Guyana's Oil. The Resource Curse and How to Overcome It

Term Paper, 2019

36 Pages, Grade: A


Table of Contents

1. Overview of Guyana’s Economy

2. Discovery of Oil

3. The Resource Curse and Dutch Disease

4. Sovereign Wealth Funds

5. Global Examples of the Resource Curse and Dutch Disease
a. Norway Oil Market
b. The Chilean Copper Market
c. Trinidadian Sectoral Shift
d. The Political and Economic History of the Neighboring Venezuela Oil Industry

6. Guyana’s Solution May Lead to the Presource Curse

7. Conclusion


The discovery of an abundance of essential natural resources can have a tremendous impact on the economic, political, and social dynamics of a nation. Logically, countries with large endowments of natural resources should have a flourishing economy. However, many underdeveloped yet resource rich countries have fail to achieve development and a rising standard of living for their populations. In fact, resource windfalls are often associated with stagnant economic growth. This phenomenon is known as the “Resource Curse.”

In 2015, Exxon discovered high grade crude oil 120 miles off the coast of the small South American nation of Guyana. Latest estimates indicate that Guyana has over five billion barrels of recoverable oil, making it the seventh largest oil producing nation per capita in the world. Yet, Guyana is also one of the poorest nations in the Western Hemisphere with a GDP of only $3.68 billion USD. However by 2025, Guyana’s oil revenue will increase the nation’s GDP by four times its current worth. Many experts, have feared the accelerated economic growth can have devastating lasting effects on the Guyanese economy. In this paper, I will examine Guyana’s current economy and their potential risk of falling victim to the Resource Curse. I will also discuss the experience of other nations that have struggled to cope with the Resource Curse. Lastly, drawing on the lessons of other countries I will present a framework of strategies that Guyana can equip themselves with in order to flourish.

In 2015, Guyana gained the World’s attention through Exxon’s discovery of high quality crude oil. This discovery will propel the small nation into becoming one of the world’s top oil exporters. Typically, oil, gold, diamonds, and various other high valued natural resources have been coveted by many nations as their economy’s primary export. The discovery of an abundance of a high value natural resource should add worth and create a sustainable increase to its economy. The people of the nation should have a high quality of life, and the infrastructure of the nation should flourish. Yet, various nations that are resource rich have experienced a paradoxical effect in which their reliance on a high value natural endowment as their primary source of revenue has adversely effected their overall economic growth. Stagnation and instability are often seen in these nations. Conversely many resource poor nations have had great economic success. This paradox has been attributed to what is commonly known as the “Resource Curse.” The first questions that may come to mind is: Why does this occur and can it be prevented? Also, who is susceptible to the Curse?

In this paper, I will discuss Guyana’s current economic profile and how the nation will be impacted by the discovery of oil. I will also discuss the Resource Curse and a related idea, the so-called “Dutch Disease,” and explore how these might impact Guyana. Additionally, I will examine the influence of the curse on other nations, both developed and developing, that have faced the same issues. Some states have managed to avoid the Resource Curse, others have not. Lastly, through the experience of various nations, I will present the dangers in which Guyana many face. Along with, practices Guyana can use to successfully overcome the threat of the Resource Curse.

Overview of Guyana’s Economy

Guyana, officially recognized as the Co-Operative Republic of Guyana is the third smallest sovereign nation in South America, with a population of approximately 750,000. Guyana is located in the north east of South America; it borders Venezuela to the Northwest, Brazil to the South and Southwest, and Suriname to the East.

Map of Guyana

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Figure 1: Geographic location of Guyana and surrounding nation1

Guyana’s north facing coast looks toward the Caribbean, a region with which Guyana shares many cultural, political, and economic ties. Guyana is even a member of the Caribbean Community also known as CARICOM. CARICOM is an integration community movement comprising of twenty developing Caribbean countries: fifteen of which are Member States and five Associated Members; their objectives rest on four pillars: economic integration; foreign policy coordination; human and social development; and security.

Guyana’s economy is currently dominated by the production and processing of four primary commodities. In order of importance these are: gold accounting for 40 percent of all exports earnings; rice at 21 percent; bauxite at 11 percent; and sugar at 7 percent. Due to the location of the agricultural sector on the coastal plain, 90 percent of the population resides there. As a result of the lack of infrastructure, transportation, and the ongoing border dispute with Venezuela2, the remaining landlocked section of Guyana remains uninhabited. The largest single employer is the state owned sugar company, GuySuCo. Foreign investors monopolize many of the other sectors. For example, America’s Reynolds Metals and British-Australian Rio Tinto Alcan subsidiaries have stake in the mineral industry such as bauxite. While the Korean company Barama own a large stake in the logging industry.

Guyana’s Principle Exports 2014

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Figure 2: Guyana's Exports by percentage3

Currently, Guyana’s GDP places them as the third poorest nation in the western hemisphere, after Haiti and Nicaragua despite its active export sector. Contributing elements of the lack of economic success is reportedly due to the education levels of human resource and the prevalent corruption or governmental mismanagement levels with in the nation. In the third quarter of 2017, the Bureau of Statistics in conjunction with the Inter-American Development Bank conducted their first Labor Force Survey of Guyana.4 The report found 58.2 percent of the active workforce have either no formal education or have only completed primary school as demonstrated in Figure 3.5 The absence of higher education in the active labor population supports the reliance on the agricultural sector for employment as a tertiary degree is not required. Furthermore, due to the lack of a post primary school education, the population’s advancement towards industrialization is stagnant.

