With the developed world still unrecovered from the meltdown precipitated by banks operating in a freewheeling liberalised financial industry, we hope the new Government will take steps to ensure we don’t end up at that dead-end. We raise the possibility of public and development banking.
Back in the 70s, the Government launched GNCB as a public bank, competing with the several commercial banks then operating, and GAIBANK as a development bank, securing its funds from grants and loans from the international community. By the 80s the Government effectively assumed control over the entire banking industry through varying levels of nationalisation of the private banks.
The rationale offered for our massive government intervention was, bluntly, market failure. GNCB as a public bank was responding to the unmet need for a more distributed and accessible banking system, while GAIBANK was intended to fill the endemic financing gap for targeted entrepreneurial activities left unattended by the commercial banks.
Unfortunately, the system quickly degenerated into a classic, rightly-criticised, “repressed” financial system: the Government maintained artificially low interest rates, inducing excess demand for credit which the Government must now allocate. The low interest rates (effectively so when the high inflation rates were deducted) became an effective disincentive to savings and combined with the inability of the Government to borrow internationally, eventually resulted in low investment and thus low growth. This situation was exacerbated by all the other potential negative features of development banking: cronyism, rent-seeking and corruption by bureaucrats, misallocation of funds in misconceived schemes etc. By the eighties, we had plunged into negative “growth”.
The IMF’s Structural Adjustment Program (SAP) of 1989 bequeathed our present financial system: banks and other financial institutions totally privatised and “liberalised”. It was putatively subject only to market forces with Government reduced to a “non-distorting” regulatory role. GAIBANK was dissolved and GNCB privatised. So we have three decades of experience with the liberalised financial system. What have we learnt?
The developed world has now accepted what China and the other “emerged” and emerging economies have shown: participation of Government is vital in the financial sector. Otherwise, the social function of overall national development – which necessitated the invention (and the ongoing maintenance) of the banking system in the first place – will inevitably be eroded and vitiated by the workings of unmediated human greed. A system driven only by the profit motive cannot do otherwise. We have been spared the worst excesses of the financial depravity experienced up north – through our relative “underdevelopment in financial instruments”. On the other hand, we have not witnessed any turnaround in banking efficiency or the financial intermediation necessary to foster the growth of our economy.
Our privatised banks have maintained and even extended the dispersion of branches into the countryside but these have been deployed to more efficiently trawl for deposits rather than for disbursing more loans. In this former task, they have been singularly successful but in their reluctance to service the domestic entrepreneurial potential necessary for our development, they have piled up billions and billions of dollars lying idle in their coffers. Theoretically, in the financial liberalisation model, the private banks were supposed to have competed with each other to lend the funds secured from deposits leading to the lowest possible rate of interest and still make a profit over the rate offered to attract deposits. If the claim was valid, it certainly never reached Guyana.
In our considered judgement, we threw out the baby with the bathwater when we closed down our development and public banks. The raison d’etre for those institutions is even more evident – and necessary – today if we want to achieve the double-digit growth rates necessary for a quantum leap in living standards. With funding of our version of a Sovereign Wealth Fund established as a Natural Resource Fund, the public banks can intermediate the latter’s investment mandate.
Of course, we have to rectify the downside risks inherent in government ownership, which, in our case, having tried the model can be easier identified.