Creating a more resilient Guyanese economy to overcome the challenges of the Resource Curse

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Bobby Gossai, Jr.
Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.

The theory of a ‘curse of natural resources’ can be traced back to the 1970s. The subsequent two decades saw the emergence of a significant body of research proposing a link between resource production, economic underperformance and various socio-political ills.

However, since the turn of the century, the nature of the alleged curse and its causality have come under question. Critics of the resource-curse theory point to countries that have avoided the curse – such as Botswana, Chile and Malaysia – and challenge the methodology, particularly the use of a small sample of countries or short timeframe (Steven et al. 2015).

The shortcomings of the resource-curse theory arise mainly from the reductionist quest for ‘one big explanation’ of the role of resources in development. The generalisation that resource production harms the economy overlooks the complexity of economic development in different countries under different circumstances. Inevitably, the experience of extractives-led growth varies from country to country.

A resilient economy achieves growth while diversifying away from the extractive sector, thereby reducing their vulnerability to falls in resource prices and the eventual depletion of reserves. The key point here is that revenue from extractives is not income. It is simply the reshuffling of a country’s portfolio of assets: exchanging resources below ground for cash above ground. Overall success is determined by the extent to which a country can capitalize on such reshuffling – namely, by investing the cash productively and by forging linkages between the extractive sector and the rest of the economy.

On the basis of such premises, while it is not inevitable, the resource curse is alive and active. Numerous resource-exporting countries have failed to diversify their economies away from the extractive sector even if they have developed other economic sectors; they remain dependent on extractive revenues. Such failure is most pronounced among some of the Gulf countries, which, though certainly more prosperous than they would have been without oil and gas, remain highly vulnerable to price shocks. During periods of shrinking revenues, less well-endowed countries find themselves increasingly dependent on oil-backed debt.

Extractives-led Growth Model

The standard policy advice for extractives-led growth focuses on governance imperatives such as transparency and sovereign wealth funds. Nevertheless, this ignores the fact that such growth frequently encourages poor governance. Without strong institutions, it leads to the enrichment of minority elite groups; and as the sector develops, the interest of those groups in capturing rents and maintaining their hold on power acts as a barrier to improving governance.

Avoiding the resource curse is a question not only of good governance, but also of an economic policy that provides for the transition of an economy over time in accordance with its competitive advantages. The challenge of such a policy in the context of low institutional capacity and/or limited economic development is huge. There is often a mismatch between the policies prescribed and the capacity of governments to implement them, as a result of which symptoms of the resource curse are manifest in many countries. Furthermore, vested interests benefiting from an extractives-centred policy may directly oppose reforms that would promote economic diversification.

Both governments with extractives potential and the agencies advising them to give too little consideration to the size and nature of the resource base. If extractives-led growth is to be sustained, resource extraction must persist long enough for new economic sectors to emerge and generate revenues that can support government spending and import needs as income from extractives declines.

On the basis of current estimates of the size of reserves, as an emerging producer, Guyana must be careful so as to ensure that there are sufficient reserves for extractives-led growth to be a viable economic strategy. Moreover, the extractives-led growth model, in the form in which it is currently being promoted, is at odds with low-carbon and green growth strategies. It offers no suggestions on how the government should manage the risk of stranded assets or how they can reconcile extractives-led growth with national sustainable-development objectives.

Planning the Fundamental Needs of the Resource Development

Simultaneously managing the risks of the resource curse and stranded assets while taking advantage of green-growth opportunities imposes even greater demands on the institutional and economic capacities of low-income countries. Indeed, it requires making difficult choices and taking precautionary measures. For example, while the risk of stranded assets can be reduced by prioritizing resources for domestic use rather than export, careful planning is needed to ensure investment is not inhibited altogether or unsustainable patterns of fuel consumption locked in. Alternatively, governments can pursue the fast-track extraction and export of resources to avoid their becoming stranded, but the resulting glut of revenues and the rapid development of the resource sector increase the risk of the resource curse.

An obvious way of managing the risk of the resource curse is to pursue the development of the extractive sector at a slower pace, allowing time for institutional capacity and economic linkages to be built. Such an approach would make it easier for governments to avoid the curse and steer economic diversification in as manner consistent with green-growth objectives.

It is important to make the right decisions about what role, if any, new extractive discoveries should play in a country’s development and the governance of revenues from them. For producer country governments, failure to make the right decisions means that the chance to reduce poverty and improve living standards is squandered. For the operating companies, such a failure threatens their investments and assets, and risks damaging their corporate reputation. Finally, making the right decisions matters for global markets since during an economic crisis they are crucial to avoid creating global supply issues and increasing commodity price volatility (Stevens et al. 2013).

