Don’t be fooled by rising GDP

Apr 03, 2022 News

– Oil already widening gap between rich and poor – Int’l Economist

By Kiana Wilburg

Kaieteur News – The Government of Guyana has boasted that the oil sector which has experienced an increase in oil production from 120,000 barrels of oil per day (bpd) to 340,000 bpd is poised to drive Guyana’s growth to historic levels.

International Economist, Terence Yhip

In fact, Senior Minister with responsibility for Finance, Dr. Ashni Singh had disclosed during the reading of this year’s GY$552.9B national budget that Guyana’s real Gross Domestic Product (GDP) is projected to grow by 47.5 percent. It is a level of performance no other country in the world is forecast to achieve in 2022.
While Guyanese should feel justifiably proud of the fact that their country’s GDP has been growing the fastest, and will continue to do so, Terrence Yhip, an economist, says citizens must not get carried away just by the sheer size of such figures as they, in isolation, are not an accurate reflection of the country’s wellbeing, and more importantly, the wellbeing of citizens. Indeed, “Income disparities persist across the land, and the problem is severest amongst Amerindians in the hinterland.”
Yhip explained in a note to this newspaper that GDP tends to spike for countries which are starting out with a low GDP base, blessed with high-valued natural resources, (e.g. copper, oil and gas) and choose to do rapid spending or investments with the earnings made. “For example, Nauru (a tiny island country in Micronesia, northeast of Australia) is a good example of a country where high income inequality exists but where a natural resource bonanza caused income per capita to surge from a few hundred US dollars to more than US$27,000 from the export of phosphates after 1982. Nauru had become the richest country in the world for a short while. Unfortunately, however, not every Nauruan man, woman and child received that amount of spending power.”
The economist further noted that several other countries had embarked on ambitious investment projects between 1975 and 1978 after oil prices spiked in the early 1970s and created a windfall. “As you can see from the chart (attached to this article), in all cases, GDP growth per capita worsened after the big push (of oil money into the economy). Growth per capita dropped sharply in Trinidad and Tobago and Ecuador, whilst output per capita even dropped in Venezuela, Nigeria and Bolivia in the period following the investment booms,” the economist said.
He added, “Venezuela spent 40 percent of the windfall on public investment. Nigeria stands out because it invested so heavily, saw paltry results during the boom but a big decline after that. Bolivia’s investment drive was equally a disaster. The country suffered its first major economic crisis in 1978-1986 that started with external debt default in July 1978. What were the causes of the failures, not only in the 1970s but also in every decade after?”
In answering this question, Yhip noted, in summary, that the scale and pace of public investments were simply beyond the ability of the country to properly absorb same in an effective and efficient way. He said too that difficulties in managing the economy and controlling corruption also made matters worse.
Turing to Guyana, he noted that there are some critical facts readers ought to pay attention to. For most households across the country, Yhip articulated that it is still a struggle for families to make ends meet. In fact, he noted that income inequality continues to be a major area of concern while adding that it has worsened over the many years. He explained that one way of measuring the gap between the rich and poor is the Gini Index, a number that ranges from 0 percent to 100 percent. Higher values mean higher inequality. With this in mind, the economist pointed out that Guyana’s Gini Index rose from 46 percent in 2006 to 52 percent in 2019 (World Bank data). In simpler terms, it means that the gap between rich and poor widened in 2019.
In concluding, Yhip said, indeed Guyanese should feel justifiably proud of the fact that their country’s GDP has been growing the fastest, and that Guyana is one of a few bright spots in the world. In fact, he highlighted that GDP per capita will reach an estimated US$14,000 in 2022 and US$20,000 in 2023 (at current exchange rates).
The economist warned, “But one must not get carried away by these large averages. Every Guyanese man, woman and child of every household will not be getting these incomes. The oil money will not erase absolute poverty, nor will it reduce income inequality overnight.”
The industry expert continued, “Reducing income inequality will require increasing employment, wages and transferring income. Experience has shown that the most effective and enduring remedies are a vibrant economy that generates high paying jobs, facilitates workers’ mobility across jobs and sectors, with policies in place for improving labour skills.”
Yhip said transferring income does have a role but the programmes must be well designed and delivered or they can become a dependency and a heavy burden on government budgets.
In this day and age when information is at one’s fingertips, Yhip emphatically stated that it would be unforgivable if Guyana were to commit the very same errors that so many failed oil-rich countries have made. By contrast, Yhip said Guyana can adopt best practices of relatively successful natural-resource rich countries, such as Chile and Botswana, and beat the odds.