.1289***
1.0000***
1.1796***
1.1796***
(2.463)
(2.417)
(2.538)
(2.463)
(2.417)
(2.538)
(2.761)
(5.029)
(5.029)
-2.0712
-1.9869
-1.8946
-2.0712
-1.9869
-1.8946
-2.093
(1.337)
(1.268)
(1.240)
(1.337)
(1.268)
(1.240)
(1.510)
-0.0107
-0.0115
-0.0118
-0.0107
-0.0115
-0.0118
-0.0083
(0.844)
(0.910)
(0.948)
(0.844)
(0.910)
(0.948)
(0.799)
0.0009
0.0008
0.0012
0.0009
0.0008
0.0012
0.0003
(0.132)
(0.112)
(0.175)
(0.132)
(0.112)
(0.175)
(0.055)
0.0534
0.0530
0.0478
0.0534
0.0530
0.0478
0.0512
(1.242)
(1.174)
(1.110)
(1.242)
(1.174)
(1.110)
(1.464)
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
(0.918)
(0.766)
(0.790)
(0.918)
(0.766)
(0.790)
(0.960)
0.0077
0.0075
0.0035
0.0077
0.0075
0.0035
(0.805)
(0.773)
(0.328)
(0.805)
(0.773)
(0.328)
0.0145
0.0196
0.0147
0.0145
0.0196
0.0147
0.0120
(0.759)
(1.220)
(0.873)
(0.759)
(1.220)
(0.873)
(0.767)
Private
-0.0067
-0.0072
-0.0054
-0.0067
-0.0072
-0.0054
-0.0049
Investment
(1.114)
(1.202)
(0.861)
(1.114)
(1.202)
(0.861)
(1.015)
External Debt
0.0052
0.0055
0.0067
0.0052
0.0055
0.0067
0.0047
(0.412)
(0.432)
(0.533)
(0.412)
(0.432)
(0.533)
(0.425)
0.0011
0.0015
0.0021
0.0011
0.0015
0.0021
(0.158)
(0.201)
(0.294)
(0.158)
(0.201)
(0.294)
0.0004
-0.0000
-0.0011
0.0004
-0.0000
-0.0011
(0.046)
(0.105)
(0.126)
(0.046)
(0.105)
(0.126)
0.0046
0.0048
0.0044
0.0046
0.0048
0.0044
(0.540)
(0.555)
(0.516)
(0.540)
(0.555)
(0.516)
-0.0032
-0.0015
-0.0007
-0.0032
-0.0015
-0.0007
Index
(0.234)
(0.105)
(0.057)
(0.234)
(0.105)
(0.057)
Trade/GDP
0.0061
0.0061
0.0046
(0.482)
(0.482)
(0.417)
Independent
Variables
Life Expectancy
Education
Migration
Labour
Inflation Rate
Fiscal Deficit
Exchange Rate
Bilateral Aid
ODA
Crude Oil
Exports
Tax/Trade
Price
-0.0000
-0.0000
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
(0.000)
(0.000)
Merchandise
0.0123
0.0123
TOT
(0.824)
(0.824)
Democracy
-0.0015
-0.0016
-0.0021
-0.0015
-0.0016
-0.0021
-0.0003
Index
(0.402)
(0.437)
(0.560)
(0.402)
(0.437)
(0.560)
(0.151)
Technology
0.8793***
0.8854***
0.8817***
0.8793***
0.8854***
0.8816***
0.9019***
0.9089***
0.9089***
(15.268)
(15.513)
(15.812)
(15.268)
(15.513)
(15.812)
(20.500)
(23.743)
(23.743)
0.0036
0.0035
0.0036
0.0036
0.0035
0.0036
0.0023
(1.251)
(1.202)
(1.285)
(1.251)
(1.202)
(1.285)
(1.007)
0.0062**
0.0060**
0.0070**
0.0062**
0.0060**
0.0070**
0.0062***
0.0060***
0.0060***
(2.158)
(1.976)
(2.293)
(2.158)
(1.976)
(2.293)
(2.738)
(3.120)
(3.120)
-
-
-
-
0.0239***
0.0242***
0.0234***
0.0180***
(4.046)
(4.071)
(3.956)
(4.218)
IMF
World Bank
PNC
PPP
YR
Fixed
0.0239***
0.0241***
0.0233***
0.0224***
0.0179***
(4.045)
(4.071)
(3.955)
(4.701)
(4.218)
Yes/Yes
Yes/Yes
Yes/Yes
Yes/Yes
Yes/Yes
Yes/Yes
Yes/Yes
Yes/Yes
Yes/Yes
36.175
35.769
36.954
36.175
35.768
36.953
54.334
130.393
130.393
0.9484
0.9478
0.9495
0.9484
0.9478
0.9495
0.956
0.9538
0.9538
45
45
45
45
45
45
45
45
45
Effects/Weather
F-Statistic
Adjusted
R-
Square
Observations
T-statistics in ( )
and *** ** * indicate significance at the 1 percent, 5 percent and 10 percent level respectively.
