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Guyana - ECONOMY
GUYANA'S ECONOMY WAS IN DIRE CONDITION in the early 1990s. When the country gained independence in 1966, it was one of the least developed areas in the Western Hemisphere. In the 1970s and 1980s, the economy deteriorated further after the government nationalized foreign-owned companies and took control of almost all economic activity. Output of bauxite, sugar, and rice--the country's three main products--fell sharply. Guyana's gross domestic product (GDP reflected the decline in output. Real GDP fell during the late 1970s and decreased by an estimated 6 percent per year during the 1980s. The fall in GDP in terms of United States dollars was even more dramatic because of repeated devaluations of the Guyanese dollar (for value of the Guyanese dollar). In 1990 the GDP was only US$275 million. Per capita GDP amounted to less than US$369 per capita, making Guyana one of the poorest countries in the hemisphere.
Declining GDP was but one symptom of the malaise that had overcome Guyana's economy in the 1980s. Other indications were the nation's crumbling infrastructure, especially the electrical power supply; the high level of external debt and payments arrears; and the emigration of professionals and skilled workers. Conditions were harsh for the roughly 764,000 people living in the country. In 1990 an estimated 40 percent of workers earned the minimum wage, equivalent to only US$0.5 per day. Three factors--the flourishing illegal economy, the cash remittances that Guyanese citizens received from relatives living abroad, and the country's near selfsufficiency in food production--were all that kept the economic decline from becoming a disaster.
But in the early 1990s, there were signs that twenty years of stagnation and decline could be ending. The government of Guyana was at last coming to grips with the deep economic crisis. The economy's performance had not yet recovered, but the government was dismantling statist policies and opening up the country to foreign investment.
There were two principal reasons for the dramatic policy reversal. The first reason was the death in 1985 of then-President Linden Forbes Burnham, who had been in power since the mid-1960s. Burnham refused to recognize the ill effects of "cooperative" socialism, which he had designed. The second reason for the reversal was Guyana's debt. President Hugh Desmond Hoyte, Burnham's successor, inherited a tremendous external debt burden and large debt payment arrears. By 1988 those arrears exceeded US$885 million (equal to four times the country's annual exports), and Guyana's international creditors had exhausted their patience. Hoyte faced the stark alternatives of having all credit to his country cut off or enacting a package of reforms approved by the International Monetary Fund (IMF). He chose the latter option, launching an ambitious Economic Recovery Program (ERP) in 1988 with the goal of dismantling Guyana's socialist economy and ending the country's self-imposed isolation. "My single ambition," Hoyte told the Financial Times in 1989, "is to put this economy right. I want to put it on the path to recovery."
Guyana's economy was still far from recovery in 1991, but the Hoyte government's commitment to reform was clear. The government had cut its budget deficit (in real terms), removed most price controls, legalized foreign currency trading, liberalized trade regulations, encouraged foreign investment, and had begun privatizing state-owned companies. In early 1991, the official and market exchange rates were unified for the first time since independence. Market forces were replacing state intervention; incentives to private individuals were replacing government regulations. Foreign investors appeared ready to tap Guyana's considerable natural resource potential.
Economic reform still faced formidable obstacles, however. Chief among these was the shortage of financial resources to improve the nation's infrastructure and rebuild its productive base. The IMF and other international creditors had refinanced the debt, propping up the financial side of the economy. But Guyana needed additional loans--even though its debt burden was already huge--so that the productive side of the economy could be rebuilt. A second obstacle was the social cost of the government's austerity plan. Guyanese citizens could ill afford to receive lower wages or pay higher taxes to help eliminate the budget deficit. Thus, Guyana needed international assistance for humanitarian as well as economic reasons. For the government then, the economic reform program posed two sizable challenges: to maintain the political initiative at home and to garner the continued support of the international financial community.
Guyana was first colonized by Dutch settlers in the 1600s. Spanish explorers had ignored the area because it lacked obvious mineral wealth. Key features of Guyana's current economic structure, especially the patterns of land use, can be traced to the period of Dutch stewardship. The Dutch West India Company, which administered most of the colony from 1621 to 1792, granted early Dutch and then British settlers ownership over 100-hectare tracts of land. Settlers augmented these narrow coastal tracts by clearing swampland and expanding their holdings inland, for several kilometers in some cases. Many of the large sugar plantations that formed the basis of the colonial economy were established in this manner. Dutch settlers also left their mark on the land. They built a system of dikes and drainage canals on Guyana's low-lying coastal plain, using techniques developed in the Netherlands. Parts of this original sea-defense system continued to operate in the 1990s.
Sugar soon emerged as the most important plantation crop. Sugar was first grown in colonial Guyana in 1658 but was not produced on a large scale until the late 1700s, about 100 years later than in the rest of the Caribbean region. Because Guyana's plantation owners entered the sugar industry late, they were able to import relatively advanced equipment for milling sugarcane. This investment in advanced equipment gave the local sugar industry a firm foundation and made it the leading sector of the local economy. By 1800 there were an estimated 380 sugar estates along the coast. In the 1990s, almost two centuries later, the population was still concentrated on the same coastal strip of land, and sugar was still one of the nation's two most valuable products.
Guyana's distinct ethnic makeup can be traced to conditions that prevailed during the colonial period. To supply the labor required for sugar cultivation, plantation owners at first imported slaves from West Africa. (The indigenous Amerindian population of Guyana was small and lived mostly in the impenetrable interior.) Thousands of slaves were imported each year as plantations expanded; more than 100,000 slaves worked in the colony by 1830.
The British formally took over the colony in 1814. But British Guiana's plantation economy fell into turmoil after 1833, when Britain passed the Act for the Abolition of Slavery Throughout the British Colonies. The law provided a five-year transitional period during which plantation owners were to begin paying soon-to-be- freed slaves for their services. In practice, however, owners alienated the slaves by wringing as much work as possible from them during the last years in bondage. Upon emancipation in 1838, almost all of the former slaves abandoned the plantations. Agricultural production plummeted. Some groups of former slaves were able to buy failed plantations, but they lacked the capital to reconstruct the complex operations after years of neglect. Most former slaves reverted to subsistence farming. By 1848 only 20,000 Africans worked on sugar estates. Even so, few Africans left the country; more than 40 percent of Guyana's postindependence population was descended from African slaves.
