Over the course of the recent weeks, the Alliance for change, in commenting on the requirements for economic growth have sought to make the point that access to capital, which is invariably made available in the form of credit, is a fundamental component of the capitalist free enterprise system.
This is why the “credit crunch” in the American financial system was treated as such a serious issue prompting the Obama administration to undertake decisive action to restore this crucial access to capital.
Thus, it is submitted that if an emerging economy such as Guyana is serious about charting a sustained course of economic growth, it will have to enunciate as part of a clearly thought out industrial policy, how such growth will be capitalized.
In this regard, it should be noted that in his 1 955 classic Theory of Economic Growth, Sir Arthur Lewis made the point that no country has made economic progress without positive stimulus from intelligent governments.
There is an abundance of scholarly work which has established how governments can pursue intelligent industrial policies in which the private sector takes the lead with prodding support from an activist state. Government policies have been important for shaping global giants like Toyota, Hyundai and Samsung. It has been pointed out that the Japanese car industries received close to 40 years of tariff support before giants like Toyota were able to compete globally.
It is against this background that the AFC in its Action Plan proposes the establishment of a State Development Bank. The sources of funding for such a Bank are clearly identified as well as the general principles that would govern and guide such an institution.
Some important proposed principles of such a bank that is expected to ignite tangible growth are: 1. Loans must be below market interest rates without compromising viability and 2. The SDB would provide free technical advice on the viability of the investment projects. In this regard, it should be noted that borrowers would be expected to establish the feasibility of their projects by providing a sound business plan.
Moreover, borrowers would be expected to satisfy clearly delineated performance criteria such as employment quota, workers’ rights, successfully compete in foreign markets and create sufficient domestic linkages.
The AFC has suggested that each political party in Parliament would be allowed one representative on the Board of such a Bank who meet the technical qualifications of a banker, financial analyst and investment specialist.
It was submitted that priorities must be given for agriculture, agro- processing, bagasse electricity, coconut plantations and processing, small and medium size manufacturing, jewellery manufacturing for exports, wind energy, solar energy, ICT, aqua culture and eco tourism.
The AFC has noted that Guyana has not really had a money problem which could not have been channeled towards production purposes. As at the end of 2004, Guyana’s banking system had a total of G$22, 623 million in excess liquidity, while at the end of 2005 that number increased to G$26, 615 million representing 14.4 percent and 16.9 percent of GDP, respectively. Given the Guyana–US exchange rate those numbers represent US$113.6 million and US$133 million in 2004 and 2005, respectively.
It should be here underscored that there has not been exactly a paucity of wisdom counseling in this regard. The AFC recalls that way back on the 29th of November, 1998, there was a very comprehensively complied economic report by the then Stabroek News’ journalist Gitanjali Singh which solicited the views of a renowned financial analyst named Dr. Graham Scott.
The counsel is as valid today as it was then “Dr Scott said the government has to introduce securities legislation to facilitate a capital market and licence a financial institution like a merchant bank to put together private sector deals and encourage the development of the private sector… He feels that Guyana has to get into value added investments as the days for being a plantation economy are long gone.”
Amazing stuff when we consider that more than a decade later, we are essentially at that identical infant juncture.
In the literature on the viability of development banking, the example of South Korea, Taiwan and Japan are often cited as the specimens of the effectiveness and success of the SDB. The example of Brazil’s BNDS which has a Balance sheet larger than the World Bank’s has been the subject of much discussion. Interestingly enough, the Brazilian government finances the development bank from taxation but other sources of funding are also employed.
The BNDS has been an important source of stable finance for Brazilian companies during the global financial crisis. Incidentally, it should be pointed out, that when President Lula proposed building a hyro-electric plant in Guyana this very development bank was cited as the source of the funding.
Of course, as Dr. Tarron Khemraj has pointed out, “a SDB is only one aspect of a menu of financial institutions and markets that are necessary to finance economic growth and a production transformation in the economy.
In addition, foreign investments are essential and so too are investments from the Diaspora. Dr. Khemraj has pointed out that for instance close to 50% of China’s FDI are really Chinese Diaspora investments in China. However, such FDI must be significantly growth and development oriented and not centered on the extraction of raw materials for export as the recent deal with the Indian Coffee Company contains.
Essentially, in summation, the AFC posits that a prudent industrial policy which specifically deals with the capitalization needs of industry is urgently needed in igniting real and tangible growth. The AFC submits that the instrument of the Development Bank efficiently managed by the State is the optimal (along with the other menu of instruments) mechanism in providing such capitalization needs.
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