Oil, Govern­ment Take & Spend­ing: Navigating Guyana’s De­vel­op­men­tal Chal­lenges - 2

Stabroek News Sunday - - LETTERS -

In­tro­duc­tion

To­day’s col­umn con­sid­ers the sec­ond topic in my list of the top ten de­vel­op­men­tal chal­lenges, which the spend­ing of Guy-ana’s sig­nif­i­cant es­ti­mated Govern­ment Take from the petroleum sec­tor must nav­i­gate. That is the Re­source Curse. Be­fore tack­ling this topic, I shall briefly wrap-up last week’s dis­cus­sion of the first chal­lenge, the Dutch Dis­ease threat.

As noted, at the eco­nomic core of the Dutch Dis­ease phe­nom­e­non lies two eco­nomic traits; namely, a ten­dency to­wards nom­i­nal and real ex­change rate ap­pre­ci­a­tion plus the grow­ing global loss of com­pet­i­tive­ness in the af­fected econ­omy. Ex­pe­ri­ence sug­gests the im­ple­men­ta­tion of three poli­cies. These are: 1) poli­cies di­rected at slow­ing the rate of ex­change rate ap­pre­ci­a­tion 2) re-en­gi­neer­ing the non-oil sec­tors (es­pe­cially tra­di­tional ex­ports) along with the do­mes­tic sec­tors pro­duc­ing goods and ser­vices for the do­mes­tic mar­ket, and 3) cre­at­ing a Sov­er­eign Wealth Fund (SWF), which in­vests in in­ter­na­tional as­sets mar­kets. In ef­fect, the cre­ation of a SWF seeks to in­crease govern­ment sav­ings. This mod­u­lates rapid in­flows of for­eign ex­change and stems the con­se­quen­tial rise of national spend­ing.

The ob­ser­va­tion, how­ever, which I wish to add here in or­der to close the dis­cus­sion is that the in­crease in national sav­ings does not have to come only from the state sec­tor through a SWF. The ev­i­dence shows that mech­a­nisms de­signed to in­crease sav­ings from other sec­tors (such as house­holds and do­mes­tic busi­ness) can pro­duce the same pol­icy ef­fect for navigating the Dutch Dis­ease.

Re­source Curse: Paradox of Plenty

Like the Dutch Dis­ease, the Re­source Curse is colour­ful lan­guage for eco­nom­ics, long known as the dis­mal science! Like the Dutch Dis­ease, the Re­source Curse also de­rives from a de­scrip­tion of an ob­served cor­re­la­tion. In the case of the Re­source Curse, the iden­ti­fied cor­re­la­tion is for de­vel­op­ing coun­tries (or small and mid­dle in­come ones based on global clas­si­fi­ca­tions) that are nat­u­ral re­source abun­dant (es­pe­cially petroleum) cor­re­lates with weaker macroe­co­nomic per­for­mance, lesser eco­nomic growth, lesser broad-based de­vel­op­ment, greater demo­cratic gov­er­nance chal­lenges, and more stunted in­sti­tu­tional sup­port sys­tems, when they are com­pared to sim­i­lar coun­tries with­out abun­dant nat­u­ral re­sources.

For those read­ers with lim­ited knowl­edge of sta­tis­ti­cal the­ory, the first sci­en­tific rule of an­a­lyt­i­cal statis­tics is that cor­re­la­tion is not the same as cau­sa­tion. Cor­re­la­tion is not a cause and ef­fect statis­tic. In­deed, the two cor­re­lated sets of items listed above could well have been si­mul­ta­ne­ously caused or de­ter­mined by some other con­sid­er­a­tion. More­over, it is in recog­ni­tion of this that the Re­source Curse the­sis has been the sub­ject of in­tense con­tro­versy in eco­nom­ics.

It is widely rec­og­nized that the cor­re­la­tion iden­ti­fied in the Re­source Curse is, with­out a doubt, counter-in­tu­itive. One would bet­ter ex­pect that, ev­ery­thing be­ing equal, those coun­tries with abun­dant nat­u­ral wealth to per­form bet­ter than those with­out! This has led some econ­o­mists to term this phe­nom­e­non: the paradox of plenty.

