The Economy: The Oil Revenues relative to GDP, Economic Growth, Human Development, Income Distribution & Poverty

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With the announcement of another huge oil find and the recent release of CGX’s oil contract with the Government of Guyana (GoG), Guyana is becoming more and more attractive to foreign investors, and of course, there is likely to be heightened excitement by the Private Sector and the Guyanese people. This article seeks to answer the questions; how will the oil revenues translate to expansion in GDP, economic growth and human development? Will there be a direct impact on human development especially? And what is the difference between economic growth and GDP expansion?

To answer the aforesaid questions, firstly, a background is presented herein. In a recent article featured under this column, the author had computed on average, what the annual revenue is likely to be from ExxonMobil at 100,000 barrels per day, plus royalty which worked out to about $70 – $80 billion annually, at a price of US$50 per barrel. Using those same assumptions – under reasonable certainty – and taking into account CGX – Guyana could earn about $200 billion annually for the first three years.

Bearing in mind that other oil companies may come on board which means the oil revenue will only increase proportionately; the more oil finds made – production level may increase which would mean further increases in revenues. In fact, it was announced that by 2023 – production will increase to 220,000 barrels per day, by then, assuming oil price remains stable at US$50 per barrel, annual revenue could surpass $200 – $300 billion.

One analyst posited that oil production could reach 500,000 barrels per day – to which – this author also concurs. Incidentally, at the time of writing this article, ExxonMobil announced that production will indeed reach 500,000 barrels per day with the new discovery.

Economic logic would, however, dictate that by 2020 much more discoveries are going to be revealed and therefore production capacity is very likely to be scaled up to as much as one million barrels per day in the first decade of commercial oil production at least.

This means that in the first decade, assuming that oil price remains stable at US$50 per barrel, Guyana’s Gross Domestic Product (GDP) could reach GY$2.0 trillion or US$9.7 billion. Noting that as at December 2016, GDP was recorded at $711 billion or US$3.4 billion. Put differently, this means that in the first decade, Guyana’s nominal GDP could potentially expand by more than 200 percent.

Now, what are GDP and economic growth? And the difference between the two? GDP – which is the acronym for Gross Domestic Product – simply means the sum total of all the goods and services produced in an economy – at market values – in a given time period – usually a calendar year. Real GDP on the other hand, is a macroeconomic measure of the size (nominal GDP) of an economy adjusted for price changes and inflation.

Real GDP is then used to measure the economic growth rate. The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next. In other words, economic growth is the increase in the ability of an economy to produce goods and services over time – whereas – GDP is the monetary value of all goods and services. Economic growth, in turn, is used to determine economic welfare comparisons; international welfare comparisons; and business cycle forecasts.

However, in the context of this article – only the economic welfare component is addressed – hereunder.

Economic welfare measures the nation’s overall state of economic well-being. Real GDP is not a perfect measure of economic welfare for seven reasons: (1) quality improvements tend to be neglected in calculating real GDP so the inflation rate is overstated and the real GDP understated; (2) real GDP does not include household production, that is, productive activities done in and around the house by members of the household; (3) Real GDP, as measured, omits the underground economy, which is illegal economic activity or legal economic activity that goes unreported for tax avoidance reasons; (4) health and life expectancy are not directly included in real GDP; (5) Leisure time, a valuable component of an individual’s welfare, is not included in real GDP; (6) environmental damage is not deducted from real GDP; and (7) political freedom and social justice are not included in real GDP.

“Human development is all about human freedoms: freedom to realize the full potential of human life, not just of a few, nor of most, but of all lives in every corner of the world – now and in the future”, (UNDP, 2016).

The human development approach focuses on improving the lives people lead rather than assuming that economic growth will lead, automatically, to greater opportunities for all. Income growth is an important means to development, rather than an end in itself. In other words, human development is about giving people more freedom and opportunities to live lives they value.

In effect, this means developing people’s abilities and giving them a chance to use them. For example, educating a girl will give her a chance to build her skills, but it is of little use if she is denied access to jobs, or does not have the skills for the local labor market (cited from UNDP.org).

Yale University (2004) published a paper on “Economic Growth and Human Development”. The paper showed the linkages between economic and human development – arisen from a study – in some states. It was found that the two-way relationship suggested that nations may enter into a virtuous cycle of high growth and large gains in human development, or a vicious cycle of low growth and low rates of human development improvement.

In these states, levels of economic growth and human development are mutually reinforcing, either leading towards an upward spiral of development, or a poverty trap. Countries may also find themselves in a lop-sided state, at least temporarily, with relatively good growth and relatively poor human development and vice versa.

There may be various reasons for “economic growth lopsided” nations, that is, those which have high rates of GDP growth relative to improvement in human development indicators, including low social expenditure, government corruption, or inequitable distribution of incomes. The resultant effect of such cases suggests that good economic growth not accompanied by increases and/or improvements in human development may prove to be ultimately unstable.

Concluding remarks

In putting the aforementioned discussions into perspective – what all that preamble simply means – is that – with the potential huge growth in GDP (by almost over 100 % in the first decade, transforming the economy into a trillion or potentially a two-trillion-dollar economy), on account of large sums of oil revenues – does not necessarily mean that the quality of life on a broader spectrum – will be improved and/or experienced by a wide cross-section of the Guyanese people.

It does not guarantee real economic growth against the background of the human development paradigm – with respect to poverty reduction in particular.

Case in point, with the largest retrenchment in Guyanese (recent) economic history of some 10,000 sugar workers – having the far-reaching implication of further adversely affecting about 40,000 dependents – is a huge real blow in this regard.  This outcome has in effect taken away approximately $10 billion in income distribution to these workers and the broader economy annually.

This means that the economic and social well-being of these people are going to decline rather rapidly and oil revenue would not necessarily create direct employment for them. There are a number of government programs nonetheless aimed at re-engaging these people in productive income generating activities such as training with new skills – namely carpentry and plumbing etc. But these measures, though designed with good intent, will not compensate for the economic loss incurred, neither would it give rise to stability and progressive growth in the income distribution of these thousands of retrenched people.

(In a subsequent article, these thematic discussions will be advanced in greater depth under a different topical subject).

*The author of this column is the holder of a Master of Science Degree from a UK university in Business Management, with a specialism in Global Finance and Financial Markets.

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