Guyana Petroleum Road Map Part 2 Guidepost 3: Yet More on Spending Gov’t Revenues to Confront the “top-10 economic challenges”

Introduction

Today’s column addresses three additional “top-10 economic challenges” in light of Guyana’s coming petroleum sector; namely: intergenerational equity, the permanent income hypothesis (PIH) budget rule, and managing public expectations.

Challenge: Intergenerational Equity

The notion of intergenerational equity has several components to it. These are not simply economic in nature, but also apply across such crucial areas as environmental, sociological, psychological, legal, and social matters. In these varied applications, the concept of intergenerational equity conveys the principle of fairness across generations.

Consequently, three petroleum industry-related concerns arise. First, Guyana’s petroleum discoveries are, for practical purposes, finite and non-renewable. Consequently, after peak production is attained, petroleum resource depletion kicks in. Thus, if these resources are to benefit present and future generations, then fairness in their current use is an absolute obligation to future generations.

Second, the petroleum industry is notorious for engendering environmental damage; due to a mix of factors, including: willful neglect, cutting corners, lack of suitable preparation, and the proverbial Acts of God. It is unfair therefore, for the present generation to use Guyana’s petroleum patrimony, and leave behind related environmental damage, to be attended to by future generations. This, however, raises a major practical issue: how to measure intergenerational equity when every generation has an obligation to pass on petroleum assets in reasonable condition to future generations?

Third, it follows that, Guyana’s longterm development strategy of promoting a “Green State and Sustainable Development”, clearly, conflicts with a petroleum dependent path of economic growth.

In conclusion, my earlier treatment of this topic I had highlighted the paradox that, “our obligations to future generations compete with our obligations of justice to contemporaries”. This paradox raises serious risks. One of these is, treating intergenerational equity as a zero-sum game; where one generation’s benefit is another’s loss!

Challenge: Budget Rule (PIH)

Revenue Watch Institute (RWI), 2014 describes a fiscal budget rule as “a multiyear constraint imposed on Government finances”. This is normally expressed in the form of determinative revenue, expenditure, or debt targets. RWI has identified five options worldwide as representing the major types or classes of fiscal rules utilised in petroleum-rich exporting countries. These are the Balanced Budget Rule, as typified by Chile, Mongolia and is listed as the first rule in the classic RWI publication: Fiscal Rules for Natural Resource Funds, (2014). This is followed by the Debt Rule, as typified by Indonesia and Mongolia again. Next is the Expenditure Rule, as typified by Botswana, Peru and Mongolia yet again. Finally, there is the Revenue Rule as typified by Alaska, Ghana, Kazakhstan, Timor-Leste and Trinidad and Tobago.

Essentially, a fiscal/budget rule is a commitment that successive governments pledge to attain. This commitment converts the target or budget rule into a long term standard for governing the nation’s public management of its petroleum revenues, if it is supported by present and future governments. Such an approach is deemed necessary because of 1) the specific challenges, which I have listed in the “top-ten” and 2) some of the intrinsic features of the petroleum industry. These features include, firstly, its finite character; and, secondly, its tendency to sharp short to medium-term swings in economic activity, combined with decades-long “boom and bust cycles”. The explicit goal of a fiscal rule is to commit successive governments to “sound” macro-economic policies. This “soundness” is considered to be necessary, but not enough for the efficient and effective use of petroleum revenues.

Over the past two decades, the Permanent Income Hypothesis (PIH) has been a leading fiscal benchmark or budget rule used to guide petroleum-rich small poor open economies’ in their spending of petroleum revenues or Government Take. I have identified operation of this budget rule as one of “the top-ten development challenges”, which Guyana has to confront. The reason I do so, is because I am very much aware that development agencies, (along with Guyana’s traditional donor partners) have tendentiously sought to bias Government spending in favour of the PIH budget rule. This remains true despite the mounting global evidence of 1) its overly-conservative domestic spending bias and 2) its overly-dependent promotion of external savings. The latter is indeed typified in the spread of structured Sovereign Wealth Funds.

Challenge: Expectation Management

The Economic Glossary puts it simply, expectations refer to “what people or businesses anticipate will happen” especially in markets. This is so crucial a consideration that, in “modelling market demand and supply schedules, expectations are held constant”. With the emergence of Guyana’s petroleum industry there are expectations among most groups that there will be “windfall revenues”. These revenues, they fear, may bring the risk of the “lottery-syndrome”.

This syndrome describes the “stereotypical non-rational behaviour” of some lottery winners, who have so mismanaged their good fortune (winnings) that they actually end up poorer! This may be rare, but it has happened. And, it is precisely because of this possibility that, managing expectation constitutes one of the most potentially difficult of all the challenges. Because of this risk of the lottery-syndrome, the Government of Guyana (GoG) may become so risk averse that it hoards and not spends its petroleum revenues to promote development. Hoarding is investing these “assets” in so-called safe overseas financial institutions. I label these as “so-called safe” because of the mounting scandals associated with “managers of oilrich developing countries, natural resources funds”.

This apart, experience suggests four societal variables are key to managing expectations. These are firstly, the socioeconomic configuration of the geographic area where petroleum is found. To date all Guyana’s oil “discoveries” are well offshore. Second, the climate of national opinion is central. Third, the risks that confront the commercialisation of the petroleum finds. Readers would recall that I termed as existential risks, the threats posed by Venezuela and the environment. And, fourth, implementation delays, which we have already considered also affect expectations. Additionally, there are the burgeoning risks of mismanagement and corruption.

Conclusion

Next week I’ll wrap-up consideration of the “top-10 economic challenges” and their impact on Government spending.

LUCAS STOCK INDEX

The Lucas Stock Index (LSI) increased 0.38% during the third period of trading in September 2019. The stocks of four companies were traded, with 164,073 shares changing hands. There were two Climbers and no Tumblers. The stocks of Banks DIH Limited (DIH) rose 0.64% on the sale of 153,110 shares and the stocks of Demerara Distillers Limited (DDL) rose 1.25% on the sale of 10,292 shares. In the meanwhile, the stocks of Demerara Tobacco Company (DTC) and Guyana Bank for Trade and Industry (BTI) remained unchanged on the sale of 190 and 481 shares, respectively. The LSI closed at 586.52.