On the other hand there is a significant positive relationship between growth and the
PPP regime. This also endorses a priori observation of significant increases in per
capita income and living standards reflected in other socioeconomic indicators during
the post-1992 era.
Surprisingly, external debt stock has no significant impact on the rate of growth. This
perhaps suggests that while the level of external debt is bad for growth, the size of debt
servicing is more important for the rate of growth as it severely limits government
spending. In 1990, debt servicing to government current revenues equals 217%. This
ratio dropped to 96% in 1991 and remain as high as 25% in 2003. There is no
significant relationship between growth and AID or ODA. One possible explanation for
this is the level of ODA and AID received is too trivial to have any significant impact on
35
Singh, Dhanraj R
the rate of growth. The weak relationships observed between growth and other policy
variables are somewhat disappointing. However, as Harrison (1996) noted, a major
problem with using annual data in identifying the determinants of long term growth is
that the underlying relationships between policy variables and growth can be affected by
shocks or cyclical fluctuations. Nevertheless, the F-tests reject the null hypothesis that
the policy variables are not important in determining growth. Using the specification in
equation (1), I experimented with specifying human capital, physical capital and labour
in levels and re-estimate the coefficients. The individual and joint coefficients were not
significant; thus it is not presented. As a form of robustness check, in columns (7) to (9),
I gradually omitted the insignificant variables in column (1) to (6) to determine whether
the observed relationships were noise and dependent on the inclusion of other
variables. The results remained unchanged and robust and the joint significance also
improved.
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Table (6): Sensitivity Results
Dependent Variable: Growth Rate
(10)
Independent Variables
Physical Capital Stock
0.2311***
(6.706)
Mortality Rate
1.1885***
(3.259)
Life Expectancy
-1.5869
(1.125)
Education
-0.0189*
(1.719)
Migration
-0.0015
(0.237)
Labour
0.0583
(1.492)
Inflation Rate
0.0000
(0.094)
Fiscal Deficit
0.0076
(0.931)
Exchange Rate
0.0188
(1.125)
Private Investment
-0.0044
(0.827)
External Debt
-0.0022
(0.195)
Bilateral Aid
-0.0042
(0.623)
ODA
0.0053
(0.702)
Crude Oil
0.0110
(1.435)
Exports Price Index
0.0095
(0.735)
Trade/GDP
-0.0033
(0.286)
Democracy Index
0.0065
(1.230)
Technology
0.8893***
(18.074)
IMF
0.0039
(1.588)
World Bank
0.0056**
(2.251)
PNC x Democracy Index -0.0139**
(2.259)
PPP x Democracy Index
(11)
(12)
(13)
0.2311***
(6.706)
1.1885***
(3.259)
-1.5869
(1.125)
-0.0189*
(1.800)
-0.0015
(0.237)
0.0583
(1.492)
0.0000
(0.094)
0.0076
(0.931)
0.0188
(1.125)
-0.0044
(0.827)
-0.0022
(0.195)
-0.0042
(0.623)
0.0053
(0.702)
0.0110
(1.435)
0.0095
(0.735)
-0.0033
(0.286)
-0.0075**
(1.926)
0.8893***
(18.074)
0.0039
(1.588)
0.0056**
(2.251)
0.2430***
(7.405)
1.0854***
(3.143)
-0.7647
(0.552)
-0.0199*
(1.938)
-1.0080
(1.198)
0.0523
(1.424)
-0.0000
(0.4513)
0.0061
(0.799)
0.0014
(0.905)
-0.0036
(0.712)
-0.0106
(0.926)
-0.0059
(0.930)
0.0118
(1.506)
0.0128*
(1.773)
0.0114
(0.946)
-0.0022
(0.204)
0.0058
(1.174)
0.9144***
(19.136)
0.0081***
(2.582)
0.0054**
(2.314)
-0.0137**
(2.365)
0.2430***
(7.405)
1.0854***
(3.143)
-0.7647
(0.552)
-0.0199*
(1.938)
-1.0080
(1.198)
0.0523
(1.424)
-0.0000
(0.4513)
0.0061
(0.799)
0.0014
(0.905)
-0.0036
(0.712)
-0.0106
(0.926)
-0.0059
(0.930)
0.0118
(1.506)
0.0128*
(1.773)
0.0114
(0.946)
