Some worthwhile strategies, if implemented, can prevent Dutch disease

Apr 22, 2023 Letters

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Dear Editor,

With Guyana’s discovery of an enormous amount of oil and gas which has captured the world’s attention, and all eyes are now on our small country and the insurmountable potential it now has to develop the people and its respective industries, many conversations have started. The talk of the Dutch disease has also entered the discussions, and rightfully so. The question is what really is the Dutch disease?

This concept has been theorized to occur when a country’s economy becomes dominated by one industry or sector that experiences a boom in profits, and the economy as a whole becomes overly dependent on the export of resources from that sector. This phenomenon has had tremendous negative effects on resource-rich countries throughout history, with examples ranging from oil-rich nations in the Middle East to, more recently, Nigeria amidst its crude oil boom of the 2000s. Guyana, our beautiful country, recently discovered significant offshore oil reserves, and we, too, are now at risk of experiencing the symptoms of the Dutch disease. However, there are appropriate measures and initiatives that the government can take in order to effectively mitigate the impacts of the Dutch disease that may threaten our economy and, by extension, our people’s way of life. What, therefore, can the government do in order to avoid the disastrous symptoms that have arisen from the Dutch disease?

It is important to note that although the exploration and production of oil in Guyana are still in its embryonic stages, the potential impact of the country’s discovery of oil reserves warrants critical evaluation.The major oil discovery in our country was in 2015 by ExxonMobil, where the first oil production was carried out in 2019, with a volume of approximately 120,000 barrels per day. Around that time, it was estimated that Guyana has around 8 billion barrels of oil reserves from the Stabroek block, which has changed significantly today.

Guyana’s oil discovery has now branded us as an oil-producing nation with the third largest oil reserves in the South American continent and 17th in the world of oil producing nations.Importantly, the economy of the country will require a more robust framework in order to avoid the ailment of the Dutch disease. The symptoms of the Dutch disease are essentially the results of a resource boom that leads to an economic slowdown.This total economic failure can result in numerous negative outcomes such as a fly-away exchange rate that will render other businesses within the economy uncompetitive due to the value of the currency, the massive decline in the development of traditional industries that are critical to a diversified economy and this can lead to inflation, and also, political instability can arise due to some countries’ dependence on the natural resource sector to facilitate economic growth, employment and fund national budgets.

To prevent some of the aforementioned, Guyana requires diversification of its economy as the first step towards mitigating a potential Dutch disease scenario. The country already has at least three other sectors – gold mining, agriculture, and forestry, which contribute significantly to Gross Domestic Product (GDP). However, these sectors must be further promoted for development through adequate fiscal policies such as subsidies or tax incentives to prevent them from being neglected due to the new boom sector of oil and gas. Perhaps the most effective way of avoiding the Dutch disease is to invest in alternative sectors that can supplement the country’s economy. These sectors must have the potential to offer employment opportunities and revenues and promote the growth of the country’s GDP. Reducing dependency on the oil sector should be among the leading objectives of such an economic diversification plan. The diversification of the Guyanese economy will shield it from the volatility of crude oil prices and promote stable economic growth.

A significant portion of the revenues derived from oil production ought to be invested in other sectors of the economy. The government should maintain a reasonable policy on taxation schedules and allocate funds to other sectors of the economy. A portion of these funds could be ploughed into areas like infrastructure, education, and health services, of which we see some indications in this direction. If these sectors are pumped with adequate funding, it would further stimulate growth in the economy, creating more job opportunities and encouraging the growth of the GDP. Another way of achieving diversification is in the area of tourism. Guyana boasts of several natural tourist attractions, such as the Guyana Shield and Kaieteur Falls, yet they are relatively still untapped. Developing a robust tourism sector can generate funds, resulting in employment and improving infrastructures such as hospitality, transportation, hygiene, and other essential amenities.

Another strategy in Guyana’s quest to prevent the Dutch disease epidemic should be to ensure transparent and accountable governance. Guyana has a less stable political climate than, say, some countries in Europe or America, so this makes it even more crucial to increase political stability to avoid the effects of the Dutch disease. Transparent and accountable government necessitates an environment that is free from corrupt practices to ensure that oil revenues are channeled into the country’s economic growth. This step is crucial for the development of the country and the prevention of the Dutch disease. Ineffective governance and excessive bureaucracy are major barriers to economic growth, and the government must make conscious efforts in this regard to minimize some bureaucracies.

The management of the people’s revenue accruing from the oil industry is equally significant. A sovereign wealth fund or a natural resource fund, managed effectively, is an effective means of conserving revenue. The fund can be invested in other sectors of our economy or invested abroad to ensure healthy returns on investment. To make this possible, Guyana must seek counsel from countries with significant experience in managing sovereign wealth funds. Such guidance will ensure that investments are made properly, thereby reducing the risk of investing in the sector. The government should also consider exploring the possibility of investing in other countries, leveraging the revenues generated from the oil industry to acquire ownership in multinational corporations. Such investments can serve as a form of check on the effects of a drastic fall in oil prices; these investments can guarantee support from multinational corporations if an oil price crash is encountered.

Effective management of the oil sector will require ensuring adequate capacity building. A lack of skilled labour will impact negatively on the development of the oil sector. Therefore, Guyana must focus on education and training programs that will equip its citizens with the necessary skills required to work in the industry from

all ten administrative regions. Such an emphasis will ensure that ExxonMobil relies mainly on the local workforce, providing employment opportunities, and reducing the impact of the fly-away exchange rate in the economy.

In conclusion, the impact of the Dutch disease on the economic growth potential of countries, particularly those dependent on the natural resource sector, has significant negative consequences. It is, therefore, important that Guyana through the government avoids this pitfall by encouraging economic diversification, promoting transparent and accountable governance supported by effective sovereign wealth management policies, investment in education for capacity building and investments in other countries, and lastly, promoting organizational leadership that is capable of driving our country on the right path. The implementation of these initiatives is paramount to ensuring that the oil sector contributes to the development of Guyana’s economy without negatively impacting other industries.

Yours respectfully,

Hon. Jermaine Figueira

Member of Parliament

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• disease, Dutch, Hon. Jermaine Figueira, Member of Parliament, strategies

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