Guyana Petroleum Road Map Part 2 Guidepost 3: More on spending gov’t revenues to confront the expected “top-10 economic challenges”

Introduction

This week’s column continues my evaluation of what I had earlier labelled: “a non-exhaustive list of the top-10 economic challenges”, which the Government of Guyana (GoG) will have to confront with First Oil due in 2020. Three of these challenges were briefly addressed last week namely, the Dutch Disease, the Resource Curse/Paradox of Plenty, and the Governance Curse. Today’s column addresses a further three top-10 challenges. Those are: Absorptive capacity, the Enclave Economy and Implementation Lags. Because of space constraints, I plan to discuss three more challenges from the remaining four items on this list, in next week’s column.

Challenge: Absorptive Capacity

As I had posited earlier in the evaluation of this challenge, I believe that, intuitively, most readers acknowledge severe constraints, bottlenecks, and impediments, constrain both the capacity and flexibility of Guyana’s economy, in circumstances where expansionary spending is occurring. Indeed, this phenomenon had long been acknowledged in the field of business management, where the notion of absorptive capacity was originally developed. It was noted that, for a firm/ business its ability to acquire, assimilate, transform and commercially exploit, knowledge/information that are external to it defines its absorptive capacity.

For an economy like Guyana, this concept is proxied by what economists term as its output or GDP gap. Measurement of this gap however, is not straightforward. It is in fact very difficult. And this is basically, because all market-based economies operate with continual “ups and downs”. Such fluctuations are impelled by a range of factors: seasonal, cyclical, secular, and also random exogenous occurrences.

As my earlier evaluation had indicated, statisticians face the Herculean task of isolating the “regular and irregular ups and downs” of economic activity, in order to isolate the economy’s underlying long-term trend growth. This trend measures the economy’s productive capacity. Economists’ term this an indicator of Guyana’s potential output/GDP. This potential is the maximum amount of goods and services Guyana can produce, when operating efficiently at or near full capacity. Furthermore, just as Guyana’s GDP fluctuates upwards and downwards continually, so too does its output gap!

As a side observation, analogous to the output gap is Guyana’s unemployment gap. This latter is estimated as the employment rate, which is consistent with a constant rate of inflation. In technical language, this is referred to as “the non-accelerating inflation rate of unemployment (NAIRU), or the natural rate of employment.”

Challenge: Enclave Economy

Turning to the economic challenge of an enclave economy, in Guyana this notion refers to the situation in which, well-capitalised foreign-owned enclave firms extract petroleum for export to the rest of the world, where it is either consumed and/or processed and re-exported. As this develops, the enclave petroleum firms maintain minimal linkages and connections to the rest of the domestic economy, which hosts it!

In a small economy like Guyana, the consequence of this is an economic system where what is produced is not largely consumed domestically (directly or indirectly). The enclave economy is therefore, distinguished by the peculiar feature of its not being integrated into the remainder of the domestic economy; and alongside this, it remains closely integrated into the rest of the world!

Furthermore, one typically observes that, in relation to the rest of the local economy, the enclave petroleum sector “crowds out” most, if not all, other domestic sectors. Thus, for example, this sector commands the best of the locally available skilled labour. And, it attracts the best of the educated, and trained population. In the latter case, this is due to the higher wages it can afford to pay.

Additionally, one can clearly discern that, the petroleum sector typically pays higher wages and salaries (thereby attracting the best of the skilled labour). Because of all this, the petroleum sector achieves higher levels of technology transfer and adaptation! As a final rule, this sector also utilises far superior technology (indeed one might say “global cutting-edge” technology like the ultra-deep offshore petroleum extraction in Guyana) and therefore higher ratios of capital to output and investment than the remainder of the local economy. Regrettably, the local economy represents the virtual opposite constellation of economic and structural circumstances. That sector has low capital intensity, low wages, low productivity, low skills, low technology transfer, and low technical adaptation!

As was pointed out in my earlier column, researchers of this phenomena, identify four sets of linkages and transmission channels, through which public policy should be directed at promoting linkages, spillovers, and connections in order to spread the economic benefits derived from enclaves.

Challenge: Implementation Lags

In the Guyana Petroleum Road Map, the term “implementation lags” refers to all delays encountered during the country’s preparations for its coming First Oil in 2020. It therefore covers 1) a recognition lag, or the time it takes for the Authorities, industry operators, and other key stakeholders to accept comprehensively the imminent development of Guyana’s petroleum sector 2) a decision lag, or the time it takes to create a policy response to this, and 3) the effectiveness lag, or the time it takes to get the complex state machinery operating in a manner designed to deal with this coming formidable challenge.

In this formulation the State is treated as complicated, because this refers not only to its executive function, but simultaneously to the legislative; judicial/legal; security; institutional; financial management and fiscal/regulatory dimensions. At the core of this complexity is the issue of timing. This core complexity makes implementation lags far from unique to the petroleum sector. Indeed lags are a common phenomenon worldwide and lessons can be drawn from these experiences.

Several analyses have researched implementation lags in preparation for a coming petroleum sector. Some of these works are however, speculative, abstract and theoretical. Nonetheless, a small number are empirical evaluations and case studies. These latter are particularly helpful in providing guidance on the lessons to be drawn from other countries’ experiences. I had concluded in my earlier column that, for Guyana to avoid implementation lags related challenges (falling under the rubric natural resource curse/paradox of plenty), it is very necessary, for Guyana to draw on global experiences.

Conclusion

Next week I continue with three more of the top-10 challenges.