Poverty in the Americas fastest emerging Petrostate Public Sector: Jobs not enough, calls for UBI persist

Introduction

Today’s column engages the fifth of the six listed social protection mechanisms [state employment] that are widely utilized to address persistent poverty in emerging oil-rich economies. Following that, I review my option for an UBI mechanism [universal direct cash transfers to citizens] as Guyana’s surest option for achieving this outcome. This latter task will require several columns going forward.

Item 5: State Employment

Widespread disdain for the quality of governance in developing oil-rich states, has made state jobs a rarely evaluated mechanism by external advisers like the IMF, World Bank, or IADB to contemplate for governments of emerging oil-rich states. Yet it has emerged as a central mechanism for wealth distribution adopted by emerging oil-producing countries!

Regrettably though, this mechanism is typically regressive. Furthermore, as the Systematic. Country Diagnostic (SCD) observes, in Guyana-type economies, [high per capita natural resources] governments have proclivities to expand public sector employment. Thus, currently, Guyana state employment is about ten percent of the total. And, the pressure to raise this number has been growing as oil revenues have risen.

Also, paradoxically, while this mechanism bolsters the job numbers and expands the state, its capability to manage oil wealth and improved service delivery does not keep pace.

This outcome disproportionately benefits public employees at the expense of private ones. This regressive bias could be large in Guyana where state employment is concentrated in urban areas and unevenly within socioeconomic and ethnic groups.

The conclusion is therefore clear; realizing a fair distribution of oil wealth and maximizing poverty reduction require two key factors; namely i) the progressivity of public spending and ii) the state’s institutional capability.

However, according to the SCD Guyana’s current systems are:

“inadequate and poorly targeted … due to a rudimentary social safety net system and lack of supporting data system. The main social assistance programs are public assistance and universal old-age pension. The safety net is made up of a universal pension for the elderly, while the benefits are limited as the number of beneficiaries are low”.

I agree that a strong social protection system is vital to promoting distributional equity and addressing the limitations of the oil sector in respect to employment and growth in traditional sectors. That is why cash transfers are used to improve living standards among poor and vulnerable households. Such transfers offer specific advantages and dis-advantages, and the experience yields important lessons for designing an effective transfer mechanism. Guyana’s current social protection programmes are inadequate and poorly targeted.

I explore this further in what follows.

Having identified six mechanisms commonly applied in oil-rich emerging states to address their development and prioritize poverty removal I have briefly evaluated five of these [item 2 to item 6] in recent Sunday columns. Today I introduce Item 1 on the list and shall re-visit the topic and update my presentation of it, in coming weeks

I recall again, for readers’ benefit that from the very inception of Guyana’s unprecedented offshore petroleum discoveries, I have favoured taking steps to adopt a UBI mechanism, which I have already termed, The Buxton Proposal. That Proposal seeks to authorize a mechanism that ensures Guyana’s windfall wealth does not disappear, leaving the poor trapped in their poverty.

Social Protection and Cash Transfers

I have from the outset prioritized an UBI mechanism as the surest means for defeating persistent poverty in Guyana. This is based on the thesis that, for an oil 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) is responsive to the expected adverse effects of resource wealth cannot overcome poverty speedily enough. This is due to the workings of oil wealth and its intrinsic incapacity to contribute to equitable sharing of its benefits. This, in turn reflects the asymmetric distribution of oil revenues and their economic impact. As the SCD notes in every contract:

“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. “

Dutch Disease

From repeated commentary in this column readers should be 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 is 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 an 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 the Dutch Disease on this group is expected to be large.

While social protection and cash transfers have been adopted by oil producing countries; with each adapting its particular purpose, institutional arrangements differ.

Conclusion

Going forward, my next column will explore this proposition.