Faced with the prospect of a complete extinction of the sugar industry, plantation owners looked abroad for laborers. Free immigrants had little enthusiasm for the harsh working conditions on sugar estates, but indentured servants were less discriminating. Indentured servants typically contracted to work for five years in exchange for a one-way passage to British Guiana as well as food and housing. (In some cases, a return voyage was offered in exchange for extra years of service.) After taking on indentured servants from Portugal, China, and the West Indies, plantation owners turned to what would become the most important source of immigrants: India. About 240,000 indentured East Indians were brought to British Guiana between 1838 and 1917, the date when indentured labor was abolished. The British government supported this intraempire transfer of labor. In the short term, the influx of labor saved British Guiana's sugar industry. In the long term, the immigration deeply affected British Guiana's ethnic makeup. Most of the East Indians remained in the colony after completing their terms of indenture; many became independent rice farmers. Their descendants, along with later immigrants from India, accounted for about half of Guyana's postindependence population.
The racial and ethnic divisions that arose out of the two great waves of immigration into Guyana in the colonial period had a profound effect on the country. The divisions between Afro-Guyanese and Indo-Guyanese persisted into the modern period, in both economic and political terms. In the early 1990s, most IndoGuyanese were still employed in agriculture, growing sugar and rice, while the majority of Afro-Guyanese lived in Guyana's few urban areas..
The most important change in Guyana's economy after the turn of the century was the development of the bauxite (aluminum ore) industry by North American companies. Mining of bauxite began in 1914, and the ore would alternate with sugar as Guyana's most valuable product. Guyana possessed vast reserves of bauxite in the northeast, and by the 1960s, the country had become the world's fourth largest producer (after the Soviet Union, Jamaica, and Suriname). Until the 1980s, Guyana was also the leading producer of calcined bauxite, a high grade of the mineral required for specialized applications.
Guyana achieved political independence in 1966, but economic independence did not immediately follow. Most decisions affecting the economy continued to be made abroad because foreign companies owned most of the agricultural and mining enterprises. Two British companies, Booker McConnell and Jessel Securities, controlled the largest sugar estates and exerted a great deal of influence on the nation. In the early 1970s, the Booker McConnell company alone accounted for almost one-third of Guyana's gross national product (GNP). The company produced 85 percent of Guyana's sugar, employed 13 percent of the work force, and took in 35 percent of the country's foreign exchange earnings.
Two other foreign companies dominated the mining sector: the Demerara Bauxite Company (Demba), a subsidiary of the Aluminum Company of Canada (Alcan); and the Reynolds Bauxite Company, a subsidiary of the Reynolds Metals Company of the United States. Together these firms accounted for 45 percent of the nation's foreign exchange earnings. Foreign companies also controlled the major banks.
The Burnham government, which took office in 1964, saw continued foreign domination of the economy as an obstacle to progress. As economist DeLisle Worrell pointed out, foreign ownership was considered the root cause of local economic difficulties. Emerging nations of the Caribbean region shared this viewpoint, which was supported by a number of arguments. Foreign-owned companies were said to use inappropriate production technologies in the Caribbean. These technologies were capital intensive, rather than labor intensive, because they had been developed for the industrialized world. Thus, local unemployment remained higher than necessary. Furthermore, local economies were geared to producing only primary products (sugar and bauxite in Guyana) rather than value-added products (processed foods and aluminum parts, for example). Guyana sold its inexpensive primary products abroad at world market prices that made local economies vulnerable to international price swings. At the same time, local economies had to import expensive products, such as machinery, because most small, less-developed countries had no manufacturing base.
According to critics of the country's economic system, foreign companies were satisfied with the existing arrangements and had no incentive to develop the local economies. In short, foreign control was stifling regional aspirations. Many people in Caribbean countries, particularly those with left-leaning political sympathies, called for government control of the economies.
The government moved vigorously to take control of the economy. In 1970 Burnham proclaimed Guyana as the world's first "cooperative republic." He said that the country would continue to welcome foreign investors but that the government would own at least 51 percent of any enterprise operating in Guyana. The Burnham government originally planned not to exceed this 51 percent ownership; it wanted majority control of the companies but wanted to maintain foreign management teams and the flow of foreign investment. In practice, however, major foreign companies balked at the idea of shared ownership, and the Burnham government took complete control of the economy, eliminating both foreign ownership and foreign management.
During the 1970s, Guyana nationalized the major companies operating in the country. Demba became a state-owned corporation in 1971. Three years later, the government took over the Reynolds Bauxite Company. The Burnham government then turned its attention to the sugar industry. Some observers say the latter move was largely for political reasons; they say the Burnham government was seeking to extend its base of support among Indo-Guyanese sugar laborers. Guyana nationalized Jessel Securities in 1975 after the company began laying off workers to cut costs. In 1976 the government nationalized the huge Booker McConnell company. By the late 1970s, the government controlled over 80 percent of the economy.
Nationalization of large foreign companies was but one aspect of pervasive government control of economic activity. By the early 1980s, the government had also taken over the bulk of the retailing and distribution systems. It controlled the marketing of all exports, even those few products, such as rice, which were still produced privately. It owned all but two financial institutions and tightly regulated currency exchange. The government controlled prices and even attempted to dictate patterns of consumption by banning a wide range of consumer imports. Local substitutes for even the most basic imports were proposed, such as rice flour for imported wheat flour.
The nationalized economy at first appeared to be performing well. During the early 1970s, world prices of both sugar and bauxite rose, allowing the newly nationalized enterprises to reap sizable profits. Increased government spending helped stimulate the economy, and GDP grew at about 4 percent per year from 1970 to 1975.
In the late 1970s and early 1980s, however, the world commodity prices that had favored Guyana declined, reversing the earlier gains. Economic output dropped as demand for sugar and bauxite fell. Nonetheless, government spending continued at a high rate, and Guyana was forced to begin borrowing abroad. This pattern of declining GDP, continued high levels of government spending, and foreign borrowing was common throughout Latin America in the 1980s.
