Political cooperation is necessary for escaping the natural resource curse

Could Guyana escape the natural resource curse?

Part 7

We explored the idea of the resource curse in six previous columns before analysing the cost aspects of the oil and gas contract. We took a break from this topic in the previous three successive essays. Last week’s essay looked at how recurring costs could have an interesting effect on the long-term average cost oil when several units of cost are pushed into the future. We still have to tackle many big topics such as the capital markets in Guyana and the recent GuySuCo ‘bond’ issue, heightened government borrowing against oil revenues (a stunning US$900 million for two-year disbursement), recent trends in company profits and other financials, recent developments in the foreign exchange market, the Consolidated Fund (again) and numerous others. However, it’s probably helpful to complete the discussion on the natural resource curse instead of leaving the series open ended.

I argued that in order to make a prediction on whether Guyana could escape the curse, we have to consider the conditions prevailing in the country today and the will to overcome them. These are the initial conditions. Two conditions were identified: the limited capacity to do research in Guyana and the present production structure. With some shrewd leadership, the former constraint should not be difficult to overcome given a large Guyanese diaspora. However, in the past twenty years experts from the diaspora, with the exception of a very few, appear politically connected to one of the main parties. With the entrenched two-party political system, this approach will continue to exclude people who can contribute but are unwilling to elevate party interests above national ones.

On the other hand, it will be very difficult to circumvent the present structure of production. I think Guyanese leaders regardless of political persuasion understand the necessity to change the makeup of what the country produces and exports, but it will not be easy. Trinidad and Tobago had its first drilling in 1857 and that was the situation until in 1910 the British established Trinidad Oilfields Ltd. Professor Jay Mandle argued convincingly that with over 100 years of experience, Trinidad and Tobago (TT) did not fundamentally change the structure of exports, although there was expansion of non-tradable production. 

By 2014, the oil and gas sector accounted for 42.1% of GDP, but accounted for 85% of exports. This suggests that the changing structure of the TT economy went mainly into sectors not generating foreign exchange. These are non-tradable sectors such as construction, financial services and other services. Agriculture started its decline as early as 1968. TT experienced severe economic downturns and booms throughout its history with oil and gas. There was a major economic boom from 1973 to 1982, a severe downturn from 1982 to 1992 and yet another significant expansion from 1999 to 2008. The economic performance has been mixed in the decade following 2008. However, one cannot deny that TT has infrastructure comparable to some advanced economies. Nevertheless, the over consumption of automobiles, subsidised gas and limited space conspired to create traffic nightmares.

Over in Guyana, the projects necessary for escaping the curse will require political cooperation. Some kind of arrangement will be needed to allow both the elites of the PNCR and PPPC to claim joint ownership of the big ticket infrastructure projects and any future new industry outside the oil and gas sector. It should be noted that having first-world infrastructure will not necessarily change the structure of exports and production, but this is a necessary start. In spite of the developed physical infrastructure of TT, the country still depends on oil and gas for most of its export earnings.

Any political consensus outside of a binding constitutional arrangement will not work, especially the opportunistic type of agreement like the Cummingsburg Accord. The likelihood of reneging is very high if cooperation is not enshrined in a new constitution. Moreover, reneging is almost certain given the nature of the core support of the PPPC and PNCR. The present constitution allows for consensus through committees, but this is not enough as it does not allow for joint elite ownership of the big development projects.

Most of Guyana’s political troubles originate from the fact that the main parties derive a significant percentage of their support from one of the two dominant ethnic groups. In the past, I have labelled this strategic pro-ethnic voting. Most Guyanese, but not all, vote to keep the other side out of power. This does not mean they are bad people. It implies that these folks are faced with limited trust and information about how the other side will vote in secret ballot. Therefore, the safe strategy is for many to vote for their respective leaders who they perceive will look after their economic interests. The group that wins has a sense of victory and demands economic rewards. The group that loses has traditionally expressed a feeling of marginalization and discrimination, real or perceived.

This situation is obviously unsound since the losing group has a different perception of the future. In other words, in business and economic terms, they have a different subjective discount rate of the future. Any business must have an expected rate of return on investment. If the business owner is pessimistic about the future she will perceive a high subjective discount, which is likely to motivate her to sit on her capital or migrate. If the owner is optimistic and sees fewer looming risks, she perceives a lower discount rate and is more likely to invest.

The principle is the same for inter-group political rivalry. The winners discount the future at a lower rate compared with the losers. This is because the winners perceive better returns since their kith and kin are the leaders. The losers take the opposite position as they perceive their interests are under threat. This difference in subjective discount rate has serious implications for long-term economic growth. Common sense tells us that if we can get everyone to have a level of optimism somewhere between the high and low discount rates, the economy will grow faster in the long-term. Hence, political consensus and cooperation are necessary to get everyone marching at the same rate, thus boosting economic growth in a sustainable manner. Oil revenues will no doubt boost growth, but not necessarily in a sustainable manner.

The way to get a common perception or discount rate is not through words such as inclusion and unity, but through constitutional overhaul which legalises and institutionalises cooperation between the two dominant ethnic elites. A constitution should be seen as a form of economic institution just like laws that protect private property, patents and copy rights. A constitutional framework promoting cooperation is perhaps more important than legislation to make the capital markets work better, yet economists from the IMF, World Bank and in the mainstream don’t emphasise constitutions as central to economic growth.

However, elite cooperation enshrined in a new constitution is not without its risks. Any political cooperation between PNCR and PPPC will (not may) result in an authoritarian government, as these are instinctively authoritarian parties. The recent firing of columnists Dr David Hinds and Mr Lincoln Lewis by the Granger

government underscores the authoritarian instincts of the PNCR and the derivative politicians in AFC.

The new sizable multi-ethnic group of voters in Guyana presents an opportunity for providing credible electoral challenges to the incumbents should constitutional overhaul present an authoritarian power sharing system. This group also include independent Africans, Indians and Amerindians. Therefore, electoral reform has to be part of the institutional construct. It is perhaps the only disciplining mechanism for any power sharing arrangement between the PPPC and PNCR. Otherwise, authoritarianism will entrench the resource curse and harm post-1992 democratic consolidation. Political scientists have observed the tendency for authoritarian regimes to be rife with nepotism, corruption, embezzlement, bribery and patronage.

The independent voters of Guyana will have to play this crucial role as challenger even if there is no constitutional overhaul to promote cooperation. Otherwise, I am extremely pessimistic that Guyana can escape the resource curse since the political will does not appear to exist in the PPPC and PNCR for shaping a new law of the land.

Comments: tkhemraj@ncf.edu


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