Could Guyana escape the natural resource curse?
Oil and other sectors
application elsewhere in the economy is GuySuCo. Sugarcane makes molasses that also gives rum, world class ones at that. GuySuCo also provides a public good known as drainage. Sugarcane can also give biomass for cogeneration. In the right scale, sugarcane could also be used for sweets and ethanol. While these are all old technologies, they still require a certain degree of ingenuity, industrial activity and planning to link them all up across an economy. The misunderstood free market would not get it done. Management will.
Another way to think about structure is to consider how much Guyana’s exports rise as the income of trading partners increases by 1 per cent. The country wants to be in a position in which a 1 per cent increase in the incomes of people living in our export markets will generate a more than 1 per cent rise in Guyana’s exports. This is one way to secure a stable economy in the future.
On the other hand, we can expect that the new oil revenues will result in an increase in average Guyanese income. The increase will likely not be shared equitably, but on average we can expect incomes to rise. Therefore, we want to be aware of how much will Guyana’s imports grow for every 1 per cent rise in average income. If this higher income induces a more than proportionate increase in imports, we can expect trouble. In other words, if higher incomes mean the country will move from consuming bora and catahar to broccoli and Brussel sprouts or from Banks beer to expensive French cognac, you can expect that Guyana will be knocking at the IMF’s door around 2030.
The point I am making is the structure of production matters for the export and import composition and how likely the country will steer clear of balance of payments problems. The goods Guyana presently exports are not high income elasticity products, meaning exports do not grow faster than the incomes of foreign countries. However, over the long term, Guyana’s imports grow
Ifaster than the growth of Guyanese income. This is mainly because the country imports energy-based products such as oils and gas and chemicals. Crude oil incidentally has a lower income elasticity than the downstream derivatives such as jet fuels, gasoline, lubricants, asphalt, LPG, etc.
From 2020 Guyana will be exporting crude oil and importing relatively high income elasticity downstream derivatives such as those listed above. The country cannot escape this initial condition or adverse structure immediately. One private investor indicated that a micro refinery can be built for US$100 million. Although I remain sceptical that it can be done with US$100 million, I wish private enterprise would get into downstream production as soon as possible. With proper management, structural change that secures stable and sustained growth without balance of payments crises is possible. t will not occur overnight and an astute government will have to direct structural change. A developmental civil service will be needed because the free market does not exist in reality, only in one chapter of all microeconomics textbooks. If ExxonMobil indeed scales up production to 500,000 barrels per day, Guyana will realize US$150 million per year in royalty, assuming US$50 a barrel. However, the mysterious average cost number adds much uncertainty to expected revenues from profit share. I will address this in a later column. Suffice to say, a scaling up to 500,000 per day will provide enough revenues for a comprehensive renewable energy industrial strategy. The newly announced Department of Energy will only be responsible for energy derived from fossil fuel.
Comments: tkhemraj@ncf.edu