Guyana's economic decline grew more acute during the 1980s. Unfavorable world prices were only part of the problem. There were two more basic difficulties: the lack of local managers capable of running the large agricultural and mining enterprises, and the lack of investment in those enterprises as government resources were depleted. Bauxite production, which had dropped from 3 million tons per year in the 1960s to 2 million tons in 1971, fell to 1.3 million tons by 1988. Similarly, sugar production declined from 330,000 tons in 1976 to about 245,000 tons in the mid-1980s, and had declined to 168,000 tons by 1988. Rice production never again reached its 1977 peak of 210,000 tons. By 1988, national output of rice was almost 40 percent lower than in 1977.
The decline in productivity was a serious problem, and the Burnham government's reaction to the downturn aggravated the situation. As export revenues fell, foreign exchange became scarce. Rather than attacking the root of the problem, low domestic output, the government attempted to ration foreign exchange. The government regulated all transactions requiring foreign exchange and severely restricted imports. These controls created their own inefficiencies and shortages. More significantly, tight government control encouraged the growth of a large parallel market. Smugglers brought in illegal imports, and currency traders circumvented government controls on foreign exchange. Although many citizens began working and trading in the parallel economy, many others were leaving the country. An estimated 72,000 Guyanese, almost one-tenth of the population, emigrated between 1976 and 1981. Among those who left the country were many of the most skilled managers and entrepreneurs. Finally, the hostile political orientation of the Burnham government foreclosed the possibility of aid from the United States.
The crisis finally came to a head in the late 1980s because of Guyana's unsustainable foreign debt. As export revenues fell, the government began borrowing abroad to finance the purchase of essential imports. External debt ballooned to US$1.7 billion by 1988, almost six times as large as Guyana's official GDP. Because the government funneled the borrowed money into consumption rather than productive investment, Guyana's economy did not grow out of debt. Instead, the government became increasingly unable to meet its debt obligations. Overdue payments, or arrears, reached a staggering US$1 billion in 1988. Rather than risk a curtailment of all foreign credit (even short-term loans for imported machinery and merchandise), the Hoyte government embarked on an IMF-backed austerity and recovery program. The Economic Reform Program (ERP) introduced in 1988 amounted to a reversal of the statist policies that had dominated Guyana's economy for two decades.
The structure of Guyana's export-oriented economy in the 1980s was much the same as it had been since colonial times. Sugar, bauxite, and rice were the most important products. In fiscal year (FY) 1989, agriculture accounted for 30 percent of Guyana's official GDP, mining for 10 percent, manufacturing and construction for 15 percent, services for 22 percent, government for 18 percent, and other activities for about 5 percent. The existence of a large unofficial parallel market in Guyana made it difficult to obtain reliable data on overall economic activity. But according to some estimates, as much as one-half of Guyana's actual economic activity occurred in the parallel market.
The most important agricultural concern was the sugar industry, operated by the state-owned Guyana Sugar Corporation (Guysuco). Sugar production declined significantly during the 1980s. The magnitude of the decline became apparent in 1988, when Guyana imported sugar for the first time in the twentieth century. The second most important agricultural product was rice. In contrast to sugar, rice was produced mostly on privately owned farms, and most rice was consumed domestically. Rice production fluctuated widely during the 1980s. Droughts, floods, and plant disease often interfered with crops, especially in 1988, when Guyana imported rice as well as sugar. Guyana also produced livestock for domestic consumption and exported fishery products. Forest resources remained largely unexploited.
Bauxite production was the most important part of the mining sector. The major bauxite mines, operated by the Guyana Mining Enterprise Limited (Guymine), were in the Linden area and on the Berbice River at Kwakwani. Bauxite production declined to 1.3 million tons in 1988 compared with the 1966 level of 3 million tons. Guyana also mined gold and diamonds, but the exact value of all of these goods was not known because smugglers commonly absconded with these valuable minerals.
Processing of sugar, bauxite, rice, and other primary products accounted for three-quarters of Guyana's manufacturing activity. Guyanese industry produced some consumer goods, but the country lacked heavy manufacturers. The service component of GDP included transport, communications, financial activities, trade, and distribution. Official statistics did not include many services, which the parallel market provided.
A growing share of economic activity in Guyana took place outside of the official economy in the 1980s. The rise of the socalled parallel market was alarming for several reasons. In general terms, the parallel economy, or black market, was harmful because it indicated that the official economy was not providing enough goods and services, and that a "norm of illegality" existed in Guyana. More specifically, the illegal economy drained talent and initiative from the official economy, deprived the government of tax revenues, and led to inefficient use of resources. In addition, the parallel market was considered a major source of inflation and currency instability.
The size of Guyana's parallel economy was difficult to estimate because illegal traders and businessmen kept a low profile to avoid both foreign currency regulations and taxation. The Financial Times and the Economist both estimated in 1989 that the parallel market carried out between US$50 million and US$100 million worth of business annually. By the higher estimate, the parallel economy was about one-third the size of the official economy. Economist Clive Thomas argued in various studies that the parallel economy ranged from one-half to roughly the same size as the official economy.
The key feature of the illegal economy was foreign currency trading, an activity that arose when the government began restricting legal access to foreign exchange. When it introduced foreign exchange controls in the late 1970s, the government was trying to keep Guyana's balance of payments from worsening by controlling the flow of money and goods to and from the country. The government also had to restrict access to foreign currency in order to maintain an overvalued exchange rate. If Guyanese citizens had had unlimited access to foreign currency, many of them would have bought United States dollars, depleting Guyana's foreign exchange reserves, because of their anticipation of devaluations of the Guyanese dollar.
The restriction on foreign exchange helped maintain the fixed exchange rate but it also created a shortage of foreign currency, making it nearly impossible for individuals and businesses to import essential items (foreign merchants would not accept Guyanese dollars). Street traders filled the gap by supplying much-needed foreign currency; they made a profit by selling foreign currencies at a high price. Thus, the black market exchange rate per United States dollar was about G$60 in early 1989, compared with the official rate of G$33. The Economist reported in mid-1990 that brick-sized stacks of G$100 bills were trading for US$1,000 on Georgetown's America Street, dubbed "Wall Street."
