Guyana - History of the Economy Postindependence

Postindependence

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.

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