Preserving the value of the local currency amidst concerns of deepened political and economic crisis

Preserving the value of the local currency amidst concerns of deepened political and economic crisis


The previous article in last week’s edition pointed out broadly the economic implications of sanctions that can be imposed upon Guyana by the United Nations, US and the larger western world.

The development experience of many countries involves frequent changes in political institutions, constitutions and even economic institutions such as the overall level of property rights enforcement or reliance on labour-repression in agriculture, endure. This theoretical view holds true in the case of Guyana with the retrenchment of over 7000-plus sugar workers coupled with the struggles which they have had to endure by not even receiving their severance payments. Empirical work illustrates how the appearance of change in certain dimensions of specific institutions does not necessarily mean a change in economic institutions that are essential for the allocation of resources in society.

The persistence of de facto political power emphasises how the same elites are able to shape politics even when certain aspects of specific political institutions change. Also, a complementary mechanism which is referred to as the iron law of “Oligarchy” following Robert Michels (1911) classic book, focuses on how changes in the identity of elites can go hand in hand with the same dysfunctional policies and economic institutions.

The proponents argued that the reason for persistence is not the persistence of the elites, but the persistence of incentives of whoever is in power to distort the system for their own benefit. An oligarchic structure is one in which a group of agents monopolise political power and are difficult to displace because of the entrenchment afforded to them by the political institutions.

The iron law of oligarchy emerges when the current elite are replaced by newcomers, sometimes with a popular mandate, and yet once these newcomers are in power they have no incentive to change the oligarchic structure, and instead use the entrenchment provided by the existing political institutions for their own benefit.

This model, proponents have contended, is useful in thinking about how the frequent changes in the identity of those who hold political power can go hand in hand with the continuation of disastrous policies. This pattern has been observed in many Latin American, Caribbean, and African countries, for example, in Bolivia, Ghana, Haiti, or Zimbabwe, which have all experienced significant changes in the identity of groups in political power combined with a surprising continuity in the types of policies and economic institutions (Acemoglu and Robinson, 2006b).

International sanctions and autocrats’ duration
Single-party and military regimes are able to increase their revenues, even when targeted by sanctions, by shifting fiscal pressure from one stream to an alternative one (specifically, taxes on goods and services). This allows them to maintain cooptation while they increase repression in order to thwart the potential opposition that reduced economic performance and international support may generate. Departing from these facts, proponents hypothesised then that sanctions would be effective in destabilising only personalistic autocrats, while their impact would be negligible or even counterproductive on single-party and military dictatorships.

What could happen in the short to medium-term of a de facto government?
Under a de facto government in the case of Guyana, it is akin to history repeating itself. This would not be the first instance where Guyana would likely be under dictatorial rulership, by force. Many of our parents and grandparents lived through this era characterised by hunger, shortage of food and hyperinflation, the economy went crashing. These consequences are likely to repeat where with international sanctions on trade, exports of our locally produced goods will suffer, and importation of consumer goods will be banned.

More worryingly, these can lead to the domestic currency becoming worthless or suffer from hyperinflation. However, the Central Bank can minimise or cushion this risk from becoming too profound by doing one of two things or a combination of both. But it has to do so swiftly, and that is, (1) the Central Bank needs to consider capital controls forthwith to protect the value of the dollar as capital flight will be inevitable; and/or (2) where the stability of the dollar, in a crisis period, lies in the hands of the Central Bank Governor.

That is to say, when the Foreign exchange reserves dry up, the Bank needs to stockpile gold reserves (thankfully Guyana produces gold), to preserve the value of the local currency. Failure of which, the currency can become worthless, as in the case of Venezuela.

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