Figure 3. The Education Level of the Active Work Force Population

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The additional contributing element towards to inability for Guyana’s economic success are the levels of prevalent corruption and governmental mismanagement. According to the Corruption Perception Index 2018, places Guyana as moderately high.6 Examples of corruption and mismanagement has become normative for the population as they become desensitized to the events. An example of the normative behavior is seen in the 2010 Latin American Public Opinion Poll (LAPOP), conducted by Vanderbilt University in 26 countries, found that 78.5% of the Guyanese surveyed perceived corruption to be high. In the same LAPOP study, 32.3% of Guyanese responded positively to the statement, “Given the way things are, sometimes paying a bribe is justified.”7 With the lack of governmental accountability to the population various examples of corruption like behavior has appeared in the media, such as, the 2016 report of Omar Shariff, the permanent secretary of the Ministry of the Presidency. Shariff’s current net worth of $500 million USD is reportedly due to tax evasion and money laundering. Although the allegations of criminal activity reported led to Shariff stepping down from his governmental role, no legal action or investigation was made. Allegations such as Shariff, leads to an absence foreign investment for new business due to a lack of investor faith. This in term negatively impacts the nation’s ability to progress and industrialize. However, due to the discovery of oil in 2015, the renewed global confidence to invest within Guyana has increased.

Discovery of Oil

Exxon’s 2015 discovery of more than 90 meters of high quality, oil-bearing sandstone reservoirs named the Liza-1 within Guyana has changed the world’s perception of the nation. Exxon estimates the Liza-1 well will contain 700 million barrels of oil over its lifetime, worth over $40 billion USD. With the success of Liza-1, the deployment of three additional drill ships making thirteen oil excursions in the surrounding area known as the Stabroek block as seen in Figure 48 ; of which, twelve locations produced high quality oil, making the success rate of oil approximately 92%. Conservatively, Exxon estimates 4 billion barrels of recoverable oil will be in reserve. Further the American oil giant, projects the first two years of production will yield 120,000 barrels of oil per day; with peak production occurring in 2025 at a rate of 750,000 barrels of oil per day. With the success of Exxon, multiple oil companies have invested in Guyanese oil excursions. One notable account is the Hess Oil Company, which discovered an additional one billion barrels of oil in the Stabroek.

Drill Activity in the Stabroek Block

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Figure 4: Exxon drill sights

The evaluation of oil reserves continues to perpetually change. Foreign investors conducting their own oil excursions and reevaluating discoveries of previous wells attributes to the fluctuation in the valuation. An example of reevaluation is the Norwegian energy company Rystad. Rystad surveyed the Stabroek block and estimates peak oil production will reach its highest in 2031 with an average of 600,000 barrels of oil per day. When compared to Exxon 720,000 peak in 2025, Rystad’s evaluation reduces the reserve by the equivalent total projected production for 2020. The former Energy Minister of Trinidad Kevin Ramnarine, stated in a webinar held by Caribbean Economist Marla Dukharan, “Guyana’s moment has arrived!”9 He continues, “The projection of Guyana’s oil producing at a rate of 700,000 barrels of oil per day will make them the highest oil producing country alongside Qatar. To put the amount in prospective, Trinidad in its peak oil production in 1978 produced 229,500 barrels and it has declined ever since.” 10

Guyana’s oil discoveries has sparked the interest of several other foreign oil companies such as Shell, Total, Hess, CGX and Repsol. With an influx of possible business partners Guyana has signed several Production Sharing Agreement. The most controversial Production Sharing Agreement is Exxon’s 2016 Petroleum agreement.11 Wherein through a closed door meeting, ExxonMobil and the Government of Guyana created an agreed upon distribution of oil production and profit sharing. The agreement discussed several controversial elements such as, Guyana’s entitlement of only two percent royalty for all oil production. The agreement also outlined the fifty percent profit split with Exxon upon Guyana’s repayment to Exxon for fifty percent of the discovery and recovery cost. Presently, repayment expense is expected to reach levels over $500 million USD. During the recovery repayment stage, Guyana will only be entitled to receive 14% of its production split. Additionally during the closed door meeting, $18 million USD was given to the government of Guyana as a signing bonus. The residents of Guyana were not aware of the Production Sharing Agreement until 2018, when the agreement was leaked to the public. The blatant abuse of authority received high criticism and led to a further distrust for the government in power. Furthermore when questioned by the public in regards to the whereabouts of the $18 million signing bonus, the government was not able to produce ledgers demonstrating a deposit to the National Bank of Guyana or the State Treasury Department.

Upon further review of the contract, the public had several concerns over the potential ramification of the Production Sharing Agreement, such as: government neutralization and the fiscal package. In the agreement, the government neutralized its ability to create comprehensive legislation for their oil and gas sector.

Article 32.3 of the 2016 Exxon Production Sharing Agreement states:

If at any time after the signing of this Agreement there is a change in the laws of Guyana whether through the amendment of existing laws (including the hydrocarbons law, the customs code or tax code) or the enactment of new laws or a change having the force of law in the interpretation, implementation or application thereof (whether the change is specific to the Agreement, the Contractor or of general application) and such change has a materially adverse effect on the economic benefits, including those resulting from the fiscal regime provided by this Agreement, accruing to the Contractor hereunder during the term of this Agreement, the Government shall promptly take any and all affirmative actions to restore the lost or impaired benefits to (the) Contractor, so that (the) Contractor receives the same economic benefit under the Agreement that it would have received prior to the change in law or its interpretation, application, or implantation.”12

This section of the PSA demonstrations the consequences changing legislation during the duration of the contract can lead to Guyana repaying Exxon for lost revenue.

The other concern within the agreement is the profit sharing agreement between Exxon and The Government of Guyana. The ignorance shown in the valuation of the oil’s worth is demonstrated by the poorly negotiated fiscal package. The current fiscal package as previously mentioned consist of a payment of 2% royalty along with an equal split of the profit from the production with the remaining factors such as extraction amount and who refines the oil at the discretion of Exxon. Many critics believe the 2% royalty is well below the standards of many nations and should be in the range of 10-20%. The revenue driven from the royalty helps a nation combat the volatility of the commodity market. Allowing for a nation to save for the proverbial “rainy day.” As shown in Table 1, Guyana’s misjudgment of oil royalty cost the nation over $1.6 billion USD.