The largest currency traders in the country, known as the Big Six, set the parallel exchange rate on a weekly or daily basis by tracking supply and demand, according to Thomas. There were several sources of the foreign currency supply: illegal exports of gold, diamonds, rice, sugar, shrimp, and furniture; cash remittances from abroad; unrecorded expenditures by tourists and visitors; overinvoicing of imports; and sales of illegal drugs. Demand for foreign currency came primarily from three groups: local producers or retailers needing to import foreign materials or merchandise, investors and savers seeking a safe haven against devaluation of the local currency, and people exchanging local currency because they planned to leave Guyana temporarily or permanently. There was a close relationship between foreign currency trading and other illegal activities such as smuggling, tax evasion, and narcotics sales.
The government responded ambivalently to the parallel market. Official policy restricted illegal economic activity, but in practice, the government often turned a blind eye to the welldeveloped parallel economy. Government attempts to repress the illegal market, as in the early 1980s, were unsuccessful. Guyana's borders were long and unpatrolled, making smuggling relatively easy. In addition, cash remittances from abroad were common, meaning that many people in Guyana had frequent access to foreign currency and could easily trade on the parallel market. Many observers also noted that the government tolerated the parallel market because it provided goods that were restricted but essential. In fact, even state-owned companies traded on the parallel market.
A fundamental shift in policy toward the parallel economy occurred in the late 1980s, when the Hoyte government began stressing the need for a revitalized private sector. To many people in Guyana, as well as in the international financial community, the existing parallel market was the epitome of private sector initiative under difficult conditions. The Hoyte government signaled a measure of agreement with this view in 1989 when it legalized and regulated the parallel foreign currency market. The government's aim was to eliminate the illegal economy by absorbing it into the legal economy.
The country's underdeveloped and decaying infrastructure seriously handicapped Guyana's economy. Many of the basic facilities and services that were taken for granted even in other developing countries were either never present in Guyana or had deteriorated by the late 1980s. This absence of basic infrastructure meant that the country's economic recovery would have to begin at the most fundamental levels. No reform of Guyana's productive sectors was possible without a significant level of investment in electricity, transportation, communications, the water system, and seawalls.
The unreliable supply of electricity in Georgetown and throughout Guyana was "the single most debilitating infrastructural inadequacy," according to Minister of Finance Carl Greenidge. The United States Embassy reported that the lack of electricity in the Georgetown area was a leading factor in emigration from Guyana. Blackouts of sixteen hours per day were common in 1989-90. Improving the electrical system was a government priority. Other infrastructural problems also blocked economic development. The poor road system, for example, made it difficult to transport bauxite and blocked efforts to harvest timber.
When he took office in 1985, President Desmond Hoyte said he would accelerate "the pursuit of socialist construction." One year later, however, his government began taking the first steps toward dismantling Guyana's statist economy. Faced with a deep economic crisis--declining production levels and an acute balance of payments shortfall--the government began cutting public spending and encouraging foreign investment. At first it was not clear whether this economic reversal was simply a short-term response to the crisis or a long-term change in political philosophy. But after 1986 the Hoyte government continued to move toward a free-market economy under the guidance of the IMF, despite considerable opposition in the country. By 1990 the nation appeared ready to end its disastrous twenty-year experiment with a closed, governmentcontrolled economy.
The Hoyte government signaled its commitment to reform in 1988 when it announced a far-reaching Economic Recovery Program (ERP). The plan had four interrelated objectives: to restore economic growth, to incorporate the parallel economy into the official economy, to eliminate external and internal payments imbalances, and to normalize Guyana's financial relations with its foreign creditors. Restoring Economic Growth
To create a climate favorable for growth, the government removed many of the most onerous limitations on economic activity that had been put in place during the period following independence. First, the government liberalized foreign exchange regulations. For the first time in many years, the government allowed exporters to retain a portion of their foreign currency earnings for future use. Previously, only the government-owned Bank of Guyana had had the legal right to hold foreign currency. Second, the government lifted price controls for many items, although key goods such as petroleum, sugar, and rice remained controlled. Third, the government lifted import prohibitions for almost all items other than food and allowed individuals to import goods directly without government intervention. Fourth, private investment was encouraged by offering streamlined approval of projects and incentives such as tax holidays. To reassure potential foreign investors that Guyana's policy had indeed changed, the government announced in 1988 that "It is no part of Government's policy to nationalize property . . . . The era of nationalizations is therefore to be considered at an end."Absorbing the Parallel Market
The second major objective of the ERP was to absorb the parallel market into the legal economy. The parallel market was seen as denying tax revenues to the government, adding to inflationary pressures through uncontrolled currency trading, and generally encouraging illegal activity in Guyana. By liberalizing foreign exchange and other regulations, the government began to make inroads into the illegal economy. The 1989 Foreign Currency Act allowed licensed dealers to exchange Guyanese dollars for foreign currency at market-determined rates. By 1990, more than twenty licensed exchange houses operated in Georgetown, taking the place of some illegal currency traders.
A related policy focused on the exchange rates. The government began devaluing the Guyanese dollar so that the official exchange rate would eventually match the market rate. This devaluation process was an essential feature of the recovery program. It not only targeted the parallel economy but also improved the country's export competitiveness. But the devaluations were painful for consumers. In April 1989, the government changed the official exchange rate per United States dollar from G$10 to G$33, instantly tripling the domestic currency price of most imports. The unofficial exchange rate at that time was reportedly G$60 per United States dollar, so the Guyanese dollar was still overvalued at the official rate. As of mid-1990, the disparity between the two rates persisted: the official rate was G$45 but the unofficial rate (at the now legal exchange houses) was G$80 per United States dollar. An important milestone was reached in early 1991 when Guyana adopted a floating exchange, removing the distinction between the official and the market exchange rates. The Guyanese dollar stabilized at US$1=G$125 in June 1991.Eliminating Payments Imbalances
The third major goal of the ERP was to eliminate internal and external payments imbalances. In other words, the government was seeking to eliminate the public sector deficit on the one hand and the current account deficit on the other. The public sector deficit--the gap between government revenues and overall government spending--had reached 52 percent of GDP by 1986. This level was unsustainable and was an alarming increase over earlier deficits: an average of 12 percent of GDP during 1975-80 and an average of 2 percent of GDP during 1971-75.