-0.0022
(0.204)
-0.0079**
(2.161)
0.9144***
(19.136)
-0.0014
(0.390)
0.0054**
(2.314)
0.0140**
(2.262)
PNC x IMF
0.0137**
(2.365)
-0.0095**
(1.960)
PPP x IMF
PNC
-0.0260***
(5.368)
PPP
YR
Fixed
Effects/Weather
F-Statistic
Adjusted R-Square
Observations
T-statistics in ( )
respectively.
0.0095**
(1.960)
-0.0209***
(3.967)
0.0259***
(5.368)
No/Yes
45.724
0.9606
45
and ***
**
Yes/Yes
0.0208***
(3.967)
Yes/Yes
Yes/Yes
45.724
0.9606
45
50.290
0.9655
45
50.290
0.9655
45
* indicate significance at the 1 percent, 5 percent and 10 percent level
37
Singh, Dhanraj R
In addition to the basic results, I explored the relationship between each regime and
growth to determine the possible mechanisms through which each affects growth. I
maintained the specification used in equation (1) and interacted each regime which the
other independent variable. The coefficients were all insignificant except when
interacted with the IMF and the democracy index.
As shown in table (6), the results are nothing but salient. When the PNC is interacted
with the democracy index, the coefficient derived is negative and significant. This further
confirms the abuse of democratic rights, institutionalization of corruption and nepotism,
rigged elections, racial discrimination and avulsion and utter savagery that confronted
political opponents and civil society under the PNC administration, as suggested by
several authors mentioned earlier. Conversely, when the PPP is interacted with the
democracy index the resultant coefficient is positive and significant. This confirms the
presence of a democratic order, political rights, civil liberties, the right to ownership and
other growth enhancing political and social institutions under the PPP administration.
Exploring the relationship between the IMF and each regimes and its impact on growth
is motivated by two principal reasons. First, is to test the hypothesis proposed by Bird
(2009) that negotiations with the IMF can signal economic failure which can become
self-fulfilling. Second, is the fact that relations with the IMF deteriorated during the
1970s and 1980s as the government defaulted on its debt obligations, (Ferguson,
1995). The coefficient of the interaction term between each regime and the IMF, like
democracy, is negative and significant for the PNC, and positive and significant for the
PPP. This suggests that negotiations with the IMF under the PNC regime did in fact
harm growth, while negotiations under the PPP regime positively affected growth. This
confirms that the statist economic policies pursued under the PNC regime which the
IMF fiercely opposed stifled economic growth, while under the PPP regime, market
friendly policies supported by the IMF and the commitment to economic reforms
encouraged economic growth, (Bank, 1993). Alternatively, this can also mean that there
was a shift in the IMF’s policy recommendations from its conventional demand
management policies to more growth friendly policies, which coincided with a change in
regime. In either case, it remains that interactions with the IMF under both regime has
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
had variant and significant impact on growth, and is therefore an important determinant
of long term growth in Guyana. When the interaction terms enter the regression, the
negative coefficient of education became significant at the 10% level. If we accept this
coefficient as stationary and robust, it can be interpreted that the quality of tertiary
education is poor or there is a mismatch between tertiary education and the skills and
training that firms demand, resulting in inefficient use of resources.