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Table 1: Potential Loss of Revenue13

The International Monetary Fund upon reviewing the PSA deemed the fiscal package to be a severe misstep for Guyana. The International Monetary Fund advised all future production agreements should include the maximum cost recovery ceiling, government’s share of the profit oil, the tax obligations of the contractor, tax benefits or concessions for the contractor and subcontractors. Due to the inability to know their true worth of their oil, the Guyanese Government has left themselves exposed to becoming susceptible to both the Resource Curse and the so-called Dutch Disease.

The Resource Curse and Dutch Disease

While the discovery of oil can potentially increase the nation’s economic standing, many economist worry if Guyana is ready and equip to handle the potential windfall of revenue. Raul Gallegos, Associate Director of Control Risks Consulting Firm and author of Crude Nation: How Oil Riches Ruined Venezuela stated “Guyana’s oil discovery can be compared to a homeless person winning the lottery.14 ” He continues, “…what you see in Guyana is a similar situation as what you have seen in a number of other oil-rich nations…countries that do not have strong institutions and do not have a history of managing their finances properly and with enormous poverty that suddenly finds an enormous amount of money without knowing how to handle the fortune will lead to the Resource Curse.15

The resource curse coined by Richard Auty in 1993 explores the phenomenon of how countries rich in natural resources tend to have poor economic growth when compared to nations with limited resources. These countries not only show a lower economic growth but worsening of development in the social wellbeing of their people, prevalent in corruption, more violent tendencies, and reduction in democracy. Several casual observations demonstrate the theory of the resource curse to be compelling. One observation is nearly no overlap in the set of countries with large endowments of recourses and nations with high levels of GDP. The second causal observation also confirms nations with high-valued resources such as Oil, have not experienced sustainable accelerated economic growth. In the late 20th century many empirical studies have emerged, confirming the casual observations. A large number of cross-section studies initiated by Sachs and Warner (1995, 1997a, b, c, 1999a, b, 2001), considering different country samples and extended periods, and thus became a stylized fact (e.g., Auty and Mikesell, 1998; Sachs and Warner, 1999a).16

Jeffrey Sachs and Andrew Warner conducted a notable study on the correlation between the abundance of natural resources and economic growth in 1995. In the study, Sachs and Warner sampled 97 developing countries annual growth rate over a 20-year period from 1970-1989 in relation to the country’s natural resource-based exports in 1970, measured as a percent of GDP.17

Equation 1: Cross-Country Growth Equation18

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The equation above demonstrates the growth rate of the various nation’s economy over time. The equation variables are described as the growth in the economy between time t=0 and t=T (in this case, 1970 and 1989) should be a negative function of the initial income Yi0 and a vector of the other structural characteristics of the economy Zi. The goal of using this equation is to test whether measurement of resource dependence are among Z’s. Using the information obtained through the results of the equation, both economist ran several repeat regressions to verify their result. Their results in fact did show regression evidence of the resource curse.

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Figure 3: Growth and natural resource abundance results from 1970-198919

Figure 5, demonstrates two results of the Sachs and Warner study: the countries with the highest economic growth are among the lowest Exports of Natural Resources and the countries that did have increased economic growth started as resource poor, not resource rich. The outliers Malaysia, Mauritius, and Iceland were dismissed as they were not strong exceptions. The results of the studyshowed on average, countries with high value of resource-based exports to GDP tend to have a lower growth rate even after controlling initial income levels and trade policies.

Although an abundance of resources can be a detriment to a nation in present time, prior to the 19th century, countries like Germany, Britain, and the United States developed tremendously as a result of their natural resource reserves due to the cost of transporting goods were relatively higher. Thus, having your own resources gave you a competitive edge on the competition. However, through various innovation in the transport and energy industry, countries can easily import raw resources necessary to manufacture commodities instead of producing them. For example, countries like Japan and Korea have become world class steel producers despite their complete dependence on iron ore imports.

The causes of a nations susceptibility of falling victim to the resource curse are seen in trends that occur once an abundance of resources are found such as a lack of entrepreneurship, governmental dependency due to sectoral shifts, and the Dutch Disease.

The first trend a nation may encounter due to the Resource Curse is the lack of entrepreneurial spirit. The occurrence of this trend is due to the booming demand of the natural resource sector, hence the wages within the sector tend to increase. With higher wages to be earned by working for the resource sector, the population will naturally shift to the sector with higher wages rather than taking the risk of starting their own business and potentially not making a profit. Eventually, the lack of the entrepreneurial spirit will lead to an absence of competition for domestically manufactured goods. Therefore, inflation due to increased wages will occur and making imported commodities cheaper than those produced domestically. Inevitably, the nation suffers from a lack of innovation and overall development as well.

A nation that exemplifies the lack of the entrepreneurial spirit is Nauru, a small island nation located in the Central Pacific. During the 1970s, Nauru was among the richest nations, thanks to the large phosphate deposits. Majority of the population were highly compensated by the phosphate industry. Hence, the populous lacked the foresight to seek employment in other industries or start entrepreneurial efforts. Over time, the phosphate reserve declined due to overproduction. The citizens with no other exports to compensate, suffered from a staggering unemployment rate of over 90%20.

