Today’s column considers the second topic in my list of the top ten developmental challenges, which the spending of Guyana’s significant estimated Government Take from the petroleum sector must navigate. That is the Resource Curse. Before tackling this topic, I shall briefly wrap-up last week’s discussion of the first challenge, the Dutch Disease threat.
As noted, at the economic core of the Dutch Disease phenomenon lies two economic traits; namely, a tendency towards nominal and real exchange rate appreciation plus the growing global loss of competitiveness in the affected economy. Experience suggests the implementation of three policies. These are: 1) policies directed at slowing the rate of exchange rate appreciation 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 modulates rapid inflows of foreign exchange and stems the consequential rise of national spending.
The observation, however, which I wish to add here in order to close the discussion is that the increase in national savings does not have to come only from the state sector through a SWF. The evidence shows that mechanisms designed to increase savings from other sectors (such as households and domestic business) can produce the same policy effect for navigating the Dutch Disease…..