Tuesday, May 21, 2013

Guam's Growth Strategy, Part II: My Adaptation

As I mentioned in my previous post on this topic, I like the authors of the paper I'm discussing, and agree on most points in the strategy they laid out for Guam's development. The following are the maxims chosen to encapsulate the vision of the Pacific Tiger strategy:

(1) openness
(2) investment in human capital
(3) availability of young, creative, productive labor force
(4) public sector reforms and fiscal discipline
(5) effective policymaking and social partnership
(6) hard work and sacrifice


Openness

I agree that trade, broadly defined, should have a major role to play in trying to transform Guam into a much more productive and wealthy society. To me, the main issue is that, despite all of the favorable investing conditions that have been created on Guam, manufacturing still plays a very small role in Guam's economy, especially manufacturing for export. I think we can maintain the long-term strategy of export-led growth but focus on more immediate possibilities, like trying to increase the local value added in physical exports and tourism. 

Consider that Guam is in many ways more similar to Singapore than Ireland. We should leverage our position as a regional transshipment hub into a greater asset by importing less finished products, adding value on island, then exporting to Micronesia and we can employ this same strategy for imports from Micronesia, perhaps starting a fish-processing facility for exports to Japan, which are currently just frozen and shipped there.

Furthermore, tourism could undertake a similar transformation, should our local leaders find opportunities to expand the use of local products and services for the tourism industry.

Investment in human capital

I agree that investment in human capital is very important for long-run productivity, as would be indicated by Nobel Prize-winning economist Robert Solow's version of the Cobb-Douglas production function, which, when linearized, looks like this:

Change in Output = technological change + labor force growth (including qualitative) + growth in the capital stock

In other words, innovation, population growth, labor force improvement and investment can all have positive impacts on long-run productivity. I think it is inappropriate to single out only one of these factors in a development strategy.

I strongly agree that education and employment training programs need to be built up and improved. There should also be incentives to encourage participation in such programs.

I think there also needs to be a greater emphasis on designing and implementing major infrastructure improvement and expansion projects. While the government cannot force private companies to invest, it can choose to have a consistent commitment to avert development impediments caused by infrastructure deficiencies.

There may also be room to develop policies that encourage early adoption of improved technologies by private enterprise (maybe even mandating in some cases).

I also think that expanding capacity could be somewhat self-defeating without full employment, but addressing a broad range of the challenges could help restore full employment, especially inasmuch as some of them imply permanently higher spending.

Public sector reforms and fiscal discipline

There are major problems with the current way the government of Guam operates. First, the executive branch is very opaque. The websites of most agencies hold very little useful information for a public-spirited individual who wants to know what the government is doing. Second, the procurement process is not very smooth, not uniform, despite the stated policy goal of a centralized procurement regime, and many critical procurements get held up by administrative protests.  Third, the system of budgeting for the government of Guam is archaic.  Fourth, some very important agencies are in utter disarray. Fifth, the criminal justice/ court system is terribly backlogged. There is much to be done to straighten these out and I barely scratched the surface in my five points.  [Update: I agree with the authors about the need for flexibility in applying a sound fiscal policy. Yes, by all means balance long run revenues and expenditures, but keep in mind the effect of fiscal consolidation on short-run aggregate demand.]

Shared vision

There definitely needs to be a shared vision and a cooperative approach to planning for Guam's further economic development. Guam is a regional leader and the most wealthy economy the greater Micronesian region. Obviously when the authors are discussing a shared vision, they are most likely thinking of the policy-makers, business leaders and community leaders on Guam, but I believe Guam's chances would be far better if there were a framework for planning which, to some extent, encompassed the Northern Mariana Islands, the Republic of Palau, the Federated States of Micronesia, the Marshall Islands and probably even some of federal agencies which may have a significant impact on any regional development plans.

Return to Full Employment

The extent to which addressing the above issues will enable Guam's economy to rebound toward full employment is debatable. Several of the strategy's components imply greater commitment of resources, which could result in higher aggregate spending in the economy, especially if such spending is perceived a permanent increase. If any of the increased public goods encourage more private investment, as may be the case, then the impact will be still greater. Further, inducement to earlier adoption of technology would provide a short-run stimulus. My own feeling about inducing extra investment, however, is that it is more likely to be dependent on the return to full employment or at least the expectation that it is occurring.

The fact is that there are other elements I would propose in the strategy, particularly the adoption of non-fossil fuel power production methods, like solar, wind, tidal, OTEC, geothermal or nuclear. Further, I'd put shared prosperity at the center of the program, along with greater economic security for workers and entrepreneurs.

I hope that this basic sketch is illustrative of what strategy Guam should undertake.

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