A Guyana perspective on the six mechanisms Petrostates apply in addressing poverty

Last week’s column referenced six mechanisms utilized by oil-rich economies pursuing poverty eradication. These are reproduced below. The first five are cited in the World Bank’s, Guyana SCD 2020 namely;

universal direct cash transfers [universal basic income, UBI] cash transfers targeted at poor and vulnerable groups; transfers targeted at mitigating adverse effects of oil expansion subsidies and taxes public sector jobs/employment

6 Third Sector optimization [volunteerism, charities, social enterprises, cooperatives along with community involvement and social inclusion].

As indicated last week the first item listed is indeed the one I have already recommended for Guyana; and, therefore this will be the subject for an extended review. Further, the sixth item listed, I believe is essentially complementary to all the others; and will be briefly addressed next. Going forward therefore, I shall offer concise observations on the remainder four [items 2 to 5].

Item 6 Third Sector

For present purposes the third sector [Item 6] specifically excludes the state or public sector as well as the private or business sector as conceptualized in traditional tri-sectoral constructs of society. It explicitly includes community groups, voluntary organizations, faith and equalities groups, charities, social enterprises, co-operatives, community interest companies, mutual and housing associations.

Such bodies provide the core of a country’s social capital, built as that is, on trust and commonality, which as I have long argued grows/expands with its utilization and does not diminish.

Social capital is constrained by its limited access to finance at the pace and scale needed to eradicate persistent poverty. In all instances though, social capital enhances the capability and effectiveness of poverty reduction mechanisms.

Item 2 Targeted cash transfers to poor and vulnerable groups

To begin with such transfers may be conditional (CCT) or unconditional (UCT) when utilized as a tool for poverty reduction poverty along with its accompanying inequality. I believe the SCD is correct in observing that, “CT programs have been widely implemented across developing countries, and many have proved to effectively reduce poverty”.

Indeed, among the most successful case worldwide it cites the Bolsa Familia in Brazil. This mechanism provides broad-based and tightly controlled cash transfers for a conditional cash transfer programme focusing on health and education.

Being conditional its impact is designed to go beyond poverty reduction; and, to promote health and education [that is, human capital development]. The SCD urges “conditional transfers can have a higher impact on utilization of key services compared to non-conditional transfers – provided that the supply of these services is adequate – but are also more administratively complex [favouring] soft conditionality”.

Global experience strongly indicates that poor targeting when combined with weak and inappropriate institutional arrangements typically lead to programme failure thereby increasing socio-political pressures. The SCD provides data on the experience of Venezuela’s Misiónes. These social programmes include subsidized food, free health care and education, do offer a cautionary tale. It is claimed that because the programmes were generally poorly designed, with little focus on targeting, quality and outcomes. Unlike Bolsa Familia, Misiónes are financed directly by oil revenues outside the budget process. Therefore, they lack oversight and have been implemented with political discretion. The programmes eventually became politicized, leading to a failure of redistributive economic policies.

Item 3 Mitigating adverse impacts

As indicated above, the third mechanism seeks to improve mainly through the redesign of social programmes required mitigation of the adverse impact of rapid revenue inflows due to growing oil exports. If the Dutch disease threatens, as noted last week, job shifts from the declining tradable sector to the expanding nontradable sector will be unavoidable. But as the SCD observes the skill gap can be narrow or wide

For example, as the SCD cites a narrow reallocation would be from cultivating rice to growing fruits; or wide, a reallocation from cultivating rice to providing services [retail].

As the SCD observes targeted social protection programmes [unemployment insurance and skill training] have the potential to promote reallocation, and protect household spending against income shocks thereby modifying long-term effects of job loss and reducing pressure for equitable distribution of oil wealth in Guyana, where the declining industries including agriculture employ a large share of vulnerable population (poor, old and less educated). Social assistance programmes [old-age pensions and cash transfers] are the tools of choice.

Item 4 Subsidies and lower taxes

As a rule, subsidies are in most cases energy biased.

Lower taxes on fuel are a common tool employed by oilproducing countries to distribute natural resource endowment directly to the citizens. The SCD correctly notes that, although energy subsidies are widespread both in developed and developing countries to help reduce household living expenses, the subsidies tend to be more generous and entrenched in oil-producing countries. Thus, “politically, in oil-producing countries low energy prices are an element of a social contract that the government extracts and distributes natural resource endowment directly to citizens. According to International Energy Agency (IEA), the GCC countries are among the largest subsidizers of energy in the world. Substituting oil revenue for taxation is another way to distribute rent”.

Despite serving their purpose in alleviating the inflationary pressure from massive oil revenue, untargeted energy subsidies are generally regressive, create price distortion and overuse of natural resources.

The SCD cites an IMF study of fossil fuel subsidies globally revealing that, “the wealthiest 20 percent of the population gets a disproportionate 43 percent of the benefit from fossil fuel subsidies, while the poorest 20 percent gets only 7 percent.

Meanwhile in Venezuela, the richest 25 percent received US$3,318 in gasoline subsidies while the poorest 25 percent only received US$479 in 2010.

The contradiction is tax removal would yield a more regressive distribution, if the existing tax system were more progressive. The more progressive the existing tax system is, the more regressive the benefits of tax cuts.

Conclusion

Next week I continue with examining item 5.