Along with a lack of entrepreneurship, the sectoral shifts that a country goes through can be just as devastating. Sectoral shifts are defined as changes in the composition of demand among industries or regions. An occurrence of a sectoral shift is demonstrated through the advancement of technological innovation. Such as, in the 1990s, the United States saw a sectoral shift in the telecommunications industry through the transitioning from pagers to mobile phones. Another example of a sectoral shift is an addition or change in an international trade agreement. The labor demand increases in the export sector and decreases in the import or competing sectors. Sectoral shifts further produces a higher unemployment rate due to specifically skilled laborers being downsized as a byproduct. With a lack of positions for the ousted sector, the unemployed become dependent on the governmental support, such as free health care, food, and education.

The combination of the previously mentioned precursors can help propel a nation, especially an oil nation, towards the Resource Curse. While simultaneously leaving the economy susceptible to the so called Dutch Disease. The Dutch Disease originated in the late 1950s in the Netherlands with the discovery of large gas reserves. This discovery consequentially increased the gas exports of the nation thus led to the appreciation of the guilder (the then Dutch currency). In turn, the increased wealth caused a drastic increase in inflation. By the 1960s, the expansion of gas exports overtook the other manufacturing industries, which drastically reduced the total Dutch exports relative to the GDP. The gas exports led to an influx of foreign currency as the demand for the guilder resulted in the strengthening of the currency. The appreciation of the guilder, additionally made all other domestic goods uncompetitive in the international market; thus due to the increased layoffs, the unemployment rate raised from 1.1% to 5.1% by 1977.21 The high cost of extracting gas waned on the ability to generate positions in the capacity the nation needed. Additionally, to restrict the appreciation growth of the guilder, the Dutch kept interest rates low. This prompted investment to flee from the country, which crippled future economic potential.

In 1982, economist James Peter Neary and Warner Max Corden developed the notable econometrics model for the Dutch Disease22. The model separates domestic goods into three sectors: non-tradeable, booming, and lagging. The non-tradeable sector refers to the essential supplies needed for domestic residents including the services provided. The booming sector refers to the abundant high valued natural resource such as oil, gold, gas, diamonds, or cash crops, such as sugar, rice, wheat, or coffee. The lagging sector refers to the existing manufacturing or agriculture sectors prior to the resource boom. The model assumes four aspects: labor is perfectly mobile among all three sectors and wages have equalized; all goods are final consumption; trade is balanced (national output equals expenditures); and commodity and factor prices are not distorted.23

According to Neary and Corden, a resource boom can occur in one of three ways: a country has created a technological breakthrough in production of a good causing a positive shift within the sector; the sector has a sudden windfall of an abundant high valued resource causing an increase of supply in a specific sector; lastly, a nation produces an export solely due to its increased value on the international market. The effect of the booming sector on a nation’s economy is seen in either: the resource movement effect or the spending effect . 24 The resource movement effect or direct deindustrialization occurs when the resource boom requires an increased labor force resulting in the production to shift towards the booming sector and away from the lagging sector. For an oil nation, the rise in oil prices can marginally increase the wages of its employees causing more labors to transition from the lower wage non-tradable and manufacturing sectors to the booming oil sector. The spending effect or indirect deindustrialization, is described as the result of a resource windfall or a rise in the international price of a solely exported commodity. This version of a resource boom provides excess revenue and increased wages, creating a demand for non-tradeable or imported goods. The increased demand for imported goods is a direct result of the appreciation of the local currency’s exchange rate. Therefore, appreciation of currency can create a paradox in which imported goods are cheaper than domestically manufactured goods that are set at international market rates. While both versions of the Dutch disease model shows significant economic improvement, it is short lived. The nation can experience a lack of “cultural, technical, and intellectual development which only a strong, healthy manufacturing industry…can provide.”25

The Dutch Disease can be categorized as a problem of appreciation on the domestic currency. However, the reduction of the appreciation value can occur if a nation restricts the foreign demand for their domestic currency. This can be done through either sterilization (the monetary authorities intervening in the money market to influence the exchange rates) or by saving abroad through a sovereign wealth fund. Exchanging the value of a nation’s domestic currency reduces the appreciation of the currency, hence, a nation can avoid the Dutch Disease through a sovereign wealth fund.

Sovereign Wealth Funds

Sovereign Wealth Funds are described as dedicated, government-owned investment vehicles that are driven by foreign exchange surpluses. These investments are separately managed from the stock of international reserves. There various types of sovereign Wealth Funds, however the three predominant forms of the funds are: Stabilization Funds; Savings Funds; and Developmental/Pension Funds. Stabilization funds are set up to help insulate an economy from commodity price volatility and from external shocks. An important part of the purpose of stabilization funds is that they can help facilitate consistent levels of government revenues as commodity prices fluctuate. Putting resources away in a stabilization fund also helps insulate an economy from a rapid buildup of inflation. While, savings funds are intended to be permanent funds which are typically associated with non-renewable natural resources. These funds create a store of wealth for future generations so that the economy can benefit from the extracted resource after it has been depleted. Lastly, Development/Pension Resource Funds are established for the purpose of allocating resources for key social and economic infrastructure projects. The pension resource funds are designed to help meet target outflows in the future, associated with pensions.

The investment decision and portfolio allocation of sovereign wealth funds are linked to their governance structure and their stated investment objectives.

The performance of the Sovereign Wealth Funds are linked closely to the behavior of public finances, monetary policy through the liquidity conditions, and external accounts through the exchange rate variations. Although, Sovereign Wealth Funds are not a new concept they have recently become popularized as a tool for countries to equip themselves when faced with a volatile abundant commodity, such as: oil, copper, gold, coffee, and chocolate. Sovereign Wealth Funds are usually distinguished based on their stated policy objectives. In 2007, the International Monetary and Financial Committee expressed a need for formal transparent guidelines on the establishment of all Sovereign Wealth Funds to identify best practices for operation and success.26 The results of the guidelines became commonly known as the Santiago Principles of Generally Accepted Principles and Practices. The Santiago Principles consisted of twenty-four pillars that reflect appropriate governance and accountability arrangements of the investment of Sovereign Wealth Funds. These principles uplift the credibility of the funds and support the understanding of the advantages of a Sovereign Wealth Fund for the countries/markets involved. The principles also promote the longevity of Sovereign Wealth Funds continue to bring economic and financial benefits to home countries, recipient countries, and the international financial systems.