SECTION VII: CONCLUSIONS
This paper investigates the determinant of long term growth in Guyana’s economy,
focusing on the post-independence period. The results provide new insights in
explaining why the economy fell behind or failed to catch up with the rest of the
Caribbean
economies.
Specifically,
the results suggest
that physical capital
accumulation; human capital, specifically infant mortality rate; interactions with Bretton
Wood institutions and political economy factors satisfactorily explain long term growth.
Further, the institutions associated with each regime including the level of democracy,
are critical factors in explaining economic growth in Guyana. The analysis also shows
that the never ending internal contest for control of the political economy is particularly
harmful for economic growth as it signals political and economic instability and
discourage much needed investment. Negotiations with the IMF seemed to have
variable effects on economic growth depending on the political regime undertaking
implementation of the Fund’s programmes, while programmes implemented under the
WB have a stable and positive effect on growth. The results can be interpreted as
robust as various experimentations with alternative specifications and measurements of
each variable has been conducted and the observed relationships remain stable.
39
Singh, Dhanraj R
BIBLIOGRAPHY
Acemoglu, D., Johnson, S., & Robinson, J. (2004). Institutions as the Fundamental
Cause of Long Term Growth. NBER Working Paper 10481.
Bank., W. (1993). Guyana; From Economic Recovery to Sustained Growth, A World
Bank Country Study. Washington, D.C.: World Bank.
Bank., W. (2012). Metadata on Guyana. Data Retrieved on April 14, 2012 from the
World
Bank:
World
Development
Indicators
Database.
http://data.worldbank.org/country/guyana
Bardhan, P. (2005). Institutions Matter, But Which Onces? . Economics of Transition,
Vol 13, no 3., 499-532.
Barro, R. (1997). Determinants of Economic Growth, A Cross Country Empirical Study.
Cambridge: The MIT Press.
Baumol, W. J. (1993). Health care, education and the cost disease: A looming crisis for
public choice. Public Choice, Vol 77 no. 1, 17-28.
Bennett, K. M. (1995). Economic Decline and the Growth of the Imformal Sector: The
Guyana and Jamaica Experience. Journal of International Development 7, no. 2,
229-42.
Bird, G. (2009). Reforming IMF Conditionality; From Streamlining to Major Overhaul.
World Economics Vol.10, no 3. , 81-104.
Bordo, M., Mody, A., & Nienke, O. (2004). Keeping Capital Flowing; The Role of the
IMF. International Finance, 421-50.
Durlauf, S. (1996). Long-Run Economic Growth. New York: Springer Verlag, LLC.
Ferguson, T. (1995). Structural Adjustment and Good Governance: The Case of
Guyana. Guyana: Public Affairs Consulting Enterprise .
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
Gafar, J. (1996). Guyana: From Cooperate Socialism to Economic Liberalism and
Growth, 1976 - 1994. Journal of Developing Areas 31, no. 1, 41-73.
Greif, A. (2000). The Fundamental Problem of Excahnge; A Research Agenda in
Historical Institutional Analysis . European Review of Economic History, Vol 4. ,
251-284.
Griffith, I. L. (1997). Caribbean Security on the Eve of the 21st Century. Washington
D.C.: National Defence University.
Guyana, G. o. (2001). Guyana Poverty Reduction Strategy Paper . Georgetown :
Government of Guyana.
Harrison, A. (1996). Openess and Growth; A Time-Series, Cross-Country Analysis for
Developing Countries. Journal of Development Economics, Vol 48., 419-447.
Khemraj, T. (2008). The Missing Link: The Finance-Growth Nexus and the Guyanese
Growth Stagnation. Social and Economic Studies 57, no. 3-4, 105-29.
Lucas, R. (1988). On the Mechanics of Economic Development. Journal of Monetary
Economics 22, no. 1, 3-42.
MacDonald, S. (2010, July 27). A Country Study: Guyana. Retrieved June 11, 2012,
from The Library of Congress Country Studies: http://lcweb2.loc.gov/cgibin/query/r?frd/cstdy:@field%28DOCID+gy0014%29
MacFeeters, B. D. (1992, January). Guyana Foreign Debt. Retrieved June 12, 2012,
from The Library of Congress Country Study: http://lcweb2.loc.gov/cgibin/query/r?frd/cstdy:@field%28DOCID+gy0092%29
Mankiw, N., Romer, D., & Weil, D. (1993). A Contribution to the Empirics of Economic
Growth. Quarterly Journal of Economics , 407-437.
