Guyana most resembles the countries of Sub-Saharan Africa; not only in our level of development and societal and governance challenges, but by being resource rich and capital poor.
The Catholic Fund for Overseas Development (CAFOD) has some salutary advice that should be heeded by our Government as they embark on the exploitation of our massive oil reserves: “The management of a massive influx of oil revenues poses serious challenges for any government, but especially for those without strong democratic and accountable institutions. Power and resources in oil states become concentrated in the hands of the state, encouraging citizens to make their living through ties with the Government. This practice, known as ‘rent seeking’, reduces the incentive for other forms of productive activity.
In authoritarian states, counter pressures do not exist to push governments to develop economic strategies which are not oil-dependent, or oversight mechanisms for oil revenue management. Authoritarian states do not have democratically accountable executives, or open and transparent policy-making processes. They rarely have efficient civil service and tax authorities, independent legal systems, or active and informed civil societies.
Incentives from outside the country encourage oil-dependence. Some oil companies are willing to make secret deals, and northern governments sometimes form strong alliances with authoritarian leaders. The World Bank and the International Monetary Fund (IMF) routinely encourage development strategies based on the comparative advantage of petroleum. And they support lending to deeply indebted oil exporters when it is clear that debt only supports unproductive activities and prolongs the ability of government to mismanage oil revenues.
Oil development often brings an initial boom: higher per capita income, more employment, better nutrition and health, and more and better infrastructure. But boom usually soon turns to bust as rent-seeking and mismanagement of resources, and sometimes volatile oil prices, undermine the positive outcomes.
The negotiating position of poor host governments is weak. Only a few very large and powerful oil companies have the technology to extract Africa’s deep oil. This means oil companies drive hard bargains over the percentage of oil profits accruing to them, often winning greater shares than they have been able to in other parts of the world.
The more a country depends on natural resources, the worse is its growth performance, as it suffers from “the resource curse”. Oil dependence hurts development for the following reasons: The promise of oil wealth creates a ‘boom mentality’: governments create grandiose plans, work ethics are undermined, and productivity sinks. Public spending increases dramatically, because governments expect massive revenue increases (which usually turn out to be less than expected).
The quality of public spending declines. Money is wasted on corruption, as government officials accept bribes in return for awarding benefits. The volatility of oil prices hinders growth, distribution of wealth, and poverty alleviation. Booms encourage the loss of fiscal control and inflation, which further hampers growth, equity, and poverty alleviation. Foreign debt rises as governments borrow to cover shortfalls in expected oil revenues.
Other sectors of the economy, such as manufacturing and agriculture, decline as a result of oil dependence. Income from oil replaces tax revenues, thus removing the need for government to account to people for how it spends their money.
Oil-rich states at our level of development have several characteristics. Ironically, poverty heads the list. Nigeria, the biggest oil producer in Africa, received more than 0 billion in oil revenues over the past 25 years, yet more than 70 per cent of the population has a per capita income of less than per day. As economic growth fails to live up to expectations, governments in oil-rich states resort to repression to retain power, and spend heavily on the military.
Oil resources have been used to fund authoritarian regimes, and dependence on oil encourages many forms of corruption. Companies make payments or loans to government officials to secure contracts and other benefits. Finally, oil can exacerbate pre-existing tensions in society, as different groups demand a share of revenues.
