Prior to 2012, if you ask a stranger in the United States or Europe what he or she knows of Guyana, the most common response is “that’s where Jim Jones happened”. However, in recent times Guyana made headlines in major media networks in the United States. This is because oil exploration which started around 2006, led by U.S. oil giant Exxon Mobil, not only found oil but possibly one of the largest reserves in the hemisphere. Without a doubt, this is good news for a country that is one of the poorest in the Western Hemisphere and has a population of fewer than 750,000 people. Social temperature suggests Guyanese are optimistic, and rightfully so, that oil revenues will bring improvement in all aspects of the economy, create good paying job opportunities, and improve the quality of life. But, would it?
Such optimism must be balanced with an abundance of caution that while the discovery of oil can put Guyana on a path to widespread prosperity and long-term economic success, it can equally lead to economic, political and social tragedies. In fact, the latter seems more likely unless the government take necessary precautions and develop critical legislations and fiscal measures to ensure maximum transparency in the oil industry and oil wealth are used to fund priorities that would benefit all Guyanese. To understand why these are critical and how the government can develop the necessary legislative and policy safeguards, history offers a multitude of lessons.
The discovery of oil and influx of revenues do not guarantee higher rates of economic growth. In fact, poor countries that are resource-rich grows more slowly than other poor countries even after accounting for as many differences as possible, according to a 1997 study by Economist Jeff Sachs now of Columbia University. There are both economic and political explanations for why this happens. Economically, the influx of dollar dominated-revenues put upward pressures on the domestic currency and makes non-oil sectors, particularly the agriculture and manufacturing sectors, less competitive. If these traditional sectors go under and the economy becomes heavily dependent on oil, it also becomes vulnerable to global oil swings and crises. Trinidad and Tobago and Venezuela economies are good examples of how the over-reliance on oil revenues can undermine sustainable economic growth. This is a real threat to Guyana’s economy given that both the agriculture and manufacturing sectors declined by 10 percent each in 2016 and unlikely to rebound soon or at all.
More government revenues do not necessarily mean everyone will be better off, in fact, it can mean quite the opposite. Different approaches by governments to ensure ordinary people benefit from oil wealth and from preventing harmful pass-through effects on other sectors from the appreciation of the local currency have had varying degrees of success. Venezuela, an oil giant, and Guyana’s immediate western neighbour established a sovereign wealth fund for the future “El Fondo de Inversiones” in 1974. However, an orgy of domestic spending left the country with a heard of white-elephants projects, huge foreign debts, and declining social spending, according to The Economist. These findings highlight the importance of ensuring revenues are used to fund projects which serve a social good and public investments in critical services such as education, healthcare, public safety, and infrastructure are prioritized.
What the government decides to spend on and how much it spends on each priority are more important to the goal of ensuring widespread prosperity from oil wealth. The mere existence of sovereign wealth funds, stabilization funds, or other like funds does not absolve the government of wasteful and unproductive spending. In this regard, an examination of the government recent budget decisions raises early warning signs. For example, in 2017 the share of government spending financed by issuing new debts reached 22 percent ($54 billion) up from 1 percent ($1.2 billion) in 2015, i.e. an increase of more than 4000 percent. In the 2017 budget, increased salaries and benefits expenditures, mostly for members of the assembly, represent half of the total increase in government revenues.
The idea of directly transferring payments to households sounds good in principle. But in developed countries, such as the United States and Norway, where this idea was tested were met with charges of corruption, cronyism, and abuse for political causes despite having strong democratic institutions and checks and balances. Thus, direct cash transfers to households (other than in the case of providing support to those in poverty and the elderly through well-structured and managed programs) are unlikely to be the instrument of shared prosperity in Guyana. This would be like medicine to ease the pain and hide the symptoms while doing nothing to fix the underlying problems. Instead, oil revenues should be used to improve the country’s frail infrastructure, build modern education and health care institutions and improve public security systems – all of which contribute to laying a strong economic foundation and a path to economic prosperity for all Guyanese.
The discovery of oil and the potentials for economic growth and improved standard of living are good news for Guyanese families, workers, and businesses. However, the benefits of oil wealth do not automatically flow from the state’s treasury to families, businesses and the economy. Like oil companies which have to assembly rigs, refineries, transportation, and distribution systems to move oil from the earth to the pump, so too must the government developed necessary legislations, transparency and accountability institutions, evidenced-based policies to inform allocation and spending decisions, and regulations for ensuring environmental sustainability to ensure oil revenues flow from the state treasury to the kitchen tables of families, pocket books of small businesses and grow the economy.