Investment, growth and economic development

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In the current economic dispensation of liberalism and free market policies the role of investment in economic development is undoubtedly becoming more pronounced and pivotal. But one of the current debates is whether simply increasing levels of investment would bring the desired economic results.

An example which immediately brings this debate into focus is the economic collapse in South East Asia which enjoyed huge levels of investments and temporarily experienced very high economic growth rates and then the bubble burst.

Tim Kane, Ph.D in a 2007 lecture to the Overseas Private Investment Corporation (OPIC), entitled ‘Foreign Investment, Growth, and Economic Freedom: What Is OPIC’s Role?’ put forward some pertinent and extremely thought provoking arguments on the whole issue of investment.

“The instinctive understanding of economic growth leads us to believe that investment is a vital input because societies without investment are obviously stagnant. We tend to see a link between heavy levels of investment and economic growth. The appearance of cranes and tractors in a bustling city is evidence. And yet, this instinct is misguided. The question to ask is: Why are the cranes and tractors here? Why in this city, not that city? Why this country, not that country?” he asserted

He added that rather than ask this question, our humanitarian urge is to create new incentives to push investment into poor areas. But pushing inputs is almost always ineffective, which reminds us of the famous maxim “You cannot push a rope.”

He also noted: “Growth economists have confirmed a strong correlation between investment and economic growth. However, the use of sophisticated time series econometrics has confirmed the causality of the relationship. We know now that investment does not cause growth, but vice versa. Countries that grow tend to attract investment. This was a view first proposed, one might say, by Adam Smith in the 18th century. It was articulated clearly in the modern era by Albert Hirschman (a professor at Yale, Columbia, Harvard, and the Institute for Advanced Study) in 1958. But current data have been able to confirm Hirschman’s point that growth causes investment, and the consensus of professional economists is now resolved.”

The latter point is very relevant to Guyana where some in our society are arguing that nothing is happening with our economy in terms of investments and economic growth.

However, if a close and objective assessment of the situation is done it will be seen that in almost every sector there has been significant investments and this has been continuously taking place despite the global financial crisis, albeit maybe not the rate one would have desired but under the present circumstances this is understandable.

One sector where there has been heavy investment is the tourism sector which prior to 1992 was virtually non-existent. Today, that sector is playing an increasing role in the economic development of this country, as the situation has been dramatically transformed where scores of tourist resorts have been built, and a strong adventure/eco-tourist foundation is being laid.

The commercial and services sectors have also expanded significantly and most of our manufacturing enterprises have expanded their range of value-added products. In this regard, two of our largest local companies Banks DIH Ltd. and Demerara Distilleries Ltd (DDL) have been leaders. In fact, it was only on Wednesday that President Jagdeo commissioned a new US$9M state-of-the-art bottling plant at DDL.

Veteran entrepreneur and Chairman of DDL, Yesu Persaud pertinently noted that the company has come a long way, and explained that in 1992 it was recognised that it needed to move away from commodities into brands, so the idea of producing a product of distinction was then conceived and the El Dorado brand was born.

This investment and the many others that have preceded it is indeed an expression of confidence by the local private sector in the future of our national economy and certainly dispels the notion by some that this government is not doing anything to create an enabling business environment.