The natural resource curse and plutocratic manoeuvres in motion

Many Guyanese are now aware of some version of the natural resource curse (NRC). One taxi driver explained the idea to me last week and he also gave the Dutch disease a good shot. Economists have been pondering these ideas for at least three decades. They, however, tend not outline the transmission mechanisms of the NRC. By transmission mechanism, I mean what is taking place on the ground floor as the abundance of the resource engenders private and government corruption, rent seeking, de-industrialisation, misdirection of resources, overconsumption, civil conflict (in several cases) and, ultimately, poor long-term economic outcomes compared with countries with limited or no natural resources.

As I mentioned in previous columns and presentations, the NRC was evident for a long time through the gold sector which earned export revenues amounting to US$818 million and US$767 million 2017 and 2018, respectively. These amounts are what we know from the official statistics. The unofficial or smuggling channel would likely push the overall gold export number beyond US$ 1 billion per year. As most estimates have suggested, oil revenues in the first few years will likely be between US$280 million and US$420 million – but these go directly to government. Going forward, economic distribution will be shaped not by market forces, but by the control of government – hence the no-confidence motion, the response with de facto power by the PNCR to neutralise the PPP’s de jure power, and the bending and twisting of the constitution, known for its myriad loopholes and ambiguities. Of course, only those with the de facto power can do the bending and twisting. The PPP also loves the loophole-packed constitution but fails to appreciate that it can only enjoy its fruits of enriching a few when de jure power is accommodated.

I want to discuss a micro level or ground floor manifestation of the NRC and not the aggregate tit-for-tat political conflict we see in public display today. The expectation of oil bounties is shaping behaviour today in the private and government sectors. Take, for example, the three-pronged attack on sole proprietor business X, which does medium-scale fishing and sits on a coveted piece of wharf that the nascent oil capitalists desire. The owner of business X started out with a single self-refurbished trawler in 1990 and today has several boats and employs directly over 75 workers. At one point before the catfish embargo, business X was able to offer poor cuirass fishermen G$80 per pound instead of the prevailing G$20. This businessman could previously offer the higher price because through a process of learning by doing – an idea fundamental to our understanding of long-term economic growth – he established a foreign market for the cuirass.

Meanwhile, Big Fish upriver, financed by foreign capital but run by Guyanese, wants a monopoly on all trawlers and already possesses almost complete monopsony power when buying shrimp and fish from boat and trawler owners. Big Fish has been trying hard to push out business X for several years because he wants not only monopsony power when he buys, but also monopoly power when he sells.

The third prong of the attack on business X relates to the fact that he ticks a few of the stereotypical boxes. Firstly, he received a licence during the PPP term to import trawler fuel. Secondly, a family member owns a gas station. In spite of the licence, the accusation of fuel smuggling prevails from an official quarter. Thirdly, he is perceived to be a PPP supporter since he received the fuel concession from previous administration. The fuel can only be used for trawlers and not for sale at the gas station. Business X knows there is no economic gain from the latter since it damages the pumps and other machines.

It is not only Big Fish who wants to carve out a monopoly; the new class of plutocrats are following the example of the Jagdeoian Newly Emerging Private Sector (NEPS) by locking down several import licences – fuel licence in this case. Even if one can’t achieve a monopoly, an oligopoly will do. As we say in economics, fuel has low price elasticity and high income elasticity. The person who captures this sector (or a good percentage of it) becomes a billionaire in a short period of time – thus making the sector highly prized.

Business X, however, faced the forces of the market, world oil price shocks requiring closure for several months, and anti-competitive practices from Big Fish and others to survive up to this point. Moreover, these days, business X has been harassed by the tax authorities and regulators since 2015. Someone or a few people with political connections have been harassing business X and the gas station vicariously through mid-level government officers. Scientific tests have found no evidence that the heavy fuel for trawlers have been sold at the gas station. As I have noted in these columns, marginalisation and discrimination tend to be largely executed on the middle floor. In this essay, I am adding that the marginalisation and discrimination are motivated by the desire of someone from one side of the divide to capture monopoly rights.

The emerging oil capitalists want the wharf as well and do have their indirect channel for making it difficult for the medium-scale fishing operator. The business may not survive because of how much speculative value waterfront properties hold. Another reason why the business might not survive is because “policy makers” on the top floor are either asleep or remain passive in the face of the challenges created by mid-floor operators. Several in government still believe that a farmer who owns a 10 to 20-acre plot of land in the flood-prone coastal plain is rolling in money. The tax authorities have been busy in that direction too.

It would be sad because what will be lost is not so much the entity business X, but close to 30 years of learning by doing, of trial and error, of know how – some of the true forces of economic growth. One political leader may believe his/her supporter could fill the gap, but it will not be that simple. These things take a long time.

The top floor has simply failed to anticipate these very predictable events that are associated with the coming natural resource boom. If business X fails, we cannot say it is a case of de-industrialisation since this is not a large-scale manufacturing enterprise. Nevertheless, it would be a clear case de-diversification. If the economy is going to escape the resource curse other businesses have to survive. Land up river should have been available by the policy makers for exactly these kinds of small and medium-scale operators. Unfortunately, in anticipation of a quick flip, individuals connected to the previous government and the present one have locked down the best riverfront real estate. Land speculation will only compound the troubles of businesses like X.

Making non-oil businesses thrive in the coming years is the ultimate “local content.” Local content is not the best name; industrial policy for me is the better term. The “local content” idea goes back to at least Alexander Hamilton’s Report on the Subject of Manufacturers in 1791. Hamilton did not frame his ideas as local content but that is exactly what he was saying. The Germans would later copy Hamilton’s industrial policies and adapt them to their context.

Why should a foreign oil company own land and establish buildings in Guyana? Office space and buildings should be made by Guyanese capital and rented to oil companies. Joint ventures between Guyanese and foreign capital should be encouraged for this purpose. If Guyana provides the buildings, the country earns a bigger share of the oil revenues and government gets its cut in VAT.

The African Business Roundtable could be given Hamiltonian subsidies to produce some of these buildings instead of trying to flip an oil block. The government could sell the blocks in transparent auctions and use some of the monies to fund kibbutz-like African village farms on accepted communal ancestral lands instead of using ethnic networks in government to achieve reparations for four or five people. Now, all these things require a vision of a coherent, transparent and impartial industrial policy framework so as to optimise local content. The latter is just small subset of the former.