Business Page – August 13, 2000


The Manufacturing Sector - Is there hope?

Introduction

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 phase.

The Manufacturing Sector in Guyana

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 Outdated equipment and technology, weak financial structure, poor economic policies, untrained management and a small domestic market have all contributed to this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 assistance.

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 the economy.

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.

The Remedy

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 substitution.

“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:

  • The further 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 resources.

  • Fiscal 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 recommend caution.

  • There will be accelerated allowances for capital expenditure, depending on the rate of expenditure incurred.

Conclusion

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.