The Manufacturing Sector - Is there hope?
When the political dust settles after the elections
tomorrow one of the economic challenges which the new government will have
to face is what to do about the country’s manufacturing sector. Every
political manifesto, independent commentator and economist consistently
complain about the over-dependence of the country on a few commodities -
rice, bauxite, sugar, wood, alcohol and gold. Yet, as Guyana becomes more
integrated in the globalised economy the need to develop an efficient
manufacturing capable of competing with the best has never been greater.
Prices for the country’s traditional products have fallen dramatically and
despite the meltdown on Wall Street and Tokyo no one is predicting that the
new economy in which commodities will face continuing decline in real prices
while technology driven products, tourism and services expand, is a passing
The Manufacturing Sector in
The manufacturing sector in Guyana has always been very
small since as a colony the population made up largely of poor people were
expected to meet its low needs for manufactured goods from the UK. The
mother country in turn never considered it necessary to shift factories to
British Guyana except to do some intermediate processing of raw materials.
Then we inflicted further misery on ourselves. The harsh years of misguided
economic and political experimentation with its restrictions on imports and
availability of foreign exchange did nothing to help the country or the
sector. So bad things had became that liberalisation did not help and the
performance of the sector at best over the past ten years has been erratic.
Outdated equipment and technology, weak financial structure, poor economic
policies, untrained management and a small domestic market have all
contributed to this situation.
If we exclude sugar production and rice milling the rest
of the manufacturing sector which also includes electricity, gas and water
accounts for less than seven percent for the years 1996-1999. For the years
1989 to 1991 prior to the ERP coming on stream, the comparable average
percentage was 7.7%. If we were to go back further we note that the sector’s
share of GDP was actually higher between 1950-1975 than it has been in
recent years. In other words the domestic manufacturing sector has not
responded to the economic reform programmes and to other several attempts at
Manufacturers of course blame everything and everyone but
themselves for the continuation of this state of affairs. They blame taxes,
the bureaucracy, politicians and the banking system. While they deserve some
understanding they have to accept some responsibility for the plight in
which they find themselves. They continue to rely on the government and the
discretionary dispensation of incentives and award of contracts than to
carry out sound financial and operational management.
The Seeds of Inefficiency
Even in official circles there is a view that
manufacturers are so inefficient that they could only compete successfully
in a highly protected marketplace. Yet when we look at the environment in
which they have to operate we can understand why so few of them succeed.
Domestic manufacturers are subject to both direct and direct indirect taxes.
They pay consumption tax on their locally sold output and certain
manufacturers face excise duty as well. Further they are required to pay
import duty on their imported material inputs but are exempted from
Consumption Tax on directly imported material inputs and all domestically
sourced material inputs. They receive capital allowances on historical costs
and pay corporate income tax at the rate of 35%.
Like all businesses manufacturers have to meet other
compliance costs associated with several pieces of legislation including the
Consumption Tax Act, the Companies Act 1991, the Occupational Health &
Safety Act, the Termination of Employment and Severance Pay Act and the
National Insurance & Social Security Act. In a small developing business
the financial and non-financial responsibility and cost can be overwhelming.
In the era of the socialist experiment when Guyana
pursued policies of self-sufficiency, the government sought to compensate
for these shortcomings with various forms of protection including
restrictions on imports and fiscal and other concessions. While many of
these practices have been discontinued, successive governments have still
persisted in using fiscal policies to influence economic decisions.
The catastrophic earlier decline in the performance of
the economy and the standard of living illustrates that efforts to promote
efficient import substitution via the provision of assistance to domestic
manufacturers through tariff protection, duty free access to raw material
inputs and capital items, the availability of subsidised credit and tax
holidays, have been largely unsuccessful. Indeed the evidence suggests that
these efforts have not only failed but have involved significant costs to
Nor did the manufacturers take advantage of the
protection to strengthen their operations. With the removal of import and
exchange controls domestic manufacturers found it difficult to compete with
imported goods. At their current level of productivity the evidence suggests
that many manufacturing operations can only survive at their existing level
of productivity if they continue to receive excessive levels of protection
and bank support.
Despite this dismal situation, no country can afford to
ignore its manufacturing sector and it must constantly seek out
opportunities to create and support industries and sectors which make a net
contribution to the economy by providing jobs, generating foreign exchange
earnings or providing savings in foreign exchange as a result of import
“Manufacturing” is of course a wide term even if rice
and sugar milling was excluded. As defined by the Consumption Tax Act it
means “making goods or applying any process in the course of making goods”.
This definition includes agro-processing but also involves the application
of technical knowledge and processing equipment, in alliance with capital
and labour transformation of locally available or imported raw materials
and/or intermediate inputs, into final or intermediate products. These
include agricultural, industrial and mineral materials.
Given its manifestly rich commercially exploitable
natural resources, Guyana should readily develop the required competitive
advantage for the production and export of manufactured products from these
resources. The sector needs to look beyond history and tradition and
consider the substantial scope for expansion which beckons from value-adding
processes in wood, minerals and fruits and vegetables.
The National Development Strategy
The National Development Strategy which has received some
recognition from the major political parties refers to a study of the cost
structure of manufacturing companies in Jamaica, St. Lucia, Grenada, and
Guyana which found that Guyana was the least competitive of the
countries despite having the lowest wage rates. In Guyana the cost of energy
and transport was double that of the other countries; the transaction costs,
which include the time spent in consultations with the Government, were
deemed to be the highest; and the technology that was generally utilised in
the manufacturing processes was considered to be not appropriate.
The NDS recommends that to overcome the limitations of
market size, to take account of economies of scale and to earn vital foreign
exchange, the country has to become an export-oriented economy with cost and
quality that can compete in the international market place. The NDS
recommends that the very top priority must be assigned to sustaining a
policy framework that aids competitiveness. This includes the further
liberalisation of the economy to the point where the remaining vestiges of
protectionism which sheltered and nurtured policies of import substitution
manufacturing are dismantled. The NDS recognises however that provisions may
be necessary for the stimulation of infant industries and the development of
certain geographical areas of the country.
The National Development Strategy makes some very useful
recommendations for the development of the sector including labour force
training, improved mechanisms for industrial relations, a more uniform and
liberal tax regime, and the maintenance of a stable exchange rate over time.
Other measures recommended include:
reduction of the corporate taxes applicable to manufacturing
enterprises to encouraging more investment in the sector. Of course
this may not find favour with some economists and the Chambers of
Commerce whose members are made up of traders who will argue that they
are making rational decisions involving the optimum allocation of
incentives for value-added export products to be put in place by way
of an export allowance. One presumes that the idea is to expand the
coverage rather than increase the rates of the allowances which are
now as high as 75%. Business Page is concerned about tinkering with
taxes in the absence of comprehensive tax reform and would therefore
be accelerated allowances for capital expenditure, depending on the
rate of expenditure incurred.
Business Page generally supports the recommendations
contained in the NDS for the manufacturing sector. However the country needs
to look beyond tax measures to ensure that the environment for manufacturing
and exports positively encourages the sector. Taxation alone can in fact
exacerbate the situation for the country as a whole. There needs to be
greater linkages with other sectors of the economy. Our banking system with
all the technology and privatisation has made little structural advances,
too many of our public servants still do not understand the role of the
public service in the new era and the politicians still prefer laws which
allow them too much discretion and to dispense favours rather than establish
and administer economically sound, transparent policy regulations.