Infrastructural development linkages from the newly discovered resource

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Asking what constitutes successful development in the cases of countries with extractive sectors is a useful way of circumventing the biases stemming from the resource-curse theory and the extractives-led growth agenda.

Clearly, diversification of the economy away from the resource sector over an appropriate timeframe is key. Though an imperfect means of measurement, the non-hydrocarbon fiscal and current account deficits can be taken to calculate dependence on the sector along with other factors such as the level of direct and indirect subsidies and the amount of direct publicly funded investment the various sectors receive. On the basis of such figures, it can be determined if such subsidies and investment are diminishing over time as growth in those sectors becomes more self-sustaining.

Then there is the question of what contribution the sector can make to diversification. Creating backward and forward linkages with the rest of the economy and ‘reshuffling assets’ are two concepts that remain salient for today’s resource-holders. On the basis of those concepts, extractive revenues should not be viewed as income to be consumed. Rather, they are to be seen as representing a reshuffling of the national portfolio of assets. Converting extractive resources below ground into money above ground raises key questions about how the money can be deployed to create productive assets for the future.

The ‘stranded assets’

Any attempts to reduce the rate of depletion are up against another problem. The prospect of ambitious global action on carbon emissions appears to put a ‘sell-by date’ on fossil fuels. This creates a serious dilemma; whether or not to opt for short to medium term economic progress amid deteriorating longer-term conditions as a result of climate change. Such global action could ultimately encourage the Guyanese government to pursue the ‘one-off opportunity’ approach – for example by scaling up renewable energy through project investment or earmarked funds that channel resource revenues to support low carbon growth. There is a significant difference between governments spending to incentivize an undesirable trend in consumption and increasing the need for more subsidies, on the one hand, and governments spending to correct ‘market failures’ and enable a positive outcome that will reduce the need for state support over time, on the other. Put another way, the switch from ‘perverse’ to ‘learning’ subsidies – or introducing ways to put a price on environmental impact (‘internalize externalities’) – is to be commended.

Capacity for handling a ‘one-off opportunity’ approach

Those countries for which the strongest rationale to go fast exists – namely, relatively small reserves compared with the size of the population – are often those with the least capacity to insulate the rest of the economy from the effects of resource-sector development and handle spending windfalls.

The key to enabling the extractive sector to act as a ‘leading development sector’ is to promote diversification away from extractives as soon as the first commercial discovery has been declared. This requires some form of development or industrial policy to promote the private sector and ensure that linkages from the extractive sector make the maximum contribution to long-term and sustainable diversification. The use of the term ‘industrial policy’ in this context should not be taken as an indication that industry is the only option for diversification. That process could be based on the agricultural or service sectors.

In an ideal world – one in which where there were no market failures and the private sector was both active and effective – government policy would not be needed. It could simply be left to the private sector operating in the market and using its ‘invisible hand’. However, market failures are endemic in all economies, and developing countries are riddled with them. If the private sector is weak and ineffective, policy and legislation may be needed to encourage capacity-building. Moreover, as the experience of energy-exporting countries with high carbon intensity shows, the switch to resource-efficient, climate sensitive economic performance will be severely inhibited without a plan for transition (Bailey and Preston 2014).

The extent and nature of government intervention depend on the state of the private sector, the level of ‘technological strangeness’ between the extractive project and the rest of the economy, and the degree of market failure. It must be noted that industrial policy is essential to pave the way for a country’s transition towards ever-decreasing emissions and other types of environmental pollution. Nevertheless, it is important to find ways to reorient spending and incentives to avoid increasing the need for government support and encouraging more rent-seeking.

While this is a challenge for all countries, a country such as Guyana that is dependent on extractive exports will face various policy choices. With regard to economic sustainability, Guyana will have to decide whether to facilitate the extraction of resources, which will require approving environmental regulation and taxation affecting the sector, setting energy prices and other sectoral subsidies, as well as planning and coordinating new infrastructure, including utilities, electric grid, roads and urban development. Other decisions to be made will include how to channel revenues for economic diversification and whether the sector can engage in developing skills for other sectors necessary for sustainable transition.

The need to improve the coordination and planning of infrastructure

There is general agreement in the development literature that basic infrastructure – ranging from transport and power to water, sewage systems and telecommunications – is a prerequisite for development and, moreover, for any economy to function.

This is especially relevant in the early stages of development, when the provision of infrastructure generates its own linkages within the domestic economy. However, given the changing context and concerns outlined above, there is an overarching consideration about the sustainability of both the project-related and national infrastructure that is expected to be built as foreign investment and revenues begin to flow.

