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Having read Sir Ronald Saunders’ column entitled, “Higher cost of living demands competent governments.” I was thinking about some of the issues he raised.
Inflation in general terms is the rise of prices. It is felt at the consumer level in the rise of the cost of a gallon of gasoline or diesel, the price one pays for food stuff at the market-be it locally grown or imported, and the list goes on. At the producer level, inflation shows up as the increase in the price of inputs-gasolene, diesel, fertilizer, etc. In macroeconomic terms inflation comes from two sources: “demand pull inflation” where in the short term, demand for goods and services outpace supply causing prices to rise. And “cost push inflation” where producers see a rise in the price of inputs which causes them to raise prices of their products.
Sir Ronald posed the question: what policies can the Caribbean take to address the issue [of inflation] satisfactorily? His policy prescription: Caribbean countries should be working feverishly to increase trade in goods and services among themselves, establish joint ventures in manufacturing and agricultural production, and enhance air and sea links for the movement of people, goods and services. In other words, the Caribbean has to become more self-sufficient and less vulnerable to external factors.
Sir Ronald implicitly endorses programs to subsidize basic foods, oil and gas. His logic requires some fine tuning: at the consumer level subsidies interfere with the working of the market mechanism. By subsidizing the price of basic foods, the government keeps the price low while demand remains high relative to supply. In fact, Sir Ronald’s prescription aggravates the problem by increasing effective demand/disposable income without increasing supply.
The objective is to address the issue from the supply side. That is to funnel investments into agriculture. For example, the American farmer is one of the most productive because the ratio of capital goods per worker is one of the highest in the world. In practical terms, an American farmer has more tractors, combine, mechanization that brings their cost of production down.
I use the example of the American worker because the Guyanese public was treated to the alarming story of smugglers using the ambulance to transport contraband chicken. This situation is illustrative of the problem and the solutions. Clearly, local demand for chickens outstrips local production to the point where it is profitable to smuggle in “imported chickens.” The solution is not to subsidize consumption but to funnel investment in poultry production.
Sensing that there is an opportunity here, I researched poultry production. The production of poultry requires massive investment in a number of areas. First, the government has to improve the delivery and reliability of electricity and water to farms. Poultry production need reliable power: Imaging a hatchery with thousands of eggs and the power goes down, imagine the power supply surges and knocks out all the computers regulating the temperature of the coops, the delivery of food and water to the flocks. To address structural inflation, Guyana [and the Caribbean] needs to make significant investments in roads, electricity, water, education and over time these will pay handsome dividends [reducing production costs] and over time will curb runaway inflation.
Sir Ronald’s prescription that the Caribbean should feverishly promote intra-regional trade. This really is empty sloganeering. When one looks at the various countries in the region, they all produce similar products. All these economies are relics from the colonial era. In terms of Guyana, what should we buy from St. Vincent? Bananas? For Sir Ronald’s broad policy prescriptions to work, each island/country must have a competitive advantage in a distinguishable product that can be traded. For example, Guyana/Barbados/Jamaica all produce excellent rums. In fact, we have an over-abundance of spirits in the region. Export not intra-regional trade is the answer to our problems.
Sir Ronald: competitive advantage is not doing one thing one hundred percent better but doing a hundred things one percent better. Please join me in advocating for more investments in our productive capacity.