Sovereign Wealth Funds have gain considerable attention and investment within the last decade. In 2016, the total investment of Sovereign Wealth Funds grew to $6.51 trillion USD more than double their worth in 2008. The growth of Sovereign Wealth Funds in mineral-producing economies is part of a larger strategy of accumulating foreign assets used by developing countries during years of rapid mineral rent accumulation. A significant feature of the global financial system has been the buildup of foreign exchange reserves by developing countries. In recent years, Sovereign Wealth Funds have become increasingly important to the survival of commodity- exporting countries to avoid replicating the wastage of the 1970s, these nation created funds to preserve a portion of their wealth base for future generations.

Global Examples of the Resource Curse/Dutch Disease

While the discovery of oil can be a blessing for Guyana’s economy if properly managed, Guyana’s lack of economic growth prior to the discovery of oil has many questioning if they are ready to handle an influx of revenue. Experts believe analyzing the success and failures of select nations can be an essential tool in combating the Resource Curse. Guyana’s recent windfall of oil has drawn the attention on the government’s ability to successfully absorb the effects of the correlating responses of the growing oil sector. The Finance Minister of Guyana, Winston D. Jordan, has proposed several immediate structural initiatives to take into effect upon 2020s oil production cycle. With the support of Guyanese President David A. Granger, Minister Jordan further using the historical, economic, political, and social experiences of nations like Venezuela, Trinidad and Tobago, Chile, and Norway he can develop progressive initiatives that will serve to the avoidance of the resource curse and Dutch Disease.

Though the research on avoiding the Resource Curse and the Dutch Disease is available, Guyana’s lack of an educated populous can tip the scale in favor of the curse. Minister Jordan, believes the oil sector of Guyana will pull the nation out of poverty and propel every citizen to prosperity. While optimism for a brighter tomorrow for future generations is welcomed, the historical occurrence within the nation and their surrounding neighbor paint a rather different picture. Globally, the Resource Curse and the Dutch Disease have impacted various resource rich nations differently, primarily due to the nation’s absorptive capacity. Some nations have managed to prevail and thrive, while others have not. Both the Resource Curse and the Dutch Disease can be avoided if proactive measures are taken to help alleviate the devastating effects. In this section, I will highlight various global examples which exemplify the variations in which nations were affected by the Resource Curse of the Dutch Disease.

Norwegian Oil Market

Norway has become a global role model for their ability to keep the Resource Curse and Dutch Disease at bay. Norway’s first discovered an abundance of petroleum in the North Sea in 1969. During the first phases of oil extraction, the Norwegian government used the increased revenue to pay off all public debt. Throughout the proceeding years to follow, oil extraction increased and Norway shifted from their debtor to a creditor position. This economic shift increased the exchange rate of the Krone (Norwegian currency). Placing pressure on the domestic market as inflation of their currency followed.

In 1990, the Norwegian government established the Norwegian Petroleum Fund (Larson, 2005). Through this fund the government was able to absorb 80% of the resource rent.

Resource rent= the cost of extraction- the cost of production- the price sold

As previously analyzed, the Dutch disease occurs when an extensive change in the spending effect or the resource movement effect takes place. The spending effect increases the real exchange rate since there is a rise in the aggregate demand and reduces the competitiveness of other sectors. In the case of Norway, with an absorption of 80% in resource rents collected between taxing both the population and the oil industry and placed in the fund; the revenues were prohibited to flow back into the Norwegian economy directly, therefore preventing the increase in aggregate demand.27 According to Van der Ploeg, saving a greater fraction of revenues will decrease initial appreciation of the real exchange rate and eventually reverse it.28 Furthermore, since the fund is denominated in foreign currencies and invested in international capital markets, the Krone remained stable.29 Additionally, the competitiveness of the various lagging and manufacturing sectors were affected less than theory would suggest due to the integration of natural resources within their economy.30

The Chilean Copper Market

Another example of a nation who implemented practices to avoid the negative effects of the Resource Curse is Chile. Chile is a resource rich country located in South America. The resources include fruit, fish, pulp, wine, but most importantly copper. Chile’s copper deposit production comprises of 35% of the global production share and 50% of the Chilean export. Owning a lion share of the copper market suggest the dynamic growth perspectives will increase within the coming decades. The copper market is a highly speculative and volatile one; thus, the trading activity on the financial markets can substantially fluctuate the price of the ore within the international market based on global development such as: war, innovation, treaty agreements, etc. For example, the 2008 global recession, the world’s economy faced a sharp slowdown especially in many developed nations. Thus, the price of copper increase by 29.3% between January 2008 and December 2010.31

Since the copper market and the Chilean budget move in conjunction with each other, a boom in the ore price tends to lead to real exchange rate appreciation; which in turn, results in low an inflation rate and a rise in real wage. Owing to the volatility of the copper market, Chile successfully strived to diversify its exports structure. The share of the ores and metals export dropped from nearly 90% in the early 1960s to 60% in the late 2000s. Moreover, the reduction in the dependency of the copper market contributed to the diversification and growth rate of non- booming Chilean exports on the open market. Diversification of the exported goods, resulted in a positive upturn for the Chilean economy, when other high-income nations experienced an economic slowdown. The economic diversification encompassed not only new markets, but also a greater number of traded non-copper products. Another key factor in Chile’s economic success is the stability of a low inflation rate. With a low inflation rate enforced, the central bank reduced their interest rates. This reduction stimulated the investment activity (predominantly in the construction and residential industries) and consumption.

