Oil, Government Take & Spending: Navigating Guyana’s Developmental Challenges – 4

Introduction

Because of the amount of material I still have left to cover and the usual space limitations, today’s column is confined towards advancing the discussion of the Governance Curse. This topic is third on the list of the top-ten development challenges, which Guyana’s raising and spending of Government’s Take obtained from the petroleum sector has to navigate. Last week’s column had indicated there are four remaining features to the challenge posed by the Governance Curse, which remain for consideration. Three of these are dealt with in today’s column: 1) the dangers of “regime entrenchment;” 2) the adverse impact of both rapidly rising and volatile petroleum revenues; and 3) the adverse effect of rent-seeking behaviour on the economy. The fourth top-ten challenge, the rule of law, sometimes alternatively labelled in the literature as governance matters, will be addressed next week.

1: Regime Entrenchment

The term regime entrenchment has been reserved for those governments which happen to hold office at the time petroleum wealth first comes on-stream (that is, starts production and export) in petroleum abundant developing states. As I had earlier indicated: “Such entrenchment refers to the observed phenomenon, whereby the Government in Power “wins the lottery” of the country’s resource wealth coming on-stream during its stewardship. It is observed that all too often the tremendously enhanced revenue flows lead to regime spending on benefits for its “supporters.” Such supporters include: constituents, political party members, cronies, and indeed the ruling elite itself. This spending invariably results in the waste of national wealth because it is spent on garnering support for the ruling regime instead of advancing overall national development. These ideas are much further developed in Paul Starr’s work, Three Degrees of Entrenchment, Power, Policy, Structure. I shall elaborate on this in the paragraph below.

Starr has proposed a “framework for analyzing the mechanisms and conditions for entrenchment.” In other words, he identifies the process that mediates social relations, beliefs, and governance. He highlights this process through “three degrees” or dimensions of entrenchment. These are: 1) power entrenchment; 2) rules entrenchment; and 3) structural entrenchment. The first encapsulates the mechanisms that preserve the power of members of the incumbent regime. The second encapsulates the preservation of policies/rules/regulations in the periods after their originators lose power. And the third encapsulates the conversion of practices, policies, and beliefs into regime legacies. These legacies survive the loss of political power. Further, the mechanisms of regime entrenchment involve “changes in the rules of change, costs of change, and choice-sets of actors.”  In addition, regime entrenchment is revealed as “an inter-temporal concept.” That is, it links political conditions over time!

2: Revenue Volatility

It is my conviction that revenue volatility reveals the central contradiction inherent in the notion “paradox of plenty” or the Resource Curse. The expected unprecedented yield of Government Take will greatly impact Guyana and, particularly, its economic development in the years to come. Regrettably, so too will the volatility of revenue yield greatly impact on Guyana’s governance.

Research in petroleum abundant economies clearly reveals that state revenue volatility is a “unique and leading concern.” The world petroleum market is renowned for wide swings in production, inventory holdings, supply, demand and price for its varied products and, especially, crude oil. Guyana’s future revenue streams from the sector are, therefore, undeniably uncertain. Furthermore, there is no evidence to suggest that this is likely to change in the foreseeable future.

Invariably, wide swings in petroleum revenues are likely to produce similarly pronounced swings in public expenditure. This fluctuation hampers the flow of public investments, programmes and projects. Unforeseen spending cuts become more likely. In addition, private expenditure (investment and consumption) is also likely to be infected with the difficulties, which state revenue volatility creates. This compounds, therefore, the adverse effects on 1) economic growth, 2) national income and spending, 3) the balance of payments, 4) inflationary pressures, 5) the exchange rate, and 6) other macroeconomic variables like credit, debt creation and interest rates.

Consequently, the impact of the above considerations has yielded, over the years, more often than not, poor governance. The pressures highlighted above test the political will and long-term resolve of even the most well-intentioned and democratic governments, particularly given the immense pressures on all governments to remain in power!

Of note, there is the added consideration of the “lottery” effect of petroleum wealth discovery. This means it makes such revenues appear “politically costless.” That is, Government Take appears as lottery winnings and, therefore, not having to raise revenue (tax) from “domestic constituents.” This reduces the political pain (cost)!

3: Rent-Seeking Behaviour

In this Section, I confine my comments to briefly expand on my view that rent-seeking behaviour is profoundly anti-development, inefficient, and fatally damaging to resource allocation in Guyana-type petroleum abundant economies. Following standard textbook definitions, I had last week labelled such behaviour as: “seeking to increase the share of existing wealth by economic agents without their generating new or additional wealth” (my emphasis).

In effect, at the heart of market-based economies like Guyana, its systemic efficiency depends on economic agents, whether they are producers, owners, or consumers of wealth, aiming at maximising their benefits (profits) so that,  at the margin, the market determines the ruling costs and prices of traded products. If this is not the driving incentive motivating economic agents, then economic efficiency will not obtain. Rent-seeking behaviour is inefficient, therefore, because it leads to systemic resource misallocation.

Corrupt practices flourish when rent seeking-behaviour drives incentives in economic systems. Economic agents are incentivised to extract value without producing more or enhancing productivity! Thus, for example, efforts on the part of any oil company or Partners to use their financial resources to bribe, obtain deals, or otherwise influence politicians/state officials/regulations in order to provide them with economic favours, constitute rent-seeking behaviour. Why? Resources are being spent to secure benefit for the oil company, without its adding to production or productivity, and consequently, national wealth. Such actions redistribute benefits in favour of the oil company and Partners.

Conclusion

Next week’s column will consider the adverse impact on the rule of law. This is the basis of the notion that “Governance matters.”  After this, I shall discuss the fourth of the ten-top development challenges facing Guyana’s petroleum management; namely, Absorption Capacity.

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