Protecting Guyana from the Natural Resource Curse

The ethnically-divided country of Guyana is one of the smallest and poorest countries in South America. It has a population of just 782,000 people—roughly the size of North Dakota—and its income per capita is less than $5,000 per year. But while the rest of the world faces a crippling recession, Guyana’s economy is projected to grow by 53% this year, thanks to a significant offshore discovery. (The country’s projected growth had been even higher before the recent stress in oil markets.) Guyana sold its first barrel of oil this past January, and national oil output is expected to reach 750,000 barrels/day by 2025 and 1.2mm barrels/day by 2030—more than a barrel of oil per day for each of Guyana’s 782,000 citizens.

But will this oil wealth benefit Guyana’s citizenry? Many observers worry that Guyana may fall victim to the “natural resource curse”—a paradoxical phenomenon in which resource wealth not only fails to generate sustainable economic growth but actually worsens the standard of living for most of a country’s citizens. While some manifestations of the natural resource curse are macroeconomic in nature (for example, the so-called “Dutch disease,” in which resource-driven currency appreciation stifles other tradable sectors), other versions of the resource curse involve resource wealth undermining institutions and weakening governance. Natural resource wealth, especially from point-source resources like oil, gives the political leaders who control the resource cash flows the power and opportunity to engage in various forms corruption. Not only can these leaders profit directly through kickbacks or embezzlement, but they can use resource wealth to solidify their own political power through favoritism and clientelism. In both cases, political leaders may weaken or eliminate transparency, accountability, and institutional checks that are designed to constrain their ability to improperly use resource wealth for their own personal or political benefit. These risks are greatest in countries that already have relatively poor governance and weak institutional frameworks when the resource wealth is discovered. And this corruption and institutional weakening may make ordinary citizens worse off than they were before the resource boom, even as those with connections or political power get rich.

This manifestation of the resource curse is a significant concern for Guyana, a country with political institutions that are already fragile and prone to corruption. In a winner-take-all political system with voters split along ethnic (and even geographic) lines, politicians win by favoring their base and suppressing opposition turnout. And indeed, this year’s presidential elections, conducted just two months after the country’s first oil sale, were marred by vote rigging, civil unrest, and violence. But there are also encouraging signs that the Guyanese government is taking steps to address the resource curse concern by strengthening budgetary institutions. In January 2019, the government established the Natural Resource Fund (NRF) to manage the country’s natural resource wealth. Similar to funds established in Ghana and Timor-Leste, the NRF is structured as an offshore fund that invests in liquid international securities with well-established guidelines governing fund transfers to Guyana’s Ministry of Finance. By codifying transfer rules and prohibiting fund borrowing, the NRF will compel the government—and whichever political party controls it—to save a significant portion of its oil revenue, limiting its discretionary spending abilities and curbing the corruption opportunities that arise from unencumbered financial resources.

The NRF, however, is not sufficient. While the NRF is restricted from borrowing, the Guyanese government is not. And while the NRF limits a government’s ability to withdraw more oil revenue than the NRF’s bylaws allow, the Guyana state is not forbidden from borrowing against this revenue. This loophole would allow a profligate government—especially one that intended to reward its constituents or award suspicious investment contracts—to borrow in international financial markets to fund its expenditures. Furthermore, even with the constraints imposed by NRF transfers, Guyana’s central government expenditures are projected to double from 290 billion Guyanese dollars (approximately US$1.4 billion) to 580 billion Guyanese dollars (US$2.8 billion) over the next five years. This presents ample opportunity for political leaders to leverage their power over discretionary spending to enrich and entrench themselves.

To further constrain the sort of resource-fueled discretionary spending associated with the natural resource curse, Guyana should take at least two additional steps:

  • First, following a recommendation from the IMF, Guyana should enact a fiscal rule to limit its non-oil fiscal deficit to the expected NRF transfer This means that the Ministry of Finance’s budgeted expenditures would not be legally permitted to exceed its non-oil tax revenues and its oil-related fund transfers. This sort of fiscal rule is mainly used by resource-rich countries to smooth the volatility associated with commodity prices, but such a rule is also an indirect way of closing the sovereign borrowing loophole mentioned above. Not only does such a rule help impose fiscal discipline, but it also helps prevent that fiscal profligacy from feeding into politically- or personally-motivated spending. And indeed, some recent academic work suggests that fiscal rules that limit deficit spending (albeit in a different context) are associated with less bribery and embezzlement. An independent body should be assigned the task of setting and monitoring compliance with the budget rules, and while there’s no guarantee that Guyana would adhere strictly to the rule, establishing enforcement by an independent budgetary institution would make it harder for political leaders to circumvent the rules.
  • Second, Guyana should establish a direct distribution mechanism (DDM) to provide Guyanese citizens with direct bank transfers from the NRF. This would take oil money out of the hands of corruptible government officials and put it in the pockets of Guyana’s 782,000 citizens. Given the lack of resource-based DDMs in practice, much of the literature has admittedly focused on theoretical implications and remains contested. Some critics argue that a DDM may deprive the state of resources that could be used for productive activities like building infrastructure and investing in health and education. Critics also worry that citizens who receive money through a DDM may have weaker incentives to hold the state accountable. Yet other scholars have persuasively argued that a DDM would provide the right tax incentives to strengthen political accountability. Especially in an ethnically-divided society like Guyana, giving cash directly to the people would help alleviate some of the political tensions around public investment programs. And while DDMs in developing countries are rare, many Latin American countries employ cash transfer programs designed for poverty alleviation. By piloting a DDM, Guyana could leverage the benefits of a cash transfer program while also shielding a non-trivial portion of its revenue base from discretionary expenditures.

By limiting the magnitude of discretionary financial resources, these proposed budgetary institutions would help constrain the government’s opportunities to profit from corrupt behavior and  reduce the ruling party’s temptation to chisel away at existing institutions. These measures, of course, are not a substitute for broader legal and judicial reforms to strengthen transparency and accountability in the resource sector and elsewhere. But fiscal reforms of the sort described above would help ensure that the revenues from the oil windfall benefit the people of Guyana, and do not contribute to the institutional resource curse that has plagued so many other developing countries.

2 thoughts on “Protecting Guyana from the Natural Resource Curse

  1. Pingback: OTHER THINGS YOU MAY HAVE MISSED – JUNE 27 – raytodd.blog

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