Although, Chile faces relatively moderate fluctuations of economic activity induced by the boom and bust cycles of the copper market. A formal Sovereign Wealth Fund was introduced in 1985, known as the Copper Stabilization Fund32. The fund was established in order to stabilize the exchange rate and government revenues associated with the copper market in times of fiscal deficit. Additionally, the fund was used to help support public education, health care, and housing plans. The Chilean government also took the initiative to create an additional sovereign wealth fund called the Pension Reserve Fund, which aims to help finance pension and social welfare spending for their current and future generations.

Trinidadian Sectoral Shift

While Norway and Chile are classified as successfully overcoming the Resource Curse, several nations have fallen “victim” to the Resource Curse and Dutch Disease due to the mismanagement and overproduction of the abundant natural resource. Additionally, the poorly managed economies showcase a lack of diversification of the economy and the late introduction of a Sovereign Wealth Fund. Trinidad and Tobago and Venezuela exemplify this behavior.

Trinidad and Tobago, a tiny island nation located in the Caribbean with 1.2 million residents have a tumultuous history with their nation’s resources. Once known for their agricultural sectors, with cash crops of rice and sugar in abundance. However, Trinidad quickly propelled itself to become the wealthiest nation in the Caribbean with the discovery of oil and natural gas in 1908. A sectoral shift in the labor market from the agriculture and manufacturing sectors to the higher waged positions in the oil industry. The oil and gas sector accounted for 45% of GDP and 80% of overall exports. With growing revenue from oil and gas exports, the currency exchange rate appreciated alarmingly quickly. In the 1970s, the Trinidad and Tobago National Energy, suggested a development of infrastructure to help support the growing oil and gas sector. By 1978, Trinidad and Tobago reached their peak oil production. With increased oil revenue, the exchange rate compared to the USD reached its all-time high of 2 Trinidadian dollars to 1 USD. The inflated exchange rate effects the price of the domestic goods, it essentially became cheaper to import goods than manufacture them. Thus, the government directed their attention to the oil sector. To sustain the domestic fiscal development, they intentionally borrowed funds to save. However with an increase unemployment rate, the government instated social welfare project known colloquially as “make work projects,”33 such as repairing a cracked highway or painting buildings. These positions were not monitored for efficiency, therefore, many employees began to shirk in their positions or commit time fraud through exaggerating the timing of completing a task in order to receive a higher salary.

With an economy primarily beholden to one sector’s survival, the government began discussions in 1999 about beginning a wealth stabilization fund to save a portion of the surplus to cover the fluctuation of the oil prices. However, the fund was not codified until 2007, by which time the reduction in the oil surplus was already occurring. By 2008, Trinidad’s imports consisted of over $1 billion USD worth of food products to substitute the lack of domestic agriculture. In 2017, the nation oil reverses began to dwindle from 700 million barrels in 2016 to 243 million barrels due to overproduction and mismanagement of the longevity of the oil wells.

The Political and Economic History of the Neighboring Venezuela Oil Industry

The country that exemplifies the concept of the Dutch Disease is Guyana’s neighbor to the North-Northwest, Venezuela. On April 15th, 1914 the discovery of the first Venezuelan oilfield, Mene Grande (MG-1) made by Caribbean Petroleum gain the global interest. This discovery encouraged several foreign oil companies to invest in Venezuelan oil prospects between 1914 and 1917, of which many additional oil wells were subsequently discovered. Thru the end of 1917, the oil extracted from MG-1 was refined and processed for export. By 1918, Venezuela exported 21,194 metric tons of refined oil. Foreign investment companies continued to purchase land from Venezuela, with hopes of striking oil. By 1928, Venezuela one of the world leaders in oil exports.

The revenue obtained by the booming oil sector overshadowed the combined total of all other sectors, left Venezuela susceptible to the Dutch Disease. Neglecting the agrarian sector cause a reduction in production. Prior to relying on the oil sector, the agrarian accounted for one third of the economic production in the 1920s, however by the 1950s it only accounted for one tenth of economic activities. The increased reliance on the oil production created an inability to balance other domestic production which lead to high unemployment in the lagging sectors that could not be absorbed by the booming oil sector. The failure of not attending to the needs of the society cause Venezuela to experience deindustrialization and domestic instability. The people of Venezuela began to demand an overhaul of all foreign oil companies. In response the demand, President Isaias Medina Angarita in 1943 passed the Hydrocarbons Law. This law was the first major political step of the government to gain state control of its oil industry. Under the new law, the government would acquire fifty percent of the net profits. By 1945, the production of oil had reached to nearly one million barrels per day due to the increased demand of World War II and the rise of car sales. For example, in the United States from 1945-1950, the number of cars in service rise from 26 million to 40 million cars.

With the demand of oil increasing, the Middle Eastern countries in the mid-1950s began to contribute significant amounts of oil to the international petroleum market, due to an overproduction of the oil supply, the price of oil plummeted. To stabilize the international oil prices through establishing export quota help to prevent overproduction of oil on the international scale, Venezuela along with Iran, Saudi Arabia, Iraq, and Kuwait in September of 1960 from the Organization of the Petroleum Exporting Countries (OPEC).

