Tell us what it's going to take for you to return to Guyana.

Thursday, November 15, 2007

Guyana's Recovery Underway? That's for us to decide.

I'm currently doing research for a paper about the resource curse.
I've peeped about it on here and to some individuals but I haven't
agitated much on here because my research is still going on until the
end of this month. I'm basically scraping together all the articles
that I can get my hands on about the lackluster economic growth and
even violent armed conflict that accompanies the discovery and
exploitation of natural resources in a country.

The thing to look for is what percentage of a country's GDP is made up
of primary exports. It can be sugar, diamonds, oil or lumber.

When primary exports make up more than a certain percentage of the
GDP, you're going to have problems. For now I'll say that once they
comprise 1/3 of GDP, that's the tip over point.

The big problem is that when a country's institutions are focused on
obtaining and spending the resource rents, the private sector often
get sidelined by the government.

This has been a big problem for Guyana because most of the government
revenue comes from Sugar, Gold, Bauxite, Lumber and some diamonds, in
no particular order.

These are all primary export commodities as opposed to manufactured goods.

there is a debate as to whether the wealth of primary resources erodes
a country's institutions or if the bad institutions come first.

The general truth, however, is that there is a good correlation
between institutional quality and GDP growth.

In Guyana's case, simply injecting oil revenue into already-bad
(comparatively) institutions that are already geared toward resource
rents, won't likely grow the economy or make people better off.

A big problem is patronage politics, the buying of blocks of votes
with government revenue. If it happens in a country, it happens more
when the government gets oil revenue.

A great example of the politico-economic quandary in which many
petro-states find themselves, is Nicholas Shaxson's example of a
queue, or line:

If you pour a bucket or two of icy water on this line, it will cause
chaos for a short time, but order will be eventually restored because
everyone has trust that each person will eventually get to the front
of the line.

Regardless of what the people are waiting in line for, let's say that
the biggest or strongest people in the line start cutting to the front
or simply pushing their way to the front from behind. This trust then
dissipates and oftentimes, violent struggles or at least verbal strife

This trust is arguably the most important thing to a functioning
economy. The institutions are charged with the responsibility of
keeping order and protecting rights.

Norway, whose economy is heavily dependent on numerous primary exports
including oil and farmed fish, doesn't show signs of this disorder or
strife because the institutions are strong, and the country wasn't
exactly poor before striking oil.

The better the institutions and the better-off the economy before
discovery of extensive natural resources, the better a country is able
to cope with the challenges they pose.

The poorer a country is and the worse off its institutions before
discovery, the worse-off a country tends to be after the discovery of

Interesting is the case of Indonesia between 1965-1990. Their
institutions were only marginally better than Guyana's during the same
time period, but they had an open economy, as opposed to Guyana's
closed one, and their reliance on primary exports was less than half
of Guyana's in terms of % of GDP. Indonesia's economic growth was
phenomenal during this time, and if I'm not mistaken, that country was
a bit democratically challenged during that period. It should be
noted that Indonesia has had a young and growing population, whilst
Guyana's hasn't.

New Zealand is an interesting anomaly amongst the nations like the
Netherlands, US and Norway, with great institutions. Even though the
institutions were almost top notch, Their economy was closed during
this time period and hence, NZ experienced terrible economic growth
compared to its peers.

Another big issue that needs to be considered is "dutch disease" as it
became known in the 1960's when the Netherlands struck natural gas in
the North Sea. The influx of money from exploitation of said reserves
made Dutch currency more expensive, and manufactured goods suffered
because of it.

This has been replicated to varying degrees in other countries, but
especially so, and severely, in places that don't already have a
manufacturing sector to begin with. Leaders of developing countries
tend to spend without planning for tumultuous commodity price swings,
and when the price dips low, there isn't a manufacturing sector to
step in to save the economy.

The thing that I want to impress upon the mind when it comes to
natural resource rents vs taxes levied from enterprise, personal
income or tariffs, is that their collection remains more or less
constant (other than swings in world prices) regardless of how the
economy is doing. When a government does things to destabilize an
economy or allow violence, human rights abuses, etc. the government
still gets paid the same no matter what. Instead of inviting all to
participate in healthy commerce so as to generate tax revenues, the
government and those who lobby it are simply in a mode of dividing the
spoils instead of encouraging production.

This and other things, bring me to a few cautious semi-conclusions;
these comprise my current 'recipe' for a Guyana that not only has a
very high dependence on primary exports, lackluster institutions, low
population growth, and an economy that is not as open as needs to be:

1. The government needs to be forced by its own people to convert to
production mode instead of grabbing mode. It's the responsibility of
Guyanese to foresee the train wreck and avert it. Nicholas Shaxson
who recently published an article called 'politics, corruption and the
resource curse' says something to the effect that although
transparency measures [read FOIA] may change things a bit, the only
way to fundamentally change the game is to directly distribute
resource rents evenly amongst the people and force the government to
bargain with the electorate for its budgetary needs. He lists every
conceivable objection to such a plan, but he also quite effectively
answers each one except for, "the politicians will never go for it."
He does mention though, that a way around it is for a candidate to be
elected by promising to do just that. I'm convinced that the only
way to achieve the next points, is to fundamentally change the game or
interplay between Guyana's government and the electorate, anything
less will produce, in my opinion, a Guyana that's fundamentally
similar to the one we have now, only potentially worse.

