My strategic option for poverty reduction in the Americas fastest rising Petrostate

Introduction

Back in early September this year I received a circular appeal from the Tri-continental Research Institute that was sent to its network of fellow Researchers in the Global South. This requested us to join in a collaborative conjoint endeavour aimed at 1] formulating a new development theory, and 2] ensuring such theory is deeply rooted and well-anchored in the priority goal of extracting the poor from their persistent poverty.

In response to the circular appeal I had started a reflective review of poverty theory and policy prescription based on observations arising from my long running Sunday Stabroek column series based on Guyana’s experience as “the Americas newest and fastest rising Petrostate,”

Today’s column continues consideration of the second topic listed in the circular communication. It revisits the role of Social Protection and Cash Transfers in Poverty Reduction. Here I remind readers that from the very inception of Guyana’s; unprecedented creaming curve of offshore oil and gas discoveries, I have been strongly urging on the public and relevant Guyana Authorities the adoption of a robust universal basic income mechanism, which I have termed, The Buxton Proposal.

That Proposal is aimed at ensuring an outcome in which Guyana’s windfall wealth does not leave the persistent poor trapped in their poverty.

Social Protection and Cash Transfers

I have developed the Proposal to prioritize a universal basic income, UBI, mechanism [The Buxton Proposal] as a means for defeating persistent poverty as it is entrenched in Guyana, as is amply exhibited in my recent columns. This is based on my thesis that, for Guyana, an oil resource-rich country [the newest and fastest growing Petrostate in the Americas] a strong traditional social protection system, even when (i) facilitative of implementing re-distributive policies and (ii) responsive to the expected adverse effects of resource wealth cannot attain this goal quick enough.

Alas, what disembodies oil wealth of its capacity to contribute to equitable sharing of benefits is the asymmetric distribution of both oil revenues and their consequential economic impacts. As is noted by the World Bank in its Guyana Systematic Country Diagnostic, SCD, 2020:

“Massive oil revenues usually go directly from the oil company to the government without passing through the citizen. The priority for the government of oil-rich countries is then to distribute oil rent to its citizens. “

Government Response

Considering Government response, it has been noted by the SCD that, while the government can indirectly allocate oil rent through public investment or public spending on service delivery, the common and more direct channel used for allocating oil rent include different types of cash transfers, subsidies, low taxes and public sector employment (Segal, 2012).

The SCD further notes that at the same time, oil revenues will be fueling local demand, thereby benefiting those operating in the non-tradable sector while similarly hurting those engaged in the traditional tradable sector. The conclusion therefore is Guyana-type Petrostates have unique drivers for going beyond social protection to cover losses for the affected groups.

Dutch Disease

From repeated commentary in this column readers should be fully aware that the Dutch Disease refers to the economic phenomenon, whereby, the rapid growth of Guyana’s petroleum sector precipitates economic declines in other sectors. This outcome is very often linked to appreciation of the Guyana dollar, making it a somewhat paradoxical outcome.

This column has also engaged the query, how to avoid Dutch Disease? And, here, essentially, the two primary strategies for solving Dutch Disease are:

1, Deceleration of domestic currency appreciation. The deceleration of currency appreciation is the easier and more viable strategy

2. Diversification of the economy. The diversification of the economy is a strategy that can almost eliminate the negative impact of Dutch disease on the economy.

It is expected that; the distributional impact of Dutch Disease would be unfavourable given Guyana’s current labour-market composition. Much of the economic activity associated with the oil and gas sector, is in non-tradable services and the public sector, which is also concentrated in urban areas. Larger gains are expected for those employed in these growing sectors.

Additionally, however, the declining industries employ a number of vulnerable population (poor, old and less educated, most of them residing in rural areas. As these industries decline, the vulnerable groups are likely to lose their employment opportunities. With their inability to cope with labour market shocks especially from a structural change, the adverse impact from Dutch disease on this group is expected to be large.

As the SCD advises social protection and transfer mechanisms have been usually adopted by oil producing countries; with each adapting its particular purpose. Institutional arrangements therefore differ. It warns that although some claim best practice, every mechanism entails the risk of failure if good governance is absent.

Conclusion

My next column will start to address the six leading mechanisms in use under the rubric of development strategy, which are frequently considered in the context of oil economy employment and poverty alleviation. The first five are listed in the SCD. The six are (i) universal direct cash transfers; (ii) targeted cash transfers to poor and vulnerable groups; (iii) targeted transfers to mitigate the adverse impact of oil expansion (iv) subsidies and taxes (v) public sector employment and (vi) third sector optimization [volunteerism, charities, social enterprises, cooperatives along with community involvement and social inclusion].