In the early 1970s, the OPEC nations of the Persian Gulf began renegotiating their existing contracts with foreign oil companies, in efforts to gain additional ownership participation of the oil sector. By 1973, the negotiation resulted in sixty percent participation in the ownership of the companies.34 With a controlling stake in the oil sector, the Persian Gulf OPEC nations, raised their prices of oil by seventy percent and placed an embargo on oil to countries aligned with Israel (the United States and the Netherlands) causing the oil crisis of 1973. The conflict in the Middle East and embargo placed on the United States, resulted in the Venezuelan government quadrupling their revenues from 1972 to 1974.35

With increased profits, President Carlos Andrés Pérez focused his efforts on the needs of the Venezuelan population through Nationalization. He developed an economic plan, “La Gran Venezuela,” which called for the nationalization of the oil industry and the diversification of the economy to reduce their sole reliance of the oil industry. He pledged to develop the nation significantly by substituting inflated domestic goods with cheaper imports, providing subsidies for social welfare, and establishing protective tariffs with hopes to increase employment, fight poverty by increasing the household income, and diversify the economy. Pérez officially nationalized the oil industry on January 1, 1976 and established the Petroleos de Venezuela S.A (PDVSA), the state owned petroleum company. All foreign oil companies, concessionaires, or holding companies were replaced by Venezuelan owned companies. Furthermore in attempt to internationalize, PDVSA purchased several refineries in the United States and Europe; as well as, purchasing the majority stake hold of the American oil company, CITGO. This purchased catapulted PDVSA as the third largest oil company in the world.

However, several OPEC nations violated the production quotas established in 1960. This violation led to oil prices once again drastically declining in the 1980s, which resulted in Venezuela significantly increasing their debt. By the 1990s, symptoms of the Dutch Disease one again became apparent as industrial production declined from fifty percent to 24 percent of the nation’s GDP. During this period, PDVSA’s efficiency was questioned. During the establishment in 1976 until the approach of the Second Dutch Disease in 1992, 71% of the income obtained by PDVSA went toward the government, while the remaining 29% went towards covering the cost of operation. From 1993 until 2000, the distribution of income for PDVSA was reversed as 64% of the income went to covering the cost and 36% went towards the government.

In 2000, under President Hugo Chavez, strict policy changes Chavez’s administration took complete control over the distribution of income produced by PDVSA. Using PDVSA resources to fund social programs such as infrastructure, food, education reform, housing, and universal health care. His reliance of PDVSA revenue grew from 51% in 2000 to 56% in 2006. Additionally, the oil exports increased from 77% in 1997 to 89% in 2006. In 2002, PDVSA officially went on strike to pressure Chavez to resign from his position, while simultaneously demanding a special election. The strike lasted approximately two and a half months, which caused a near complete halt on oil production. The strike resulted in the layoff and replacement of 12,000 employees of PDVSA who oppose the administration. The reliance on the oil sector created a shortage in basic necessities such as: dairy products, meat, rice, flour, personal hygiene products, and medicine.

His administration’s reliance on oil revenue paved the path for the third and current period of the Dutch Disease. By 2008, all exports in Venezuela were eliminated and by 2012, the World Bank deemed the Venezuelan economy as “extremely vulnerable” to the fluctuation of oil prices since 96% of the country’s exports and nearly half of its fiscal revenue relied on the oil sector. Chavez’s excessiveness expenditure and the strict business policies contributed to the countries imbalance resulting in increased inflation and levels of poverty. In 2014, the current President of Venezuela, Nicolas Maduro, to assuage the declining oil prices printed additional currency which resulted in hyperinflation which reach levels of 700%. The Maduro administration was not able to revive the oil production leading into a deeper depression.

Guyana’s Solutions May Lead to the Presource Curse

Using the experience of Norway, Chile, Trinidad and Tobago, and Venezuela, Guyana’s recent oil windfall may result in economic growth if proactive measures are taken to avoid the pitfalls experienced by Trinidad and Venezuela; as well as, replicate the success of Norway and Chile. Guyana’s Finance Minister Winston Jordan, proposed several immediate structural initiatives for avoiding the Resource Curse. After witnessing the devastating effects of Venezuela’s lack of saving during “good times”, he has proposed an immediate establishment of a Sovereign Wealth Fund. The structure of the fund would consist of 100 percent of the oil profits being deposited directly to the fund. Like Chile, the fund would be used as a cushion during periods of oil price fluctuation as seen in Venezuela’s history. The government will additionally use the fund to support domestic infrastructure and run the government. Minister Jordan, is also focused on diversifying the economy. Using the strategy seen in Chile, he will diversify the economy by introducing new sectors such as tourism. He is currently creating a Ministry of Tourism to expose foreigners to the natural beauty of Guyana. According to Minister Jordan, the nation will focus on promoting the new sectors of the economy to reduce their dependency and help to ease the unemployment that will result due to the booming oil sector.

Although, Minster Jordan’s initiatives are necessary, the capital investment needed for undertaking an economic overhaul will consequentially lead to the Presource Curse. The Presource Curse coined by energy reporter, Leigh Elston and popularized by James Cust and David Mahalyi in December 2017, theorizes the time period of five to ten years between a nation discovering an abundance of oil and production of it, the nation overstates their expectation of the oil especially if weak institutions are in place. Thereby, underperforming economically prior to the production due to the enticement of potential revenue.36 The expectation of revenue can lead to impulsive decision making and rash spending habits due to the excitement of the discovery. The expectations can further create economic, political, and social rifts during the pre-production period as the abundance of natural resources can create an illusion of wealth for the nation. This can lead into an influx of foreign investment based on the future potential of the resource. However, the need of social and domestic change for a nation in poverty increases the government’s obligation to borrow against their new high valued resource to pay for the much needed public goods.

