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

Saturday, November 10, 2007

Institutions and Eonomic openness play a key role in Guyana's 'resource curse'

I made this graph from the data in the study.
Click the image to enlarge.

This study makes use of data from 1965 to 1990 to draw conclusions about the economic growth resulting from the quality of institutions, primary exports as a percentage of GDP, and whether or not a country has had an open economy during the years in question.

Guyana is near the left side of the graph. Note that this period covered the Burnham years mostly, but the comparison with other countries is helpful.

A combination of Guyana's sub-stellar "grabbing" institutions combined with a very high percentage of primary exports to GDP and a closed economy led to very lackluster growth.

Lumped together with the countries with relatively bad institutions, but with an open economy and relatively low primary export to GDP ratio, was Indonesia.

This could indicate that when a country's institutions aren't in a position to grab resource rents to play patronage politics, you can still have good economic growth if your economy is open.

On the other side of the scale, New Zealand has a near perfect rating for institutional quality during the same time period. However, due to their closed economy resulting from socialist policy, their economy hardly grew. Look at Ireland. They had an open economy, a similar primary exports to GDP ratio and slightly lower institutional quality. Nevertheless, Ireland's economy boomed in comparison to New Zealand's.

My cautious conclusion is that if Guyana can open its economy as much as possible, and if the natural resource rents were distributed evenly amongst Guyana's citizens, Guyana's institutions would be forced to act like there are not natural resource revenues and trend towards being "producer friendly" instead of "grabber friendly" in order to generate tax revenue from the private sector. Thus Guyana can experience decent economic growth while giving us time to generally improve Guyana's institutions to 1st world levels.

Abstract from:

Halvor Mehlum, Karl Moene and Ragnar Torvik
The Economic Journal, 116 (January), 1–20.  Royal Economic Society 2006. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden,MA 02148, USA.

"Countries rich in natural resources constitute both growth losers and growth winners. We claim that the main reason for these diverging experiences is differences in the quality of institutions. More natural resources push aggregate income down, when institutions are grabber friendly, while more resources raise income, when institutions are producer friendly. We test this theory building on Sachs and Warner’s influential works on the resource curse. Our main hypothesis – that institutions are decisive for the resource curse – is confirmed. Our results contrast the claims of Sachs and Warner that institutions do not play a role."

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