Dear Editor,
With Guyana’s discovery of oil and gas, which captured the world’s attention, and the potential it has to develop the people and respective industries, many conversations have started. The talk of the Dutch Disease has also entered the discussions, and rightfully so. What really is the Dutch Disease?
This concept was theorized to occur when a country’s economy becomes dominated by one industry or sector, and the economy as a whole becomes overly dependent on the export of resources from that sector. This phenomenon has had negative effects on resource-rich countries throughout history, with examples ranging from oil-rich nations in the Middle East to, more recently, Nigeria amidst its crude oil boom of the 2000s. We, too, are now at risk of experiencing the symptoms of the Dutch Disease. However, there are appropriate measures and initiatives that government can take to effectively mitigate the impacts of Dutch Disease that may threaten our economy and, by extension, our peoples’ way of life.
What therefore can the government do in order to avoid the disastrous symptoms from the Dutch Disease? It is important to note that although the exploration and production of oil in Guyana are still in its embryonic stages, the potential impact of the country’s discovery of oil reserves warrants critical evaluation. The major oil discovery in our country was in 2015 and first oil production was in 2019, with a volume of approximately 120,000 barrels per day. Around that time it was estimated that Guyana had around 8 billion barrels of oil reserves from the Stabroek block, which has changed significantly today.
Guyana’s oil discovery has branded us as an oil-producing nation with the third largest oil reserves in the South American continent and 17th in the world of oil producing nations. Importantly, the economy of the country will require a robust framework to avoid the Dutch Disease. The symptoms of the Dutch Disease are essentially the results of a resource boom leading to an economic slowdown. Total economic failure can result in negative outcomes such as a fly-away exchange rate, rendering other sectors uncompetitive due to revaluation of the currency, massive decline in the development of traditional industries, critical to a diversified economy, leading to inflation, and also, political instability can arise due to some countries’ dependence on the natural resource sector to facilitate economic growth, employment and fund national budgets.
To prevent some of the aforementioned, Guyana requires diversification of its economy as the first step towards mitigating a potential Dutch Disease scenario. The country already has at least three other sectors – gold mining, agriculture, and forestry, which contribute significantly to the country’s Gross Domestic Product (GDP). However, these sectors must be further developed, through adequate fiscal policies, such as subsidies or tax incentives, to prevent them from being neglected due to a booming oil and gas sector. Perhaps the most effective way of avoiding the Dutch Disease is to invest in alternative sectors that can supplement the country’s economy. These sectors must have the potential to offer employment opportunities and revenues and promote the country’s GDP growth.
Reducing dependency on the oil sector should be among the leading objectives of such an economic diversification plan. Diversification of the Guyanese economy shields it from volatile of crude oil prices. A significant portion of the revenues derived from oil production ought to be invested in other sectors of the economy. The government should maintain a reasonable policy on taxation schedules and allocate funds to other sectors of the economy. A portion of these funds could be ploughed into areas like infrastructure, education, and health services, of which we see some indications in this direction. If these sectors are pumped with adequate funding, it would further stimulate growth in the economy, creating more job opportunities and encouraging GDP growth.
Further diversification can be achieved in the area of tourism of which Guyana boasts several natural tourist attractions, such as the Guyana Shield and Kaieteur Falls, which are relatively still untapped. Developing a robust tourism sector can generate funds, resulting in employment and improving infrastructures such as hospitality, transportation, hygiene, and other essential amenities. Another strategy in Guyana’s quest to prevent the Dutch Disease epidemic should be to ensure transparent and accountable governance. Guyana has a less stable political climate than, say, some countries in Europe or America, so this makes it even more crucial to increase political stability to avoid the effects of the Dutch Disease.
Transparent and accountable government necessitates an environment free from corrupt practices to ensure that oil revenues are channeled into the country’s economy. This step is crucial for the development of the country and prevention of the Dutch Disease. Ineffective governance and excessive bureaucracy are major barriers to economic growth; the government must make conscious efforts in this regard to minimize bureaucracy. The management of the people’s revenue accruing from the oil industry is equally significant. A sovereign wealth fund or a natural resource fund, managed effectively, is an effective means of conserving revenue. The fund can be invested in other sectors of our economy or invested abroad to ensure healthy returns on investment.
To make this possible, Guyana must seek counsel from countries with significant experience in managing sovereign wealth funds. Such guidance will ensure that investments are made properly, thereby reducing the risk of investing in the sector. The government should also consider exploring the possibility of investing in other countries, leveraging the revenues generated from the oil industry to acquire ownership in multinational corporations. Such investments can serve as a form of check on the effects of a drastic fall in oil prices; these investments can guarantee support from multinational corporations if an oil price crash is encountered. Effective management of the oil sector will require ensuring adequate capacity building.
A lack of a skilled labour market will impact negatively on the development of the oil sector, meaning that Guyana must focus on education and training programs that will equip its citizens from all ten administrative regions with the necessary skills required to work in the industry. Such an emphasis will ensure that ExxonMobil rely mainly on the local workforce, providing employment opportunities, and reducing the impact of the fly-away exchange rate in the economy. In conclusion, the impact of the Dutch disease on the economic growth potential of countries, particularly those dependent on the natural resource sector, has significant negative consequences.
It is therefore important that Guyana, through the government, avoids this pitfall by encouraging economic diversification, promoting transparent and accountable governance, supported by effective sovereign wealth management policies, investment in education for capacity building and investments in other countries, and lastly, promoting organizational leadership that is capable of driving our country on the right path. The implementation of these initiatives is paramount to ensuring that the oil sector contributes to the development of Guyana’s economy without negatively impacting other industries.
Sincerely,
Hon. Jermaine Figueira MP