THE pace at which stories of development have been happening under this administration is rapid and as such, as a nation, in our desire to embrace change, must ensure that caution is not thrown to the wind and the Law of Unintended Consequences invoked. 

A number of interesting pronouncements have occurred in the first week of the Granger Administration which, from a macroeconomic perspective, must be given some space for discussion. I will list the pronouncements which have major macroeconomic implications as they were reported in the Stabroek News chronology:
1) An announcement by the Minister of Finance eyeing a 10% increase in Public Servants’ wages and a 17% increase in non-contributory pension (move from $12,500 to $15,000)
2) An article on May 22, 2015 from the Caribbean Development Bank highlighting Guyana’s Youth Unemployment Rate at being 40%
3) Renaming and expansion of purview of Government ministries on the 21st and 22nd May.
In a letter on the 21st May, 2015, captioned ‘Wage increases without productivity increases are inflationary’, one Louis Hamilton articulates quite gracefully and simplistically, the ‘demand-pull’ type inflation which is likely to occur as a result of these types of public policies. The APNU+AFC on their campaign platform would have stressed time and over their desire to massively increase both the public servants’ wages and the non-contributory old-age pension in Guyana.
While these moves are meritorious, laudable and easy ‘cotton candy’ on an election campaign trail, when in Government, some thought must be had to effective macroeconomic destablising implications of such policies.
The APNU+AFC, campaigning on this point, and placing it in their ‘100-day manifesto’ creates an ‘anticipation’ or ‘expectation’ effect in the economy, whereby public employees and pensioners now anticipate their increased earnings and begin to plan ahead. (In Economic literature, this is the formation of Rational Expectations). The problem arises in that not only are the public employees and pensioners able to ‘foresee’ this rise in the earning power of citizens, but so are the business entities, who will conversely begin to raise their prices in anticipation of more money in the economy, as the pursuit of profit is the primary motive of the entrepreneur.
Distinct effects will abound from this situation:
1) A consistent ‘tug of war’ on prices between the entities and the consumers in Guyana, creating an upward price spiral in the economy (inflationary situation).
2) Because of this massive increase in the quantum of money in the economy, a potential depreciation of the value of the Guyana dollar against international currencies
3) Given the high proclivity of Guyanese to consume foreign goods (imports), a potential degradation in the Current Account balance of the Balance of Payments.
Given the sheer mass of workers who are employed by the public sector (traditionally a larger employer in Guyana than the private sector), there is great potency in the policy to be an economically destabilising one, with bouts of massive inflation to be had should such a quantum of monetary shock be given to the system. (On a technical note: in a study on Inflation in Guyana, conducted by Dr. Cyril Solomon published in Transition Journal 42 of the University of Guyana, his econometric estimation of monetary potency in Guyana lies at 0.09, meaning that a 1 percent increase in the money supply in the economy has a 9 percent increase in prices, notwithstanding Open Market Operations by Central Bank which has the potential to taper the inflationary effects)
In addition to this, these announcements by the Government of a flat ‘across the board’ increase to public employees, without any conditionality on performance or improvements in ‘on the job’ performance creates an inflationary situation as more money now lies in the hands of the public, without much expansion in the national output. The expansion of Government ministries purviews and ambit now means that more individuals will now be employed in the public sector, some of whom would be more productively employed in the private sector and contribute very little to the national output. While as a social policy this is an excellent move, it continues to heap inflationary pressure and its ‘spin off’ effects identified above (as effects 2 and 3), on the economy. This type of employment policy was tested in the 1970s and 1980s in our experiment with socialism and a vertically integrated state, and while it kept unemployment low, eventually landed the economy in trouble. I have little issue with the non-contributory pension increase as those individuals are normatively judged in our society as being past their productive years, (hence the retirement legality) but it gives rise to another source of inflationary pressures.
This treatment of unemployment in Guyana while superficially may seem to address the unemployment problems of Guyana, (and even may temporarily alleviate the problem), does not address the structural mismatch (and concomitant unemployment) between the University of Guyana and the Guyanese economy, nor the stark unemployment situation which faces the individual who has dropped out of school, or is unable to acquire CSEC passes, which is the cross-section for which unemployed youths are heavily concentrated around. In the long run, a manifestation of the fractures which we face in our economy will yet prevail.
The health of the Guyanese economy is less jeopardised with a gradual scaling up of salaries over a period of time as it makes it much more difficult for business owners to continuously anticipate salary increases and change prices. While a cutting of VAT has been proposed, one has seen clearly that prices have a tendency to resist falling (downward rigidity), even in situations where input costs are lowered (e.g., the resistance of minibus owners to reduce prices even in the face of a drop in petrol prices) and this may result in a situation where prices are kept artificially high by business entities, with the Government unintentionally losing valuable revenue. Such a case would be detrimental to the Guyanese economy, where, only a small group of business owners ‘win’ from the policy in the form of higher profits. What can be done without jeopardising the economy’s health, is an expansion in the basket of zero rated items, to more adeptly reflect the average consumer’s basket.
The situation of unemployment, being a serious one, should not be shunned by the Government of Guyana but ‘quick fixes’ may also be detrimental with a number of unintended effects. As a country, it is time that we foster an entrepreneurial environment for young people, providing them with the essential tools for start-ups, teaching how to care for infant businesses, incubate the businesses (as Singapore successfully did) and foster greater productivity. The time is now and the time is right for our private sector to grow. I hope President Granger and his Administration fulfil this word, as was fervently promised on the campaign election trail.
RICHARD N. RAMBARRAN