Introduction
Discussing Guidepost 2 of Part 2, I began last week with identifying three general areas of public spending of petroleum revenues indicated by the Government of Guyana (GoG) thus far. Today’s column starts to evaluate these three areas, beginning with the first listed, namely, GoG priorities that are considered as “well underway” in terms of their present “conceptualisation and/or state of implementation”. I gave several examples of such priorities. I also indicated that most of these topics have been discussed earlier in the series. I therefore noted there is no need to revisit them in any detail, except the priority listed as the Sovereign Wealth Fund (SWF), which is now legally enshrined as Guyana’s Natural Resources Fund (NRF).
This Fund might well turn out to be one of the largest, if not the largest area of public spending from petroleum revenues! Because of 1) the sheer size of this spending, and 2) the rather minimal public discussion of this item, I believe it warrants further attention here, given the Road Map’s strategic goals.
SWF/NRF – Revisited
In my previous columns, I had cautioned the GoG against succumbing to the global drumbeat (strongly echoed in the local media), which asserts that a SWF represents a desirable progressive policy stance. The claim routinely made is that a SWF serves the best long-term interests of small developing petroleum exporters. I had argued: Guyana cannot afford such “progressive orthodoxy”. Why is this the case? I have stressed that, in essence, SWFs recycle surpluses generated from national resources exploitation in Guyana-type economies, into global capital accumulation circuits. These accumulation circuits exist, however, to drive global capitalist expansion and growth, not Guyana’s.
Of note, this feature of SWFs is rarely, if ever, stressed when recommending the establishment of an SWF! Indeed, to the contrary, it is typically claimed that, SWFs only perform essential roles for the benefit of petroleum-rich Guyana-type economies! The fact that this driver is never admitted in the discourse on SWFs will be expanded on later in some detail in my presentation of my Buxton Proposal, which will be the final topic considered in Guyana’s Petroleum Road Map.
What in reality is an SWF?
An SWF is a long-term state-owned pool of money or investment funds that is invested in real and financial assets globally. This pool derives in the main from export earnings. Further, while some investors claim that a Central Bank is similarly structured, however, a Central Bank’s goal is normally currency stability and avoiding inflation! A SWF’s goal is always to maximise returns on its holdings.
SWFs: State Capital and Global Capitalism
My assertion has been that, Guyana’s SWF/NRF constitutes the state (as owner) operating in a largely private global capitalist economy. Collectively, this feature is aggravated by the reported size of SWFs (US$8.1 trillion in total assets, of which petroleum-based SWFs control US$4.4 trillion, or 54 percent). Such enormous state capital invariably generates tension in a universe of private investors, who are accumulating capital and investing this in private financial markets, where private risk-return incentives prevail!
Inexorably, therefore, the most important consequence of a petroleum-based (or indeed other natural resources based) SWF in economies like ours is that it becomes, in effect, a conduit for redistributing surpluses generated by Guyana’s export earnings to finance non-domestic based income-generating activities! Indeed, I had observed that the Guyana Green Paper had unambiguously asserted: “investment in overseas markets is necessary (my emphasis) to minimise risk of local instability.”
As I had noted, Norway’s Fund is the largest (US$1058 bln), followed by the UAE (US$693 bln), Kuwait (US$592 bln), Saudi Arabia (US$516 bln), Qatar (US$320 bln) and the Comparator Trinidad and Tobago (at only US$5.5 bln). At the time of listing all these Funds are among the top 10 in terms of transparency rankings.
Despite popular belief, Norway (1990) is not the country that first established an SWF! Four decades earlier (1953), both Kuwait and Saudi Arabia had established theirs. Additionally, some countries also have multiple SWFs. Regional distribution data show Asia and the Middle East account for around 40% of the global total, Europe 13%, and all of Africa less than 3%.
Lessons Learnt
My earlier analysis was focussed on drawing lessons from global experiences, to guide Guyana’s efforts. I had posited then that the economic features and design of Guyana’s SWF should be guided by two basic factors: namely, 1) promoting the Green State and the United Nations Sustainable Development vision, and 2) macroeconomic management of the risks/uncertainties that small, poor, open developing economies routinely face.
I, therefore, advanced the proposition that Guyana’s SWF should be: 1) integrated into the country’s national budgetary processes; 2) utilise global best practices (especially in the area of governance); 3) establish a ‘careful’ balance between rules and discretion in its main areas of operation (both extremes must be avoided); 4) avoid ambiguities in the key areas of regulation, oversight and surveillance; 5) secure a long-lasting commitment from successive governments, particularly in such areas as defining Fund objectives; disclosure requirements; employment of specific numerical targets; unambiguous investment rules; and, backed by legislation defining the responsibilities of stakeholders.
Conclusion
In concluding the earlier discussion I had offered several observations: First, there are no perfect SWFs. Searching for such is futile, illusory, and wasteful. Second, there is no “one-size-fits-all” set of legislation and organisation to be purchased “off-the-shelf.” Each SWF has to be designed/constructed as specific to its economic environment. Guyana’s size, the size of its expected petroleum finds, its openness, human and institutional capabilities, along with its investment needs, growth and poverty reduction requirements have to be inputted into the design of its SWF. Third, a common thread throughout SWF legislation/structure/operation is the preservation of a balance between rules-based regulations/decision-making and the discretion afforded to the relevant Authorities.
Finally, all SWFs carry intrinsic risks; and one of these is moral hazard! This risk is embedded in all insurance-type arrangements; and arises because insurance spending provides compensation for errors in risk-taking behaviour. However, such spending also competes with expenditure devoted to minimising/preempting risks.
Next week I evaluate Guyana’s SWF/NRF.