The government attacked the public sector deficit in a straightforward manner: it cut spending and sought to enhance revenues. The government halted all monetary transfers to troubled state-owned enterprises (with the exception of the Guyana Electricity Corporation). As a longer-term measure, the government began studying the public enterprises--the heart of the statist economy--to determine which ones should be privatized (wholly or partially) and which ones should be closed. By 1990 the government had plans to allow significant privatization of the sugar and bauxite industries. In addition, the central government planned to limit expenditures by delaying salary increases and eliminating unnecessary civil service positions. Such fiscal austerity was useful to the economy. Still, the need to service the foreign debt limited the extent to which the government could cut back on spending; the government slated half of 1989 expenditures for interest payments.
The government attempted to raise revenues by absorbing the parallel economy to broaden the tax base, by improving the collection of the consumption tax, and by reducing import duty exemptions. Starting in 1988, the government required companies to pay taxes on earnings from the current year, rather than the previous year. This set of expenditure and revenue policies produced measurable results but failed to eliminate the serious financial difficulties facing the government.Normalizing International Financial Relations
Even more pressing than the public sector deficit was Guyana's balance of payments shortfall. The extent of the problem was indicated by the overall balance of payments, which was a record of the flow of goods, services, and capital between Guyana and the rest of the world. The deficit in the current account had increased during the early 1980s, reaching almost 50 percent of GDP in 1986. In effect, this meant that Guyana was receiving more goods and services from the rest of the world than it was providing and was having to pay for the difference. The government paid part of this deficit by using reserves such as stocks of gold. But part of the deficit went unpaid when reserves became depleted. This unpaid portion was critical. Referred to as "external payment arrears," it marked Guyana as a bad credit risk, threatening to completely undermine Guyana's ability to obtain even short-term trade credits from abroad. Accumulated external payment arrears had expanded to almost three times Guyana's official GDP by 1988.
The Hoyte government attempted to decrease the balance of payments deficit by increasing exports and limiting imports; Guyana's trade was close to balanced in 1988, but a sizable trade deficit again appeared in 1990. Low productivity meant that exports did not expand significantly, and the government lacked the resources needed to eliminate the external payments arrears. Therefore, an agreement with the country's foreign creditors was crucial.
The IMF and the World Bank played a vital role in devising Guyana's economic reform program. The two institutions also helped ensure that the government implemented the planned reforms.
The IMF had curtailed all further lending to Guyana beginning in 1983, because payments on previous loans were overdue. In 1988 the IMF worked with government representatives to draft a reform plan, with the understanding that economic reform within Guyana would lead to renewed international financial support for the country. IMF support was important not only for the resources the institution could provide but also because many other lenders, such as commercial banks and foreign governments, waited for IMF approval before making loans.
In 1989, after Guyana's government had shown a commitment to restructuring the economy, the IMF and the World Bank helped eliminate the external payments arrears. A so-called Donor Support Group led by Canada and the Bank for International Settlements paid US$180 million to enable Guyana to repay arrears. The IMF, the World Bank, and the Caribbean Development Bank then refinanced this amount, essentially replacing Guyana's overdue payments with a new long-term loan. The elimination of the longstanding external payments arrears cleared the way for Guyana to borrow abroad if necessary and allowed it to reschedule other external debts on more favorable terms.Results of the Economic Recovery Program
The reforms introduced by President Hoyte resulted in no immediate progress. A policy framework paper prepared by the government in cooperation with the World Bank and the IMF had predicted that real GDP would grow by 5 percent in 1989. But instead, real GDP fell by 3.3 percent. Economic performance continued to decline in early 1990, according to the United States Embassy. Changes in government policy could not erase the profound difficulties facing the economy: massive foreign debt, emigration of skilled persons, and lack of infrastructure.
But in early 1991, there were signs of improvement: Guyana had rescheduled its debt, making the country eligible for international loans and assistance, and foreign investment surged in the country. These changes, preconditions but not guarantees of economic recovery, would not have occurred without the Economic Recovery Program.
About 240,000 people, or about 55 percent of the adult population (85 percent of adult men and 25 percent of adult women), were economically active in Guyana as of 1990. Official statistics indicated that 16 percent of the economically active persons were unemployed in 1980. In 1985 the government reported that no reliable unemployment estimate was available. Unemployment in 1990 was estimated at between 12 percent and 15 percent. In the mid1980s , an estimated 30 percent of employed people worked in agriculture, 20 percent in mining and manufacturing, and 50 percent in construction, services, and administration. As with other economic statistics in Guyana, these figures did not include the substantial number of people working in the parallel economy.
The United States Department of State estimated in 1990 that 25 percent of Guyana's work force was unionized. Organized labor in Guyana was closely tied to the major national political parties. In 1990, the largest labor organization, the Trades Union Congress (TUC), comprised eighteen unions, most of which were affiliated with the ruling People's National Congress (PNC) party. President Hoyte was honorary president of the oldest TUC member, the Guyana Labour Union (GLU). British Guiana's best known labor leader, Hubert Nathaniel Critchlow, started the GLU in 1917 (as the British Guiana Labour Union) when he organized dockworkers. Another important labor organization was the Guyana Agricultural and General Workers Union (GAWU), which represented 14,000 sugar workers. The predominantly Indo-Guyanese GAWU was associated with the opposition People's Progressive Party (PPP). Intraparty divisions were reflected in labor organizations: in 1988 seven unions left the TUC in protest at PNC electioneering tactics and formed the Federation of Independent Trade Unions of Guyana (FITUG).
Labor unions played an important role in the anticolonial movement in the 1960s and in the nationalization of foreign companies in the 1970s. But the close ties between the TUC unions and the governing PNC party did not guarantee that workers' interests were always advanced. In 1988 the Guyanese National Assembly adopted a constitutional amendment under which government no longer had to consult with trade unions on labor and social legislation. According to the government, this move was an essential step toward dismantling the statist economy. As part of the reform program, the government effectively cut workers' purchasing power by repeatedly devaluing the Guyanese currency. Wage increases did not keep pace with the devaluations. Prolonged strikes followed, leading to production losses in all major sectors. During wage negotiations in 1990, the unions were again dissatisfied when President Hoyte announced across-the-board pay increases that were significantly lower than what the unions had requested. Economic stabilization was taking precedence over union demands.