41
Singh, Dhanraj R
Manring, R., Sundaram, R., & Greenbaum, A. (2007). Guyana Economic Performance
Assessment, USAID. Arlington: Nathan Associates Inc.
North, D. C. (1990). Institutions, Institutional Change and Economic Performance.
Cambridge: Cambridge University Press.
Romer, P. (1986). Increasing Returns and Long Run Growth. Journal of Political
Economy 94, no.5, 1002-1037.
Simmons, C. (1992, January). Guyana Police. Retrieved June 11, 2012, from Library of
Congress
Country
Studies:
http://lcweb2.loc.gov/cgi-
bin/query/r?frd/cstdy:@field%28DOCID+gy0128%29
Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly
Journal of Economics, Vol. 70 no. 1, 65-94.
Staritz, C. J. (2007). Guyana: Why Has Growth Stopped? An Empirical Study on the
Stagnation of Economic Growth. International Monetary Fund, IMF Working
Papers 07/86, 1-26.
Statistical, Y. (2010). Archives: Yearbooks of Immigration Statistics. Retrieved April 20,
2012, from U.S. Department of Homeland Security: http://www.dhs.gov/archives
Thomas, C. Y. (1988). The Poor and the Powerless; Economic Policy and change in the
Caribbean. London: Latin America Bureau.
Weisman, E. (2003). Sources of Economic Growth. In E.-B. Plilippe, F. Ebrima, & R.
Nallari, Experience with Macroeconomic Stabilization, Structual Adjustment, and
Poverty Reduction (pp. 120-34). Washington D.C: International Monetary Fund.
Yearbook, S. (2010). Archives: Yearbook of Immigration Statistics. Retrieved April 20,
2012, from U.S. Department of Homeland Security: http://www.dhs.gov/archives
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
APPENDIX A: DEFINITIONS AND MEASUREMENTS OF
EXPLANATORY VARIABLES
A.1. Economic Growth
GDP growth (y) is measured as the log differences of real GDP per capita (constant
2000 US$). (See http://data.worldbank.org/country/guyana.)
A.2. Physical Capital
Physical Capital stock is calculated using the perpetual inventory method and is
expressed in log differences. The formula that is applied is:
Kt+1 = It + (1 – r) OKt
Where; I is investment (gross fixed capital formation) in year ‘t’; and r is the fixed rate of
depreciation and OK is the opening level of capital stock. Consistent with the
consumption rate of capital complied by the Bureau of Statistics and other studies, the
fixed rate of depreciation is assumed to be 4%. In order to generate a series of capital
stock an initial level of capital stock is required for 1965. An arbitrary amount of 35% of
GDP has been assumed. This amount is consistent with the literature. The capital stock
series is not sensitive the initial level of capital stock, (Weisman, 2003, p. 128). (See
http://data.worldbank.org/country/guyana.)
A.3. Human Capital
Human Capital is measured using three independent variables, each expressed in log
differences. These include (1) infant mortality rate (deaths per 1000 live births), (2) total
life expectancy at birth, and (3) education. For education, I utilized the annual number of
graduates of the University of Guyana since it is the only tertiary education institution in
Guyana from independence. For this variable the growth rate is net that of the
population growth rate so as to ensure that it is not merely picking up increases in the
43
Singh, Dhanraj R
population, i.e. dlogedu* = dlogedu – dlogpop. I also experimented with defining human
capital in level. (For data, see http://data.worldbank.org/country/guyana.)
A.4. Labour
There is a severe paucity of labour force data in Guyana. Actual labour force data is
only available for a subset of years. I estimated the missing values using the population
growth rate as a proxy for growth rate of the labour force for the corresponding years.
This
series
is
also
expressed
in
log
differences.
(See
http://data.worldbank.org/country/guyana.)
