Part 2
Introduction
Today’s column focuses on Chapter 4 of the Guyana SCD 2020. Chapters 1 to 3 were covered in last week’s column. Generally, those columns are tilted towards review and diagnosis; while, as we shall observe, Chapter 4 poses the central contradiction of rapidly rising oil wealth and the persistence of weak job growth and limited poverty reduction. The remainder two Chapters [5 and 6] are heavily occupied with policy prescription, institutional development and legal, regulatory, and monitoring actions.
SCD, Chapter 4: Economic Transformation and Job Creation
Global as well as local extractive sector experiences dramatically reveal that, resource-driven economic growth has more often than not limited job creation, impeded poverty reduction and reduced the competitiveness of the non-resource sectors. Indeed, Guyana is a poster nation for this Dutch Disease vulnerability. Dutch disease or the paradox of plenty, has been referred to and discussed on multiple occasions in this series. And its well- known associated real exchange-rate appreciation has been shown to have negative impacts on Guyanese jobs and productivity between 2006 and 2017. These are infamously noted as “years of jobless growth, little impact on poverty reduction and …structural transformation” [SCD 2020]
Without appropriate actions the SCD projects the oil sector will be expected to repeat [2005-2017] experiences, going forward. The SCD projects the creation of only 3,850 direct jobs and 23,100 indirect jobs by 2025. That is 0.7 and 3.9 percent of the workforce, respectively.
The job-creating potential of the oil sector is limited by 1] its capital- and skill-intensive nature, and 2] Guyana’s small, undiversified manufacturing base. And, as exports rise, the appreciation of the real exchange rate is expected to negatively impact the competitiveness of tradable sectors, a key symptom of Dutch disease. Manufacturing and agriculture are likely to experience job losses as employment shifts toward the oil sector and non-tradable services.
The SCD posits that, the revenues produced by the oil sector “can distort the labor market by encouraging the unchecked expansion of public-sector employment and the establishment of generous transfer programs”. This is highly contentious and marks a key separation between neoliberal and extractivist analysis.
I’ll pursue this discussion later with remarks on the notion of Dutch Disease. I had last addressed this topic in my appraisal of the 2021 National Budget. As I put it then the National Budget termed this “the most dangerous pitfall the Authorities will have to navigate as the country pursues economic growth and development with macroeconomic balance”.
In other words, the Dutch Disease pitfall refers to the substantial risk that, as the expected expansion of Guyana’s oil and gas sector proceeds, this could further impair the international competitiveness of Guyana’s exports and economy by leading to increases in the nominal and real foreign exchange rate. A situation will emerge in which less Guyana dollars are required to purchase a given unit of foreign currency, both in nominal terms, and real terms; [that is, adjusted for price changes]. The disease is labelled Dutch, because this phenomenon was first observed in the 1970s in the Dutch manufacturing sector, following on that country’s discovery of huge natural gas deposits two decades earlier.
The SCD deems appropriate public policies to support private-sector development and job creation as essential. Further it asserts that, over the previous decade, expanding the public sector while driving job creation in Guyana, it created an unfavourable business environment of a large state presence in the economy, limited competition, and rent-seeking behaviours. These have inhibited the development of the private sector. Consequently, it projects that as Guyana moves into a new phase of its oil development, the international experience highlights the perils of resource-driven growth.
While the oil sector tends to create a limited number of jobs, massive oil revenue is expected to change the dynamics of local labour markets by weakening competitiveness of the tradable sector, increasing the country’s dependence on oil exports, undermining incentive to work, and triggering an expansion of public sector employment. Public policies must counter the adverse effects of the oil sector on employment dynamics and reinforce the competitiveness of the non-resource economy. Public investment can diversify and modernize production in sectors in which Guyana has a comparative advantage, expanding employment creation while maintaining incentives to work. Complementary improvements in the business climate could enhance the impact of public investment on job growth and economic diversification.
Conclusion
As indicated, at the economic core of the Dutch Disease phenomenon lies two economic traits; namely, 1) a tendency towards nominal and real exchange rate appreciation 2) a growing loss of global competitiveness. Experience suggests the implementation of three policies. These are 1) policies directed at slowing the rate of exchange rate appreciation as a corrective. 2) re-engineering the non-oil sectors (especially traditional exports) along with the domestic sectors producing goods and services for the domestic market and, 3) creating a Sovereign Wealth Fund, SWF, which invests in international assets markets. In effect, the creation of a SWF seeks to increase government savings. This is expected to modulate rapid inflows of foreign exchange and thus stem a consequential rise of national spending.