Workers in Guyana received overtime pay when they worked in excess of an eight-hour day or a forty-hour week. But in 1990, about 40 percent of the country's workers were in minimum-wage jobs, earning the equivalent of US$0.5 per day (at December 1990 exchange rates). These low wages, often not enough to even cover the costs of commuting to work, helped explain the high rate of emigration. The government barred children under age fourteen from working, but the United States Department of State reported in 1990 that younger children did work, often selling candy, cigarettes, and other items along roads.
Agriculture was the chief economic activity in Guyana. Only the coastal plain, comprising about 5 percent of the country's land area, was suitable for cultivation of crops. Much of this fertile area lay more than one meter below the high-tide level of the sea and had to be protected by a system of dikes and dams, making agricultural expansion expensive and difficult. In the 1980s, there were reports that the 200-year-old system of dikes in Guyana was in a serious state of disrepair. Guyana's remaining land area is divided into a white sand belt, which is forested, and interior highlands consisting of mountains, plateaus, and savanna.
In the 1980s, sugar and rice were the primary agricultural products, as they had been since the nineteenth century. Sugar was produced primarily for export whereas most rice was consumed domestically. Other crops included bananas, coconuts, coffee, cocoa, and citrus fruits. Small amounts of vegetables and tobacco were also produced. During the late 1980s, some farmers succeeded in diversifying into specialty products such as heart-of-palm and asparagus for export to Europe.
The extent of Guyana's economic decline in the 1980s was clearly reflected in the performance of the sugar sector. Production levels were halved, from 324,000 tons in 1978 to 168,000 tons in 1988.
A number of factors contributed to the shrinking harvests. The first factor was nationalization. The rapid nationalization of the sugar industry in the mid-1970s led to severe management difficulties and an emigration of talent. The Guyana Sugar Corporation (Guysuco), which took over the sugar plantations, lacked needed experience. Perhaps more important, Guysuco did not have access to the reserves of foreign capital required to maintain sugar plantations and processing mills during economically difficult periods. When production fell, Guysuco became increasingly dependent on state support to pay the salaries of its 20,000 workers. Second, the industry was hard-hit by labor unrest directed at the government of Guyana. A four-week strike in early 1988 and a seven-week strike in 1989 contributed to the low harvests. Third, plant diseases and adverse weather plagued sugar crops. After disease wiped out much of the sugarcane crop in the early 1980s, farmers switched to a disease-resistant but less productive variety. Extreme weather in the form of both droughts and floods, especially in 1988, also led to smaller harvests.
Guyana exported about 85 percent of its annual sugar output, making sugar the largest source of foreign exchange. But the prospects for sugar exports grew less favorable during the 1980s. Rising production costs after nationalization, along with falling world sugar prices since the late 1970s, placed Guyana in an increasingly uncompetitive position. A 1989 Financial Times report estimated production costs in Guyana at almost US$400 per ton, roughly the same as world sugar prices at that time. By early 1991, world sugar prices had declined sharply to under US$200 per ton. Prices were expected to continue decreasing as China, Thailand, and India boosted sugar supplies to record high levels.
In the face of such keen international competition, Guyana grew increasingly dependent on its access to the subsidized markets of Europe and the United States. The bulk of sugar exports (about 160,000 tons per year in the late 1980s) went to the European Economic Community (EEC) under the Lomé Convention, a special quota arrangement. The benefits of the quota were unmistakable: in 1987, for example, the EEC price of sugar was about US$460 per ton, whereas the world price was only US$154 per ton. (The gap between the two prices was not so dramatic in other years, but it was significant.) Guyana was allowed to sell a much smaller amount of sugar (about 18,000 tons per year in 1989, down from 102,000 tons in 1974) in the United States market at prices comparable to those in the EEC under another quota arrangement, the Caribbean Basin Initiative. Maintaining preferential access to the European market was a priority in Guyana; in 1988 and 1989, production levels were too low to satisfy the EEC quota, so Guyana imported sugar at low prices and reexported it to the lucrative European market. Even so, Guyana fell 35,000 tons short of filling the quota in 1989 and 13,000 tons short in 1990.
The government of Guyana restructured the sugar industry in the mid-1980s to restore its profitability. The area dedicated to sugar production was reduced from 50,000 hectares to under 40,000 hectares, and two of ten sugarcane-processing mills were closed. Guysuco also diversified into production of dairy products, livestock, citrus, and other items. Profitability improved, but production levels and export earnings remained well below target. In mid-1990, the government took an important step toward long-term reform of the sugar industry--and a symbolically important step toward opening the economy--when Guysuco signed a management contract with the British firms Booker and Tate & Lyle. The Booker company owned most sugar plantations in Guyana until the industry was nationalized in 1976. A study by the two companies reportedly estimated that US$20 million would be needed to rehabilitate Guyana's sugar industry.
Rice production in Guyana reached a high of over 180,000 tons in 1984 but declined to a low of 130,000 tons in 1988. The fluctuating production levels were the result of disease and inconsistent weather. Droughts and heavy rains had an adverse effect on rice crops because the irrigation and drainage systems in rice-growing areas were poorly maintained. The area under rice cultivation fell from 100,000 hectares in 1964 to 36,000 hectares in 1988, according to the Guyana Rice Producers' Association.
Most rice farms in Guyana were privately owned; the government operated the irrigation systems and rice-processing mills. This division of the industry resulted in several difficulties. According to the United States Embassy, the government neglected irrigation and drainage canals because private farmers refused to pay taxes for their maintenance. Meanwhile, the government-run mills were reportedly slow in paying farmers for their crops. In addition, the government-controlled distribution system for tractors, fuel, spare parts, and fertilizer was highly inefficient, according to some reports. In 1990 the government began privatizing the rice industry by putting several rice mills up for sale.