Oil Lot­tery

In the in­ter­ro­ga­tion of this phe­nom­e­non, sev­eral econ­o­mists have drawn analo­gies to sit­u­a­tions where in­di­vid­u­als who win large lot­ter­ies and yet end up poor and/or bank­rupt. Typ­i­cally, the cause of this is that those in­di­vid­u­als who won lack ex­pe­ri­ence on how to man­age their sud­den large in­creases in wealth. Con­se­quently, some may turn to un­trust­wor­thy fi­nan­cial man­agers who ef­fec­tively en­rich them­selves, at the ex­pense of their clients. Other win­ners, who used the lot­tery win­nings on their own, and who lack the req­ui­site skills to do so, might end up los­ing much, if not all of their win­nings. Of course, the risk of the lot­tery loss (curse) is greater, the less it has been pre-con­ceived and/or pre-planned for by the win­ners. Read­ers would be fa­mil­iar with the de­mean­ing ar­ti­cles in the for­eign press, which dis­miss Guyana as a “win­ner of the oil lot­tery!”

Cau­sa­tion: Gov­er­nance

Some an­a­lysts have tried to re­search whether the cor­re­la­tion in­di­cated in the Re­source Curse the­sis rep­re­sents cau­sa­tion. Thus, they have sought to de­ter­mine if re­source wealth al­ways leads to two im­por­tant eco­nomic out­comes. First, there is an ad­verse ef­fect on gov­er­nance; that is, fos­ter­ing cor­rup­tion and/or the loot­ing of national re­sources for pri­vate gain and not pub­lic ben­e­fit. One em­pir­i­cal ob­ser­va­tion, which is very per­ti­nent to Guyana, is the greater like­li­hood of “regime en­trench­ment.”

Such en­trench­ment refers to the ob­served phe­nom­e­non, where the Govern­ment in power wins the “lot­tery” of the re­source com­ing into pro­duc­tion and ex­port dur­ing its stew­ard­ship. The tremen­dously en­hanced flow of rev­enue into the State’s cof­fers leads to regime spend­ing on ben­e­fits to its sup­port­ers (con­stituents, party mem­bers, cronies, and the rul­ing po­lit­i­cal elite it­self). In this way, pub­lic wealth does not re­sult in care­ful spend­ing on con­sid­ered plans and pro­grammes, but is in­stead wasted on “buy­ing” sup­port for the rul­ing regime.

Cau­sa­tion: Rent-seek­ing Be­hav­iour

The sec­ond eco­nomic out­come econ­o­mists iden­tify is rent-seek­ing be­hav­iour. Such be­hav­iour is pro­foundly anti-de­vel­op­ment, in­ef­fi­cient, and, fa­tally dam­ag­ing to re­source al­lo­ca­tion in mar­ket economies, like Guyana. For­mally, text­books re­fer to this phe­nom­e­non as be­hav­iour, which “seeks to in­crease the share of ex­ist­ing wealth for eco­nomic agents, with­out their gen­er­at­ing new/ad­di­tional wealth them­selves.” This makes for re­duced wealth cre­ation and eco­nomic in­ef­fi­cien­cies in a mar­ket en­vi­ron­ment. In­deed, it mis­al­lo­cates re­sources be­cause the be­hav­iour of eco­nomic agents is eco­nom­i­cally ir­ra­tional. Fur­ther, this process can foster in­come in­equal­ity along­side re­duced national in­come and pub­lic rev­enues.

More gen­er­ally, “eco­nomic rent” is that amount of in­come or re­sources any pro­duc­tive fac­tor re­ceives, which is above that which it would re­quire to re­main pro­duc­tively uti­lized. It is in other words, the ex­trac­tion of un­com­pen­sated value with­out a com­men­su­rate con­tri­bu­tion to pro­duc­tiv­ity. Rent seek­ing be­hav­iour em­bod­ies cor­rupt prac­tices (bribery, fraud, ex­tor­tion).

Other Stud­ies

There are sev­eral ex­cel­lent re­cent reviews and re­search on the ob­served cor­re­la­tion be­tween re­source abun­dance and poorer eco­nomic out­comes. In par­tic­u­lar, sev­eral of these have chal­lenged the em­pir­i­cal va­lid­ity of ear­lier stud­ies. These stud­ies ex­tend both the coun­try case study cov­er­age and the his­tor­i­cal frame of anal­y­sis. The re­sult is that the orig­i­nal ear­lier claim of a Re­source Curse is no longer, by any mea­sure, uni­ver­sally ac­cepted. To­day, stud­ies have shown why a Re­source Curse might emerge and where now, not in­fre­quently, re­source abun­dance be­comes a bless­ing!

No one up-to-date with the eco­nomic lit­er­a­ture can make a se­ri­ous claim that it in­di­cates Guyana’s re­cently found petroleum wealth would in­ex­orably lead to the Re­source Curse. This would be ut­ter non­sense of the high­est or­der.

Con­clu­sion

Next week I shall con­clude my con­sid­er­a­tion of the Re­source Curse the­sis and then con­sider the third of the listed top ten de­vel­op­ment chal­lenges oil will bring forth, the Gov­er­nance Curse.

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