A.5. Migration
Net migration is calculated using estimates provided by UNDP, World Bank and Bureau
of Statistics and is expressed in log differences. Net migration data is available in five
years periods from 1950. I estimated annual net migration assuming uniform distribution
each year within the sub periods. Migration rate is then calculated using the estimated
annual
net
migration
and
total
population.
http://data.worldbank.org/indicator/SM.POP.NETM?page=6
(See
and
http://data.un.org/Data.aspx?d=PopDiv&f=variableID%3A85)
A.6. Economic Policy
Economic Policy is measured using several macroeconomic variables. These are the
inflation rate, private investment, fiscal deficit, external debt and the official exchange
rate (G$ per US$). Inflation rate is calculated as the percentage change in GDP deflator
and is expressed in first differences. Private investment maintained its usual
measurement (current GYD$). Fiscal deficit is the deficit on government’s current
account and not capital account due to lack of data. External debt is measured as total
debt stock (DOD) current US$. Official exchange rate is the local currency per US$.
Each
series
is
expressed
http://data.worldbank.org/country/guyana)
in
log
differences.
(See
IDS 50th Anniversary Working Paper Series- Working Paper 11/12
A.7. Openness
For openness, I employed three different measures. First, I used the conventional
measure of trade as a percentage of GDP. Second, I calculated total trade taxes as a
percentage of total trade. This measure I believe better illustrates the degree of
openness as it captured the extent to which the government taxes trade in order to raise
revenues. Lastly, using merchandize exports and imports, I calculated the merchandise
terms of trade as the final measure. All three measures are expressed in log
differences.
Data is taken from the World Bank, Bank of Guyana Reports. (See
http://www.bankofguyana.org.gy/bog/index.php?option=com_content&view=article&id=1
38&Itemid=120 and http://data.worldbank.org/country/guyana)
A.8. External Factors
Under external factors, the following variables are entered independently in the
regression; net bilateral aid from Development Assistance Committee (DAC) members
measured in current US$; net overseas development assistance measured in constant
2009 US$; world market price for crude oil measured in 2011 US$ per barrel; Export
Price Index is calculated using world market prices for Bauxite (US$/t), Rice (US$/mt),
Sugar
(US
cents/kg,
2005
real)
http://data.worldbank.org/country/guyana;
and
Gold
(real
2005
US$/toz).
(See
http://minerals.usgs.gov/ds/2005/140/#data;
http://databank.worldbank.org/ddp/home.do?Step=1&id=4;http://www.bp.com/extended
sectiongenericarticle.do?categoryId=9041229&contentId=7075080)
A.8. Democracy
The principle measure of democracy used in this study is an indicator of political rights
complied by the Freedom House. The index is subjective and has three components:
(1) political rights, (2) civil liberties and (3) freedom status. A score between 0 – 10 (0 =
highest) is given for political rights and civil liberties and ‘F’, ‘PF’ and ‘NF’ is given for the
freedom status to indicate ‘Free’, ‘Partly Free’ and ‘Not Free’ respectively. The freedom
status was converted to a numerical scale of 1 – 3 with 1 = Free. All three components
are then combined into one index multiplicatively ranging from 0 – 1, with 0 equaling to
45
Singh, Dhanraj R
the highest degree of democracy. I experiment with both in level and log differences of
the index. (See http://www.freedomhouse.org/)
A.9. Technology
Technological change is calculated using the growth rate of Solow residual (sometimes
referred to as total factor productivity) as a proxy and is expressed in log differences.
This involves as 2SLS approach. First I estimated dlogyt = φ0 + φ1dlogpkt + φ3dloglabt to
derive the residuals which is (residual = dlogyt – φ0 + φ1dlogpkt + φ3dloglabt ).
A.10. Weather Conditions
Annual rainfall data measured in millimeters is available for major stations for two out of
three counties. This variable is also expressed in log differences. Data is taken from
Guyana Meteorological Station.
A.11. Dummy Variables
The dummy variable used for the different political regimes equals 1 in the year/s in
which each regime is in power and 0 otherwise. Likewise for programmes with the IMF
and the World Bank, a value of 1 is assigned for those years in which Guyana entered
in a programme with the respective institutions and 0 otherwise. Details of programmes
and years of implementation are available on both institutions websites.