Hello Guyanese citizens, in this video, we want to explain what is called the “resource curse” as it is something usually associated with oil and can relate to Guyana’s new oil industry.
The “resource curse” is a term created by researchers who observed that some countries with an abundance of natural resources – specifically oil, gas, gold and diamonds, and other minerals – tend to underperform their peers who have no such natural blessings. It is also known as the “paradox of plenty.” By underperformance, it means they tend to do worse in the usual development outcomes such as per capita income, human development index, gender equality, poverty measures and a few others. However, there have been a few notable exceptions to the notion of a resource curse including Botswana, Norway, Dubai. Additionally, there are some small countries that have done relatively better with little or no natural abundance including Barbados, Mauritius, Singapore and others.
Will Guyana become the next Botswana or Dubai? Or will it become more like the exemplars of the resource curse – Equatorial Guinea and Angola (seen as extreme failures) and Trinidad and Tobago (a semi-failure)? The resource curse is not inevitable, but we must understand some of the channels through which it can manifest itself, and plan to avoid the pitfalls.
The natural resource curse occurs when governments develop an unhealthy dependence on natural resource exports and fail to plan for a balanced and diversified economy or to support other industrial/economic sectors beyond the major resource. Guyana could fall a victim to this if its natural resources which include petroleum, minerals, forestry and agriculture/fishing resources are not managed correctly and if there are no transparent mechanisms for accountability. Yet there are some good cases of countries that are trying to manage their resources well. The NGRI has a ranking and Chile is a good example.
An example of a country experiencing the resource curse is Venezuela, Guyana’s neighbor to the west. It is estimated that Venezuela has the largest oil reserves in the world at about 300 billion barrels. However, over the last several years the citizens of Venezuela have been fleeing their country by risking their lives to cross over into Guyana or sailing to Trinidad to avoid widespread poverty. With oil hovering around US$60 a barrel now, Venezuela has potentially US$18 trillion of oil reserves or about US$634,000 dollars per citizen. Thus, with all this oil wealth, it is a paradox to see images of Venezuelans standing in long lines for food and gasoline. The death rate of Venezuelan newborns has also increased. There is runaway inflation and the overall conditions have sparked a refugee and migrant crisis in the region, resulting in over 4 million Venezuelans fleeing into neighbouring countries, according to the UN Refugee Agency (UNHCR).
Part of the resource curse in Venezuela is directly linked to “mismanagement” and “corruption” of the country’s wealth. Money from the Venezuelan Sovereign Wealth Fund (PdVSA) were siphoned off resulting in the neglect and maintenance of the capital-intensive oil industry (exploration of new wells) and diversification into other economic sectors i.e. manufacturing, technology, etc. In the end, this has resulted inflation and out migration etc. Other countries have also followed the path of resource curse.
A country may fall under the resource curse spell as a result of being too dependent on the resource to fund projects that may take several years to complete. The country may take out large debts that are borrowed against future income from the resource. This type of borrowing can have devastating consequences for a resource such as oil whose price has fluctuated wildly over the decades. For example, in 2020, the price of oil dropped below what it cost most countries to produce it. Thus, a country that was depending on oil to build bridges or airports may have difficulty repaying the loans that were taken out against future oil income. This can lead to some of the country’s most important assets being owned by foreigners whose interests are not the well-being of the country’s citizens.
The potential riches in the oil sector may cause the country’s other industries to suffer which in the long term is detrimental. Workers in the agricultural industry may find better paying jobs related to oil. Doctors may abandon their profession because running an oil business may be more financially lucrative. This draw of the resource industry may cause the country to become imbalanced and more dependent on outsiders for food and medical care. When the price of the resource drops to where it is no longer profitable, the country may not have enough farmers to feed itself or be able to produce enough basic medication.
The average citizen’s lives may become harder when an abundance of a resource such as oil is found. If a citizen is not lucky enough to have an oil related job, then that person may be outbidded for housing by a more highly paid counterpart at an oil related company. Take for example, janitors. If they work at a school, their pay may significantly be lower compared to a janitor that works at an oil services company. The janitor at the oil services company may then be able to afford a house at a better location closer to supermarkets and hospitals compared to the one with lower income.
For countries experiencing natural resource course, the government in power may try to hold on to power by attempting to circumvent democracy to benefit their party. Those holding the top jobs for the party in power may try to benefit the most from the natural resource riches.
While the natural resource curse tends to hold for most resource-rich countries, there are several noticeable exceptions such as Norway and Botswana, which implemented intentional measures to avoid the curse. Therefore, the resource curse ought not to be inevitable. It would be better for us to think about natural resource abundance as a double-edged sword of both dangers and favourable possibilities. There are, however, many more conspicuous success stories among countries with very little natural resources.
Guyana’s oil production is in the early stages but already there are troubling signs with respect to the natural resource curse.
- The inadequate signing bonus paid for the Stabroek Block was initially hidden from the public by the government.
- The allocation of the Canje and Kaieteur oil blocks to companies without any ability to drill for oil in Guyana’s ocean is highly questionable.
- Allowing the oil companies to flare Guyana’s gas without imposing penalties similar to what companies would face in their home countries is concerning.
- Both major political parties failed to uphold the laws of Guyana with respect to the award of 600 blocks when Guyana laws state a 60-blocks maximum.
Could Guyana escape the natural resource curse? Whether Guyana evades the curse will depend on many factors:
- How transparent is our government on the oil income and spending?
- Ensuring we receive an overall fair compensation for our oil.
- Ensuring that oil money is spent on projects that grow the economy not on “Pork barrel” projects.
- Upholding the laws of Guyana with regard to such issues as flaring and illegal contract awards.
- Adequate preparation, capacity building, and planning that involves all stakeholder groups; monitoring, and a policy and regulatory framework that ensures strong resource accountability measures.
- Ensuring there is a Master Plan such as a 10-year Plan for balanced investment and development in mining, oil and gas, forestry, bauxite, manganese, manufacturing, agriculture and fishing, services, etc. to ensure there is not an overdependence on petroleum to the exclusion of other sectors.
- Government needs to activate the revised Natural Resource Fund in an inclusive governance process that is representative of all interests in the society. The monitoring and watchdog role of a strong regularity and policy framework can be a deterrent to the country falling into a resource curse trap.
There are positive signs that Guyana may be headed in the right direction to minimise the curse. First, the release of the Stabroek Oil contract was a big step. It exposed that the oil companies do not pay taxes and the contract has a clause that prevents Guyana from correcting a contract that possibly includes illegal terms. The contract release also enabled analysis to show how unfair is the 2% royalty we receive for our oil, compared to Suriname’s 6.25%; Guyana is being shortchanged tens of billions of dollars. Second, Guyana being involved in the Extractive Industries Transparency Initiative (EITI), should enable some transparency with regards to how much income Guyana receives from oil and where the money is being spent. The most positive sign is our major newspapers are educating the public on oil issues and exposing corruption with regards to our oil. In the end, ALL Guyanese must play their part and hold political leaders accountable for the new-found oil wealth by voting and engaging in more civic participation with regards to our oil wealth. Otherwise, Guyanese may suffer the same fate as Venezuelans and other countries where oil has turned out to be more of a curse than a blessing.