So far we have considered the first and the second of the five economic and three political decisions in the chain that it was suggested must remain largely unbroken and be consistently implemented over decades if the natural resources of a country are to be effectively harnessed and transformational development result (Reversing the Resource Curse: How to Harness Natural Resource Wealth for Accelerated Development. http://www.lse.ac.uk/lse-player?id=1803). I have been engaging in this exercise to develop something of a broad personal vision of where the oil and gas sector in Guyana is and is heading. Unfortunately, it would appear that in the management of Guyana’s significant oil resources those links have already been broken and there needs to be quick remedial action if the situation is not to become irredeemable.
The third link demands that the local population be dealt with fairly. The natural resources of a country, indeed of the world, are randomly distributed and thus should be equitably shared. Apart from the resources of the deep sea, which are under the remit of the United Nations to be used for global development, the theory of sovereignty prevents us from attempting to globally equitably distribute national resources. However, internally every effort should be made to equitably distribute the fruits of a country’s natural resources and no particular region of a country should have veto power over distribution.
As all citizens have an equal right to an equitable portion of the revenues to be transparently determined and distributed to them, and since taking the resources out of the ground has additional cost for the local population, they must be properly protected and compensated for any such cost. One cannot depend upon the oil companies to behave in a fair and just manner in their response to the regulatory environment. Sir Paul Collier, who gave the lecture referred to above, provided examples of how British Petroleum (BP) behaved when it had to deal with the massive spill that took place in the Gulf of Mexico and how oil companies have treated with oil spills in the Gulf of Guinea.
In the former case, BP immediately put aside the huge sum of US$500 million, not to pay to clean up the oil or to compensate those affected, but simply to have an independent assessment of who was affected and the possible cost of compensation. The company did so because it knew that it was in a United States judicial jurisdiction and the lawyers for those affected were likely to take it to the cleaners by exaggerating the situation and the cost. The company ended up paying a fine of some US$19 billion (the largest fine in US history for the largest marine oil spill in the history of the petroleum industry) and about US$42 billion in compensation, which might well have been much more had it not made the US$500 million investment.
The Gulf of Guinea contains about 35% of the world’s total petroleum reserves and an abundance of other natural resources, including 20% of the world’s rainforests, but its 500 million people are extremely poor. Reading The Gulf of Guinea is Now Even More Filthy, 40k Barrels of Oil Leak from Bongo FPSO, one gets the impression that when spills occur the focus of concern is the reestablishment of production. The result is that the people have to resort to violence before their concerns are seriously addressed.
The recommendation is that countries – such as Guyana – with weak legal institutions establish fair, practical and relatively simple and timely mechanisms to address their concerns and compensate the local population in the event of oil spills or other such events. My investigation suggests that while Guyana’s Environmental Protection Agency has made some progress in broadening the scope of Exxon’s responsibilities in the event of environmental accident, no arrangement as yet exists to provide timely compensation to the local population.
The fourth link in the economic chain is what to do with the revenue: how to best use the income for this and coming generations. This generation did not did place the natural resources under the ground and there is an ethical responsibility to use depletable resources in the interest of not only this but future generations. Government should make known what those revenues are and how much will be saved for those to come. Every citizen should have some knowledge of these numbers and there should be a major public debate on this issue. Collier laments the fact that governments rarely publish these figures. Resources from actual production are not yet available and while estimates abound, I am not aware that the government has yet placed in the public domain even an estimated spending plan.
The fifth and final link is about how the resources are to be saved: what assets are to be acquired and how they will be acquired. Collier contends that for governments, establishing a sovereign wealth fund (SWF) today is akin to establishing an airline in the 1960s and a stock exchange in the 1990s – signs of modernization and must-have institutions. With funds of over US$1 trillion, Norway has the largest SWF and is advising a large number of resource-rich countries on how to establish SWFs. One can only hope that they learn from pertinent Norwegian experience. Collier pointed out that Norway, which has the largest per capita labour force capital investment in the world, only began saving abroad when it was no long profitable for it to do so internally. Generally, the focus for poor natural resource rich countries should be to invest in capacity building in both the private and public sector for them to be able invest well domestically.
To avoid the Dutch disease – where the amount of the currency inflows of a country leads to currency appreciation, making the country’s other products less price competitive on the export market and to higher levels of cheap imports, which can lead to deindustrialization as industries apart from those involved in resource exploitation move to other locations – poor natural resource-rich countries must invest in investing: build up both public and private capacities to invest and then scale up investments in non-tradable and generic capital – capital that can be used for many things.
However, this is usually the last thing governments think about: as in Guyana there is much talk about investing in the petroleum value chain. While it might appear sensible to invest in a refinery if one has oil, note must also be taken of the fact that one will be also gearing up the economy on a product that will ultimately run out, or be phased out! There is also much questionable insistence about the need for export diversification in a context of the abundance of foreign exchange that is expected from oil! The sequence for avoiding Dutch disease should be investing in the capacity to invest well, scaling up investment in non-tradable and generic capital and then consumption, largely demand based upon the existing capital stock, can increase without causing Dutch disease.
Most of the questionable tendencies mentioned above are quite prevalent in Guyana and an appreciation of the nature and structure of the most efficacious types of investment has hardly been addressed. Truth be told, some of Collier’s recommendations were unfamiliar and partly led to my conclusion that I did not have a sufficiently informed view of where the energy sector should be going.
We have now considered the five economic links in the decision chain and Guyana is not in a good place. The regime will have to put much more thought and action into having a national and international debate around a comprehensive economic plan if we are to avoid the negative consequences, one of them being the Dutch disease, that are likely to stymie transformative and sustainable development.