At a minimum, extractives-led development assumes that resources that have a high market value will be developed and therefore focuses on the best way to develop them. At a maximum, it suggests that even the least developed country could and should use its below-ground resources as the basis for economic growth – as long as it is prepared to sign up to and follow all the international initiatives on good governance. The good governance prescribed generally involves optimum contractual terms, revenue transparency, institution-building, use of stabilisation funds and local capacity-building to service, and benefit from, the sector. The main imperatives include:

  • Establishing the rule of law and strong institutions that will push through regulatory reform and enforce laws;
  • Using transparent and competitive contracting to deploy best operators, avoid conflicts and allow for adaptation to changing commodity prices;
  • Smoothing revenue volatility by using sovereign wealth and/or future generations funds; Spending revenues on long-term public infrastructure and debt repayment;
  • Ensuring the transparency of revenues and spending from the sector;
  • Increasing accountability and democratic participation (ranging from clear mandates for entities governing the sector to capacity-building for journalists and civil society);
  • Accounting for, minimizing and compensating for the environmental and socio-environmental costs of resource-extraction projects; and
  • Strengthening linkages between extractive industries and the local economy and ensuring training and capacity-building to service the sector (Natural Resource Governance Institute 2014).

Most of the advice is eminently sensible. However, backed by the public statements of policy-makers

and industry leaders, it has had the effect of reinforcing the message that: (a) resources provide an opportunity for economic development that low-income countries should not miss; (b) governance processes and mechanisms can prevent potential negative impacts; and (c) by concentrating on establishing good governance, the extractive sector can become not only the driver of economic growth, but also a beacon of good governance for the rest of society.

Achieving institutional good governance in countries with a relatively low capacity to manage the extractive sector at the outset will be a long, hard slog right from the very beginning. It will require both sustained political will and a measure of societal stability. At the same time, while it is known what needs to be done for extractives-led development to have a positive outcome, the reality of the political economy that develops around an extractive industry or other (similar) forms of rent may make it simply impossible to achieve that outcome. The desirability of the three conditions cited is beyond dispute, but the ability to establish such conditions remains severely hampered by the dynamics identified in the ‘classic’ resource-curse explanation.

To highlight the challenges for implementation, two governance imperatives must be implemented for avoiding the resource curse: stabilising revenue flows through the use of managed funds and improving transparency.

Stabilisation Funds

Emerging producer countries are advised to establish stabilisation funds or sovereign wealth funds (SWFs) to neutralize the impact of windfall revenue so that the various negative macroeconomic and associated resource-curse impacts discussed above can be avoided.

The record of the SWFs is mixed. Those that have been successful are in democratic or partly democratic countries that have well-functioning, transparent institutions and predictable and stable legal frameworks characteristics common to such funds are simple and transparent regulation, as well

as the public availability of information about them. Thus, managers are accountable not only to the government and the parliament, but also to the public, which, in itself, generates citizens’ interest in fund management. In other words, the funds can be seen as the manifestation of a compact between the government and its citizens whereby the latter are given a sense of ownership of the natural resource rents and their desire for public accountability is increased.

Ideally, the funds operate in a benign fiscal context in which fund managers can resist political pressure to overspend. Under such conditions, governments can neither misappropriate nor misallocate natural-resource revenues. For its part, the International Monetary Fund (2007) has argued that the key to success for such funds is the quality of public financial-management systems. However, SWFs do not necessarily prevent governments from pursuing unsustainable fiscal policies or using the funds’ resources as collateral for reckless borrowing (Stevens and Mitchell 2008).

Such problems are exacerbated when the executive branch of the government is subject to few restraints, and when checks and balances are weak. In such circumstances, the rules and regulations governing the funds are often changed or not respected. A more fundamental problem is that of kleptocracy. In such a case, an SWF is not advisable since it is a pot to be raided by the government.

Transparency Initiatives

Other policy advice focuses on the drive for improved transparency and institution-building in general, and greater transparency in regulating the sector in particular. A more transparent approach to attracting competition from international oil companies is another such focus.

The Extractive Industries Transparency Initiative (EITI), the NRGI (which resulted from the merger of the Revenue Watch Institute and the Natural Resource Charter) and the Publish What You Pay (PWYP) campaign have sought to persuade governments and companies to make their accounts publicly available. In particular, EITI has drawn considerable interest from oil- and gas-exporting countries and companies and has encouraged their engagement in the initiative.

Transparency is, of course, the first step towards accountability. Society has to know how much the sector is producing for, receiving from and giving to the government before it can hold anyone accountable for corruption or misuse of funds. However, transparency does not necessarily mean that accountability and better management of revenues will follow.

At the same time, predatory elites in producer countries can weaken initiatives to improve transparency in the sector. The experience of following even the best laid plans for improving governance has been mixed.

In short, the emphasis that the extractives-led growth agenda places on the opportunity offered by the sector may overrate the ability of processes, practices and policy to prevail over some systemic and psychological responses to large flows of income. It will remain a huge challenge for Guyana to translate extractive-sector growth into broader socio-economic development; even when it is able to continue to attract investment and maintain political stability.

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