The Economy: Sovereign Wealth Fund vs. Infrastructure Development
There has been much public discussions with respect to the creation of a Sovereign Wealth Fund (SWF) to manage Guyana’s oil revenue – as we enter into commercial oil production in 2020. This article, however, seeks to stimulate a different focus with regards to the public debates on this subject matter – in addressing the question on whether Guyana needs a SWF at this time, or at least for the first decade after the commencement of commercial oil production. In doing so, the article presents, firstly, a definition of a SWF and its role and objectives, followed by a deeper thematic discussion in addressing the question raised herein.
A SWF is a mechanism of moving a country’s savings and investments from present to future. SWFs are managed in different structures ranging from Central Banks to private investment corporations. There are four basic benchmarks put forward by Ang (2010) with respect to SWFs to the extent where they should take into account the economic and political context underpinning the establishment of the SWF, and the role that the SWF will pay as one part of government overall policy. The first benchmark is legitimacy – which should ensure that the capital of the SWF is not immediately spent and instead, is gradually disbursed across the present and future generations.
The second benchmark is that it should recognize the implicit liabilities of the SWF by taking into account its role in government fiscal and other macro policies. The third is setting the performance benchmark which should complement the governance structure of the SWF. And fourthly, the long-term horizon requires a SWF to consider the long run equilibrium benchmark of the markets in which the SWF invests and the long-term externalities affecting the SWF.
Conversely, instead of a SWF, there is another such like mechanism referred to as a Stabilization Fund or often times called a ‘Budget Stabilization Fund’. This type of fund usually has clearly laid out rules for the deposit and withdrawal of resources to smooth the fluctuations (deficit/surplus) in the government budget. It is usually funded from excess revenues, but their purpose is to help ensure that earnings or profits are spent – through the budget process – in a way that makes it possible to share the wealth with future generations (IMF, 2013 & Loppnow, 2009).
That said, do we really need to have a SWF when Guyana is still considered a third world country, and thus largely underdeveloped in many respects? Or, should the revenues be utilized to pursue massive investments in infrastructure, education, healthcare, security and information technology etc., which the country unarguably, badly needs?
The Impact of Infrastructure Development on Trade & Economic Development (Empirical Evidences)
Citing an Asian Development Bank Institute (ADBInstitute) Working Paper (2015), infrastructure plays a key role in facilitating trade in Asia. It was found that improvements in transport infrastructure such as the road density network, air transport, railways, ports and logistics have resulted in increased trade flows. Information and communications technology (ICT) have also enhanced trade, as the number of telephone lines, mobile phones, broadband access, internet users, and secure internet servers are found to have positive trade effects for both exporters and importers in Asia. Henceforth, though traditionally more attention has been given to hard infrastructure, the impact of soft infrastructure on trade flows ought not to be ignored and thus be more thoroughly examined (ADBInstitute, 2015).
It should be noted too that the quality of infrastructure is as important as the quantity; any poorly performing infrastructure may create obstacles for economies to meet their full growth potential. Having quality infrastructure benefits more in producing productive and efficient output, thus has greater impacts on sustainability in economic growth. As markets integrate more, the role of infrastructure should be important. Economies that still score low in regard to physical infrastructure should invest more in road density, rail and port facilities to facilitate doing business.
ICT infrastructure especially basic infrastructure such as broadband access, internet security, and telephone lines should be emphasized for communication benefits and to ease financial transactions between trading partners (ADBInstitute, 2015).
Another classic example of an oil-rich country that has pursued a similar strategy is Dubai. How did Dubai get so rich – was it really the oil revenues or locking away oil revenues in a SWF? To answer this question the answer lies in what Dubai actually did with their oil revenue at the onset– in that how was it spent? Dubai is the second wealthiest emirate in the United Arab Emirate (UAE) after Abu Dhabi which is the capital state. Dubai’s massive transformation has taken place over the last four decades, managing to shift their economy from fishing and trading to tourism, shipping, and finance. Dubai’s image is synonymous with luxury, multi-billion real estate ventures; 12 million visitors in 2005; and a Vanity Fair has described it as a “city on crack”.
Surprisingly, Dubai’s Gross Domestic Product (GDP) is not driven by oil per se – in fact, about 95 percent of Dubai’s GDP is not oil based. Dubai had discovered that it had limited oil and gas reserves (1/20th of the reserves of Abu Dhabi) and was thus determined to build up an economy that could survive the end of the oil boom. To this end, Dubai invested massively in infrastructure development. With the creation of ports, Dubai established itself as a hub of trade by sea and a center of tourism and business travel by air. There are a plethora of examples underpinning the huge economic success of this country which is beyond the scope of a single article. Hence, at the end of this article, the author has placed three links that readers can access (at their own leisure time) in this regard.
Citing the National Development Strategy (Guyana) document, recognition has been given to the fact that Guyana is very poorly supplied with roads. The gross inadequacy of the transport system affects the country’s social and economic development in many ways. For example, it increases productions costs and as such, constrains our national competitiveness particularly in the mining and forestry sectors. It also inhibits our capacity to fully utilize those natural resources that are not located on the coastland.
And, by limiting communication between those who live on the coastland and those who inhabit the hinterland, effectively divides the country into two almost unbridgeable cultures. Moreover, and perhaps more importantly – it acts as a barrier between the unity of the country both in a physical and spiritual sense: because it seems difficult to think as Guyanese and act as one nation. There is also a restriction to the coastal population’s penetration of the hinterland regions and as such, forces coast landers to live in a cramped and crowded manner on the coast, struggling and competing for land – space and other amenities, while more suitable areas are available farther south. Failure to occupy a larger part of the country tends to somewhat logically bolster some of the territorial claims by neighboring countries.
Finally, within these contexts, Guyana does not necessarily need a Sovereign Wealth Fund at the onset of oil production. Rather, a Stabilization Fund would be more suitable which would effectively reduce the heavy reliance to borrow funds externally. In essence, locking away large revenues in a SWF would mean that other countries and multinational corporations would enjoy the direct and immediate benefits of such funds for it will be used for such like investments – while Guyana will remain largely underdeveloped.
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*The author of this column is the holder of a Master of Science Degree from a UK university in Business Management, with specialism in Global Finance and Financial Markets.