Stability in a volatile Global Financial System: The Jagdeo Factor

Dr Prem Misir: ALL IS NOT well on the world’s economic front. Economic and financial crises in the U.S. continue to carry global consequences. Guyana, nonetheless, remains largely unscathed, due to President Dr. Bharrat Jagdeo’s stewardship bringing prudent economic management and strong, sustainable macroeconomic fundamentals; also, the President’s early vision of the utility value of the non-traditional Enhanced HIPC debt relief was a master stroke; where such relief freed up funds for better education, health, and social services.
Remember the Cochabamba Summit in 2006, where President Jagdeo secured the South American Community of Nations’ endorsement of a resolution, asking the IDB for 100 per cent debt relief of Guyana’s stock of debt with December 2004 as the cut-off point, effective from January 2007; this relief amounted to US$467 million. These represent the Jagdeo Factor at work. And there are other aspects of the Jagdeo Factor, even as the global economy remains fragile.

Notwithstanding this global volatility, Guyanese critics’ exuberance for isolationist explanations in the political economy gains momentum. For instance, they attribute the country’s current economic status totally to the Government’s policies and programs. These critics make no attempt to anchor their explanations in the realm of the global crisis. What is happening in the global economy today?
United States Federal Reserve Chairman, Ben S. Bernanke at the Federal Reserve Bank of Kansas City’s Annual Economic Symposium in Jackson Hole, Wyoming, in 2009, noted that since the start of the financial crisis in August 2007, the financial system remains stressed out, with rising inflation due to a commodity boom, a slowing down of the economy, failure of many vital financial institutions and financial markets, and the emergence of the global economy into a deep recession.
According to the United Nations Conference on Trade and Development (UNCTAD), global Foreign Direct Investment (FDI) declined by 39% in 2009, from US$1.7 trillion in 2008 to US$1 trillion in 2009. Smaller FDI inflows affected other regions: Africa by 36%, Asia 32%, and Latin America by 41%.
Global trade bore the brunt of the financial meltdown; the World Bank reported that global trade fell 31% between August 2008 and March 2009; but some recovery is now happening, as global trade is now growing at an annualized rate of 11%; and the total worth of global current account balances fell from 5.9% of global GDP in 2008 to approximately 3.9% in 2009.
The East Asian economies after being in dire economic straits for some years, could show a growth rate of 4.2% for 2009 and 6.8% for 2010 (Asia Economic Monitor) because of timely monetary and fiscal policy responses to the international financial meltdown. And the New York Times recently reported that the Japanese economy increased at an annualized rate of 4.6% in the final quarter of 2009, probably avoiding a double-dip recession. But economists now believe that Japan’s growth rate would become lethargic this year, due to decelerated domestic demand.
However, the global economy may return to the growth path this year from a 0.8% global fall in output last year, but its recovery is still fragile, the IMF noted; this year, the U.S. may see a growth of 2.7%, and the Eurozone of 16 countries may expect a GDP growth rate of a mere 1%. In fact, the developed economies may only increase by 2.1% in 2010, slower than other economies.

Caribbean economies also are experiencing an economic slowdown. The Latin America Monitor noted the following: St. Lucia’s tourism sector experienced a downturn in 2009, when its tourist arrivals in the first nine months declined by an average of 8.2%; Belize’s GDP growth declined by 0.2% in the third quarter of 2009; Trinidad & Tobago’s central balance remains in a weakened state at TT$3.2 billion at August 2009.
A UN report predicted only a 2% growth rate for Latin America and the Caribbean in 2009 and an unemployment rate of above 8%; the critical factors explaining this slow growth are decline in commodity prices and restrictions on domestic credit.
And ECLAC reported that in 2009, that due to the global crisis, exports fell 42% in Venezuela, 32% in Andean countries, 29% in the Caribbean, 22% in Mexico and Chile, and only 6% in Central America.
Nonetheless, critics still fail to assimilate the implications of this slowdown in the world economy for their local economy. Trade union leaders making irresponsible demands for wage hikes exemplify only one of many cases of non-assimilation. The current economic scene in Guyana requires some form of wage restraint, given the dismal impacting global economic conditions.
But notwithstanding a sluggish world economy, Guyana’s economy remains buoyant with very few bruises from this global crisis. Let me now present a sample of developmental gains in 2009:
1. Economic growth for 2009 was 2.9%, with positive growth since 2005.
2. A 3.3% increase in sugar production and a 9.2% rise in rice production from 2008.
3. A 5.8% increase in Other Crops’ output.
4. Rise in livestock sector output by 2.5%.
5. Increase in mining and quarrying output by 0.7%.
6. Raw gold output rose by 14.7%.
7. Engineering and construction sector gained momentum at 1.5%.
8. Transport and communication sector expanded by 2%.
9. Increases in the following: distribution sector increased 6.6%; financial services 3%; dwelling rentals 2%; and other services 3%.
10. Balance of payments’ surplus at US$234.4 million, and a reduced current account deficit by 31.6%.
11. Gold export earnings produced a 38.3% increase in export revenues.
12. Increase in the Bank of Guyana’s external reserves to US$628 million, the highest yet.
13. Macro economic fundamentals intact - inflation was 3.6%; interest rate 9.58%; exchange rate appreciated at 0.97% against the USD.
14. Fiscal deficit 5.3% of GDP, declining from 7.6% in 2008.
Keep in mind that the world economy impacts the local economic conditions.