TT lessons for Guyana

As one can imagine, there is a great deal of excitement in Guyana concerning how becoming a petroleum exporter will benefit the country. It is important to note however that using petroleum to achieve development is easier said than done. In the Journal of Economic Perspectives, Anthony J Venables acknowledges that “using natural resources to promote economic development sounds straight forward.” However, though he agrees that in principle a country could use those resources to create the human and physical capital that can be used to support employment and generate economic growth, he warns that “in practice, this transformation has proved hard.” Venables writes, “indeed, few developing economies have been successful with this approach and economic growth has generally been lower in resource-rich developing countries than in those without resources.” Guyana needs to look no further than Trinidad and Tobago to gain insight into what it may face in the future when a petroleum export industry becomes part of its economy. According to Jay R.

Mandle’s report “Guyana’s future as a petroleum exporting state”, of particular importance from the perspective of gaining insight into Guyana’s possible economic future is the fact that Trinidad and Tobago, like many other petroleum exporting nations, has had only limited success in diversifying. As a result, it is a nation to which the term “resource curse” or “Dutch disease” is often applied.

Taken in isolation from the rest of its economy, Trinidad and Tobago’s energy sector has been quite successful. However, the structure of the Trinidad and Tobago economy is lopsided as the energy sector is responsible for a significant amount of the country’s total exports. This is one of the reasons it cannot be considered a developed country, and the lack of diversification of the economy means that it possesses little resilience to shocks in the global energy market.

There are aspects of Trinidad and Tobago’s experience that could help Guyana formulate effective diversification policies as it becomes a petroleum exporter. The first and most important fact that will emerge in the new environment is that it will be much easier for the government to finance new investment projects.

Roads and the port could be greatly improved and the supply of electrical power made more reliable.

Petroleum thus could provide the resources for the extensive upgrading of Guyana’s infrastructure that diversification will require.

Furthermore, the Trinidad and Tobago experience also suggests that the problem of an excessively strong currency impeding diversification can be avoided. At the moment, Guyana’s currency floats against other currencies. It therefore might well become overvalued when oil dollars arrive in the country. But when that day comes, Guyana could avoid such an outcome, as did Trinidad and Tobago, by pegging its currency to the United States dollar or an index of internationally traded currencies. With the accumulated reserves that petroleum will bring to the country, its central bank could undertake decisive interventions in foreign exchange markets to offset an excessive strengthening of the Guyanese dollar. If at the same time sufficient caution is exercised concerning the increase in the domestic money supply, and inflation is avoided, the real effective exchange rate too can be managed.

Dutch Disease in Guyana is not inevitable. They just need to learn from our mistakes.