The bulk of Guyana's rice production was consumed domestically. Even so, exports took on increasing importance during the 1980s as a source of foreign exchange; there were even reports of rice being smuggled out of the country. Guyana shared a quota for rice exports to the EEC with neighboring Suriname but was unable to fill the quota during the late 1980s. In 1988 the government set a 1991 production goal of 240,000 tons and an export goal of 100,000 tons. In the first quarter of 1990, however, exports fell to a record low of 16,000 tons, for an annual rate of less than 70,000 tons. Half of these exports came directly from private farmers, the other half from the Guyana Rice Milling and Marketing Authority.
Timber was the least exploited but most abundant natural resource in Guyana in the early 1990s. Forests, many of which reportedly had commercial potential, covered three-quarters of the country's land. Over 1,000 different species of trees were known to grow in the country.
The two main difficulties in timber production were the limited access to the forests and electrical power problems at the major lumber mills. The government and interested groups overseas were addressing both difficulties. The government launched the Upper Demerara Forestry Project in the early 1980s to improve hardwood production on a 220,000-hectare site. In 1985 the International Development Association, part of the World Bank, provided a US$9 million loan for expansion of the forestry industry. In 1990 the government sold the state-owned logging company and announced plans to allow significant Republic of Korea (South Korean) and Malaysian investment in the timber industry. Showing concern for the longterm condition of its forests, the government also planned to set aside 360,000 hectares of rain forest for supervised development and international research into sustainable management.
Fishery products took on increasing importance during the 1980s as potential earners of foreign exchange. By the end of the decade, shrimp had become the third leading earner of foreign exchange after sugar and bauxite. Fisheries production in Guyana totaled about 36,000 tons in 1989, down from 45,000 tons in the mid-1980s. The most valuable portion of the catch was the 3,800 tons of shrimp. Many fishermen reportedly sold their shrimp catch at sea to avoid taxes and earn foreign currency. Thus, shrimp exports may have been much higher than recorded. Shrimp exports were expected to continue increasing as Guyana developed shrimp farms along its coast; Guysuco began operating one such farm in the late 1980s. The bulk of the fisheries catch was sold at the dockside and consumed domestically. A US$5 million fish-processing plant was under construction on the Demerara River in 1990, raising the possibility of frozen fish exports. The government sold Guyana Fisheries Limited, which employed about 5,000 people, to foreign investors in 1990.
Livestock production was not a major activity in Guyana because of a shortage of adequate pasture land and the lack of adequate transportation. In 1987 there were an estimated 210,000 cattle, 185,000 pigs, 120,000 sheep, and 15 million chickens in the country. The country imported Cuban Holstein-Zebu cattle in the mid-1980s in an effort to make Guyana self-sufficient in milk production; by 1987 annual production had reached 32 million liters, or only half the target quantity.
Guyana's mining sector offered the best hope of rapid growth in the late 1980s. The government's decision to open the sector to foreign management and investment attracted interest from companies in a number of countries, including the United States, Canada, Brazil, Norway, and Australia. Guyana was known to have sizable reserves of bauxite, gold, and diamonds. Foreign investment was expected to dramatically increase the rate at which those reserves were mined.Aluminum
Guyana was known to have a 350-million-ton bauxite reserve, one of the world's highest concentrations of the valuable mineral. But production of bauxite dipped sharply after the government nationalized the industry in the 1970s. In the mid-1980s, bauxite production hovered around 1.5 million tons per year, or half the annual level of the 1960s and 1970s. The state-owned Guyana Mining Enterprise Limited (Guymine) suffered repeated losses as a result of inefficient management, declining world prices for bauxite, and prolonged strikes by workers. The losses drained the company's capital reserves and led to deterioration of plants and equipment. Guyana's single alumina plant, located in Linden, used to separate 300,000 tons per year of aluminum oxide from raw bauxite ore until the facility closed in 1982. From then on, Guyana was forced to export only unprocessed bauxite ore, foregoing the added revenues to be gained from refining the mineral.
In the 1970s, Guyana had the advantage of being the world's leading supplier of so-called calcined bauxite, a high grade of the mineral used for lining steel furnaces and other high-temperature applications. After 1981, however, China emerged as a major source of calcined bauxite, and Guyana became known as a less reliable supplier. By the end of the decade, China had displaced Guyana as the leading exporter of calcined bauxite, even though Guyana had the advantage of being closer to the major North American and European markets.
Bauxite mining was concentrated in northeast Guyana. The two largest mines were located at Linden, on the Demerara River directly south of Georgetown, and at Kwakwani on the Berbice River. There was little development of new mining areas during the period of state ownership. But in the late 1980s, the government began offering foreign companies the chance to rebuild and expand the bauxite industry.
The Reynolds Bauxite Company, formerly the owner of the mine at Kwakwani, was one of the first foreign firms allowed back into Guyana. It provided managerial assistance to Guymine beginning in 1985. In the late 1980s, Reynolds began investing an estimated US$25 million to open a bauxite mine at Aroaima on the Berbice River. An elaborate system of tugboats and barges was required to bring the bauxite 126 kilometers down the Berbice River and then 120 kilometers along the coast to Georgetown for transport to the United States. According to London's Economist Intelligence Unit, Reynolds awarded a ten-year transportation contract to GoliathKnight , an Anglo-Dutch company. The mine was expected to produce 1.5 million tons of bauxite in its first year of operation (July 1990-June 1991) and 2.6 million tons per year by 1995. Guymine was also negotiating to allow Venezuela's Venalum company to begin extracting 600,000 tons per year in the region around Kwakwani.
The government anticipated further development of the bauxite industry in the Linden area. A new mine near Linden, called the East Montgomery North Mine, was expected to open by 1994. It was to take the place of the three largely depleted pits in the area. The government sought significant foreign investment for the project; production was expected to reach 2 million tons per year in the 1990s. Norway's Norsk Hydro was discussing the possibility of reopening the alumina plant near Linden at a cost of about US$100 million. Furthermore, just as the Reynolds company was returning to the mines it had previously owned, Alcan was negotiating a return to bauxite production facilities in Linden.