2. Transparency measures: A freedom of information act is essential.
A government who gets most of its revenue from sources outside the
electorate has almost no incentive to reveal its dealings with those
entities or the ways in which it spends the rents. Maybe a third
party bank, more trustworthy than governments sometimes, can receive
the resource rents and distribute the revenues to special personal
accounts of Guyana's citizens. The IMF is experimenting with
transparency requirements tied to loans made to developing countries.
The drawback to this is that many of these countries then decide to
take loans from China, which has no such stipulation.

3. A WIDE OPEN ECONOMY: In the post colonial era, the pendulum swung
to a closed economy. Since the return of democratic elections, the
pendulum has stuck in middle of the return swing because of structural
and political reasons. To jump start, the economy the PEOPLE need to
change the incentives of the government who will then see fit to
foster a lively economy based on not only primary resource exports but
also manufacturing, services and trade/investments. If taxing a
vibrant economy is the main way for the government to collect revenue,
you can bet it will result in a society of free-enterprise.

4. Enforcement of property rights and contracts: Knowing that not
doing this will discourage trust in the system and investors, the
government will have to expend valuable resources reforming law
enforcement and the judiciary. It's a lot of trouble (apparently),
and it won't happen unless it's the only way for government to
optimize its own revenue. Think about this: only minimal to no
transparency and enforcement of contracts/property rights is necessary
to get a small handful of large companies to extract Guyana's mineral
and natural wealth. Why would a government go through more trouble to
get the same or only marginally more revenue if its people don't force
it to? To those of you who wonder why a rich land can be a poor
country, this is your answer.

5. Active immigration measures: Assuming the above happens, there
will be a shortage of workers acting as a bottleneck to further
economic growth. It should be relatively easier for the right people
to enter or re-enter Guyana to work. Make it streamlined and make it
easy. Establish a "right of return" that allows anyone with one
Guyanese or British Guyanese grandparent to return, and become a
citizen in short order. This will require tolerance not only on the
part of the people but also the institutions in government. Many
diaspora Guyanese will have different political ideas. Many of them
will be of races no longer well represented in Guyana. Those in power
know this and hence have a disincentive to allow this to ever occur.
This is all the more reason for the people to change the incentives
that the government has to deal with. Bringing back such a diverse
population from the various first world nations would yield, in my
estimation, a synergy and inventive pool of talent that far exceeds
that of other countries of similar populations that have always
resided in the country. The diaspora is one of Guyana's greatest
assets due to remittances now, and will continue to be so, during her
golden age. This effect will be compounded with the CSME (Caribbean
Single Market Economy), when the residents and diaspora of all
member-states will be able to live and work in Guyana.

6. Active Creation of Networks and Infrastructure: People, live work
and travel along road, phone, data, water, electric and air networks.
This is why harbors and ports yield big cities and big cities turn
into bigger cities, metropolises and megopolises.

Guyana is almost equidistant between the core cities of North America
(NE US and SE Canada) and the core cities of South America (The Sao
Paulo, Santiago, Buenos Aires Triangle) and Trinidad doesn't have the
space for a large intercontinental hub that would service enough of
the types of aircraft that will be flown in the future. Guyana is
perfectly situated to be the northern port of South America's growing
giant, Brazil, and a port for the other Guianas and part of Venezuela
(another subject). Guyana needs bridges and roads that connect all
the locations along its coast and the hinterland to the coast.

A first world Guyana will have networks built in pace with and maybe
in anticipation of the needs of its future bustling and free economy,
and plenty of hydroelectric power to fuel it.

The best way to see these things happen is to change the operational
foundations of the government. The only people who can do that are
the electorate. Solutions forced from the outside will be resented as
meddling. If the government decides what rights the people have to
free commerce, speech and supportive infrastructure/institutions based
on what the government needs, then we may never see this day.

The Netherlands, one of the smallest countries of Europe experience a
golden age that lasted for about two centuries and was the most
powerful country in Europe despite it's small size, lack of natural
resources and population. They did it by founding the first modern
democracy before England did so. They had a supply of abundant energy
despite the lack of wood, because of the plentiful windmills they were
forced to build. They needed expertise beyond those existent in their
own population. As a result they encouraged the immigration of
Europe's undesirables and gave them more freedom than existed in other
parts of Europe. Thus, Jews, English Puritans, French Huguenots and
many others infused Dutch society with creativity, enterprise and
technology. The result was prosperity.

Likewise, Guyana, despite its size and level of development can become
very prosperous and mighty, for its size. Our expertise are scattered
all over, just waiting for the right framework and opportunities back
home. Once creativity and rights are encouraged and protected, will
these expertise flow back home. Only a strong Guyana can assert
sovereignty over her rightful territory. A country forever dependent
on remittances and natural resources, will one day, I fear, be the
pawn of stronger powers who would enlist the government to enslave our
people for their purposes, while those of us who are able to leave
find prosperity elsewhere and eventually lose their identity.

We are at a great crossroads now. Will it be business as usual or a
turn toward the awakened glorious potential of a golden age for

Democratize the oil revenue and change the government's incentives
toward the fostering of a vibrant and open society and economy.

1 comment:

Intraday SGX Signals said...

Really, this is the most important thing to a functioning economy. The institutions are charged with the responsibility of keeping order and protecting rights.