In cases where a number of projects are being implemented at the same time – which is quite common when a particular basin begins to be developed – each individual operator will consider the infrastructure needs only of its project. Those needs are likely to include roads, electricity, water and ICT as well as housing and services for employees. In order to ensure efficiency and economies of scale, project-related infrastructure should be coordinated with national development plans and the current requirements of the local community.

Frequently, connectivity to local and regional markets is a prerequisite for broad-based and inclusive growth. However, often the infrastructure associated with extractive projects is highly specific and brings few benefits for local communities. Indeed, such projects tend to be enclaves. However, there are cases where extractive projects open up the communities to wider geographical areas through the provision of dual-use transport links or support broader economic development by providing power for local communities.

If project plans for infrastructure are coordinated with local or regional ones, a sound base for overall development can be created and the extractive sector will become a ‘leading development sector’. However, there are cases where such plans appear to be out of sync. For example, it will become questionable to what extent Guyana should prioritize energy exports when there is an urgent need for power and industry at both the national and the regional level.

In each case, questions must be asked about infrastructure needs and how to ensure complementarity over the long term and under changing environmental and technological conditions. For example, what impact will new infrastructure have on land use? How much water and energy will it require? Will it be resilient to the effects of climate change, including increased temperatures and flooding? And, not least, can the development of new below-ground resources complement a country’s low carbon or climate-sensitive development plan?

Having identified what might be useful measures of performance or success, it is worth looking at how, and to what extent, the extractive sector can contribute to such measures. One way to seek an answer to that question is through the application and adaption of linkages from extractive projects to the rest of the economy (Hirschman 1977).

Linkages to the rest of the economy

Any extractive project generates linkages to the rest of the economy, which can be categorized as fiscal, forward and backward.

Fiscal linkages refer to the revenue generated for the owner of the resource; in most cases outside the US, this is the state as represented by the government. Forward linkages refer to the supply of the sector output to the rest of the economy, which, in the case of oil and gas projects, implies the supply of oil and natural gas products, though this definition can be expanded to include modern management techniques and managerial capacity to the rest of the economy. Backward linkages refer to the inputs into the project from the domestic economy in terms of employment, capital and material inputs into the value chain.

There is also a consumption linkage whereby rising income generates higher demand that frequently translates into increased imports as consumption patterns change; this can often destroy established handicraft and artisan activities. Another linkage is to banking; rising incomes lead to higher levels of domestic savings; if a national banking system exists, the income stream is thus redirected in a similar way to that of the fiscal linkage. These linkages act as the engine of development.

Limitations of the sector’s linkages

The implication of this analysis as used here is that the linkages of oil, gas and mineral projects are somehow limited and that, for this reason, the sector fails to act as an engine of development. One argument for that failure is the ‘enclave’ nature of extractive projects, which can be explained by several factors. The first derives from Hirschman’s concept of ‘technological strangeness’: extractive projects tend to be relatively high-tech and thus require sophisticated and complex equipment and operations. If such a project is implemented in a developing environment, it is likely to be isolated from the local economy: there may be neither companies on hand to service the project nor skilled professionals to be employed by it.

Another factor reinforcing the enclave nature of the sector is that the production of crude oil has limited opportunities for value-added industrial use. This is because of the unfavourable economics associated with refining and the downstream segment.

Such limitations are compounded by the fact that the fiscal linkages between extractives and the rest of the economy are ‘point revenues’, which accrue to the government, rather than taxes from a wide range of revenue-generating activities. Thus, only a small number of people decide how those revenues are to be spent and have responsibility for spending them. This is in contrast to peasant agriculture, for example, where the fiscal linkages are highly dispersed among the producers and the spending of revenues generated by the sector depends on a large number of individual decisions and interests.

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Bobby Gossai, Jr. recently completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the University of Aberdeen. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association, the senior policy analyst and advisor at the Ministry of Natural Resources and Environment, senior analyst at the Ministry of Agriculture, economist at the National Competitiveness Strategy Unit and a national accounts statistician at the Bureau of Statistics. Further, Mr. Gossai, Jr.’s earlier educational training includes attaining a BSc in Economics and a Post Graduate Diploma from the University of Guyana in 2005 and 2007, respectively. He obtained his first MSc in Economics from the University of West Indies, St. Augustine, Trinidad and Tobago in 2010.