<>Gold and Diamonds
The bauxite sector attracted foreign investment in the late 1980s because companies knew about Guyana's vast reserves and the country's previously formidable production capacity. Gold mining, in contrast, attracted more speculative investment from companies eager to explore the country's neglected potential. Gold production peaked in 1894 at 4,400 kilograms per year but declined to an officially declared level of 160 kilograms per year in 1983. Declared production averaged 500 kilograms per year during the late 1980s, but undeclared production was thought to be five times as high: an estimated 3,000 kilograms of gold were being extracted each year. Individual miners working in southern Guyana smuggled most of the gold they found to Brazil to avoid paying taxes and to avoid receiving Guyana's low official price, which was based on an artificially high exchange rate.
Lured by the prospect of a 1990s gold boom, at least ten foreign companies began operations or preliminary explorations within Guyana in the late 1980s. They brought with them industrial equipment, such as powerful suction dredges, that could extract up to 500 grams of gold from a riverbed in a twelve-hour shift. Three of the largest companies were Canada's Golden Star Resources and Placer Dome, and Brazil's Paranapanema. Others included Australia's Giant Resources, Homestake Mining of the United States, and Britain's Robertson Group. The Guyana Geology and Mines Commission hosted potential investors' visits to the country, and the government promised to pay the market value for gold (US$356 per ounce in May 1991) in United States dollars. The government's promise achieved measurable results in 1990: during the first half of the year, declarations increased by 75 percent over the previous year.
Even if only a few of the proposed foreign investments reached their expected output levels, the government projected that Guyana would still be producing over 6,000 kilograms of gold per year (presumably officially declared by the foreign companies) by the mid-1990s. Paranapanema, drawing on experience in Brazil's tropical terrain, expected to produce 1,500 kilograms per year at its Tassawini joint venture on the northwest Barama River. In the Mahdia region on the Essequibo River, Placer Dome and Golden Star Resources reported that an operation capable of producing 2,000 kilograms per year was probably possible; the companies planned a feasibility study before actually starting operations.
Information on diamond production in Guyana was sketchy because the bulk of the mineral was reportedly smuggled out of the country. Declared production fluctuated between 4,000 and 12,000 carats per year in the 1980s. Undeclared production was probably much higher. In 1966, the industry produced about 92,000 carats, 60 percent of which were reported as gem quality.
The lack of a reliable supply of electricity in Guyana, especially in Georgetown, was the most severe constraint on economic activity and a major factor in emigration. By 1990 blackouts of sixteen hours per day were common in the capital city, affecting even the presidential mansion. Blackouts occurred without warning and sometimes lasted for several days. Most businesses in Georgetown employed standby generators, raising the demand for imported fuel.
The electricity supply was unreliable because the facilities of the state-owned Guyana Electricity Corporation (GEC) had deteriorated during the 1980s. In 1991 the GEC had a capacity of 253 megawatts of electricity and generated 647 gigawatt-hours of electricity, satisfying about half the estimated demand. The reasons for the shortfall were not only the lack of funds to replace aging generators and to build new power plants, but also periodic fuel shortages because most electrical power was produced thermally. There were other less tangible problems: GEC's finances were inadequate because the cost of electricity was below the cost of production (especially when taking depreciation into account); and the attitude of managers and workers was reportedly very poor. The bauxite and sugar sectors had their own electricity supply system apart from the GEC, but they also suffered power shortages.
Two types of efforts were under way in the early 1990s to rectify the electricity shortage. In the short term, GEC was limping along with the help of a small floating generator made in the United States and two ten-megawatt gas-turbine generators borrowed from Brazil. There was also a possibility that electricity would be bought from neighboring Venezuela.
In the longer term, the government was trying to obtain foreign investment and assistance to rebuild the electrical system. GEC planned to hire a consulting firm to help it develop a least-cost expansion program and to improve the pricing of electrical service. International financial organizations were also expected to contribute funds. As early as 1985, the Inter-American Development Bank (IDB) had approved a US$16 million loan for rehabilitation of GEC, and an agreement was reached with an Italian company to build a US$45 million (thirty-megawatt) power station. Both projects were delayed, as were plans to build a hydroelectric plant on the Mazaruni River. The Economist Intelligence Unit reported that GEC rehabilitation still had not started in mid-1990. In 1990 negotiations were under way with the United States firm, Leucadia, to form a joint-venture company for the operation of the electrical system.
Most manufacturing in Guyana involved the processing of agricultural products (sugar, rice, coconuts, and timber) and minerals (bauxite, gold, and diamonds). The production of alumina from bauxite was suspended in 1982. Guyana produced small quantities of textiles, ceramics, and pharmaceuticals in stateowned factories. Among those industries, the pharmaceutical industry showed the most potential for growth, having attracted investments from Beecham, a British firm, and from Tecno Bago, an Argentine firm. Manufacturers in Guyana also produced wooden furniture, cigarettes, and paints, and other products.
The government was attempting to sell off many of the smaller manufacturing companies as part of the Economic Recovery Program. One of the first state-owned manufacturers to be partially privatized was Demerara Distillers Limited, which produced rum and other alcoholic beverages. The company was relatively successful under state ownership, having become the world's largest producer of rum after Bacardi and the leading supplier of bulk rum (sold under various brand names) to Britain, according to the Financial Times. The government owned the majority of the company until 1988, when Demerara Distillers issued 12 million new shares and diluted government ownership to about 47 percent. The government did not appear ready to completely relinquish its hold on the rum producer, however, because it blocked the company's 1990 effort to issue more shares.
Expansion of the manufacturing sector, like expansion in other sectors, depended on increased foreign investment. Many observers noted that with such investment, Guyana could become a supplier of manufactured products to other countries in the Caribbean region. The Commonwealth Advisory Group, affiliated with the Donor Support Group that arranged the refinancing of the debt arrears in 1989, had reported in 1989 that Guyana had the potential for "vibrant and profitable" manufacturing of garments, shoes, leather goods, sawn timber, furniture and other wood products, processed agricultural products, paints, pharmaceuticals, and refrigerators. Preconditions for that sort of development, according to the group, included an easing of the foreign exchange constraint (achieved by 1990); improved infrastructure (telecommunications and transport); a simpler, less burdensome tax system; injections of foreign capital and technical skills; attractive wages for skilled workers; and stable government policy in support of private manufacturing.
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