Minister Jordan has already demonstrated symptoms of the Presource Curse, such as closing GuySuCo, the nation’s largest employer. He has already stated his intention to improve the infrastructure of the nation through the creation of highways to make Guyana more accessible to the public. This expansion of Guyana central focus will be on three towns outside of the capital, one town in particular is Crab Island, which the government would like to build an on shore supply base for offshore oil exploration, drilling and production operation. Minister Jordan is not the only public official to preemptively set expectations for future expenditure in the name of public welfare. In 2017, Guyanese economist Professor Clive Thomas, of the opposition party A Partnership for National Unity- Alliance for Change (APNU-AFC) stated in a local interview, that the Guyanese government should distribute a direct rebate to each Guyanese household from the net oil revenue beginning as early as the 2020 oil production. This analysis is not only unfeasible, it is potentially devastating to the Guyanese economy. The 2020 oil production estimated revenue is approximately $500 million USD, nevertheless, the direct rebate would be cost approximately $1 billion USD. Since 2017, Thomas has retracted his analysis stating it was preemptive, however the idea of a rebate to all households is still discussed by the media and the public.

The Presource Curse is also seen in the form of increased, unmaintainable government borrowing, in combination with increased government spending. Politically, the Presource Curse effects the levels of corruption and reduces transparency as the government tends to conceal the nature of its debt. Lastly, the social effects include the populous building a dependence on government aid. Additionally, when the funds for government social welfare is no longer sustainable an uprising can occurring in the form of protest, coups, and riots.


In conclusion, the windfall of Guyanese oil can lead to disastrous consequences, such as the Resource Curse or the Dutch Disease, if the proper management of the economy is not undertaken. Using the strategies of successful resource rich nations, such as Norway and Chile, Guyana can create a competitive domestic market to diversify its economy through supporting the lagging sector. Through the experience of Trinidad and Venezuela, the reinforcement of the agricultural sector can provide the necessary absorptive capacity for the rising unemployment rate due to the closure of GuySuCo. The government should incentivize the agricultural sector to avoid importing food provisions for the people. Additionally, the human resource of the nation needs to immediately be addressed. With the lack of tertiary degree holders in the nation, the higher level positions will be outsourced to foreign personnel. Policy makers should encourage degrees in engineering, science, business, and architecture to cover the basic necessities of the oil sectors production. The Guyanese Government may consider sending talent to the neighboring Trinidad and Tobago, to obtain knowledge and work experience in the petroleum industry.

Finally, although the Presource Curse is still relatively new, the effects should not be ignored. The Guyanese Government should restrict their expenditure until the deficit they are currently in is paid. Along with the recovery cost owed to Exxon. Once the outstanding expenses are paid, the government by public consensus should undertake individual domestic infrastructure rather than completing all domestic welfare task simultaneously. If the Guyanese Government can demonstrate restraint when needed and practice caution in their investments, then their windfall may just be a blessing.


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"Given Mistakes Made with ExxonMobil Deal... Publish PSAs with Minimum Fiscal Terms to Be Accepted for Future Contracts – IMF Advises Govt." Kaieteur News. August 02, 2018. Accessed May 18, 2019. exxonmobil-deal-publish-psas-with-minimum-fiscal-terms-to-be-accepted-for-future-contracts- imf-advises-govt/.

Gordon, Ariana. "US$5,000 per Household Proposed." Guyana Chronicle. August 06, 2018. Accessed May 18, 2019. proposed.

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1 Guyana Maps - Perry-Castañeda Map Collection - UT Library Online. Accessed May 18, 2019.

2 The ongoing border dispute refers to the entity of Guyana Esequiba, a territory of 61,600 square miles that lies on the Western region of Guyana between Orinoco and Essequibo Rivers awarded to then British Guiana through the 1899 Arbitral Award is rich in various natural resources. In 1944, a memorandum written by Severo Mallet-Prevost, the Official Secretary of the US-Venezuela delegation in the Tribunal of Arbitration, surmised the Arbitral Award was pressured due to UK-Russian collusion. Upon publication of the memorandum, Venezuela renewed their claim for the disputed territory. In 2011, Guyana petition the United Nations’ Commission on the Limits of the Continental Shelf to extend the continental shelf an additional 150 nautical miles in order to seek oil exploration rights. Guyana petition claimed the region Esequiba was not under dispute due to the 1899 Arbitral Award. In return, the United Nations awarded the oil exportation rights to Guyana.

3 "Sectors/Markets." GO. December 14, 2015. Accessed May 18, 2019.

4 International Labour Organization, and Bureau of Statistics. Guyana Labour Force Survey. November 2017. The Third Quarter Report 2017

5 International Labour Organization, and Bureau of Statistics. Guyana Labour Force Survey

6 Transparency International. "Guyana." Transparency International - Guyana. Accessed May 18, 2019.

7 Stabroek News. "Six Things You Should Know about Corruption in Guyana." Stabroek News. May 30, 2018. Accessed May 18, 2019. know-corruption-guyana/.

8 “Guyana Project Overview." ExxonMobil. Accessed May 17, 2019.

9 Dukharan, Marla. "Guyana's Oil Outlook: The Nor-way or the Next-door-neighbour-way?" YouTube. August 16, 2018. Accessed May 18, 2019.

10 Marla Dukharan. “Guyana's Oil Outlook: The Nor-way or the next-door-neighbour-way?”

11 Petroleum Agreement Between the Government of the Cooperative Republic of Guyana and the ESSO Exploration and Production Guyana Limited, CNOOC NEXEN Petroleum Guyana Limited, and Hess Guyana Exploration Limited.”. October 7, 2016. Article 32.3.

12 Article 32.3 of the 2016 Petroleum agreement between the Government of the Cooperative Republic of Guyana and the ESSO Exploration and Production Guyana Limited, CNOOC NEXEN Petroleum Guyana Limited, and Hess Guyana Exploration Limited. This document was leaked to the press early 2017. I retrieved the file from

13 Figures are based on my research of the timeline Exxon has reported in their Guyana Initiative for Oil Extraction and Production.

14 Journalist, Global. "Global Journalist: Guyana Threatened by 'oil Curse'." YouTube. February 22, 2018. Accessed May 18, 2019.

15 Journalist, Global. "Global Journalist: Guyana Threatened by 'oil Curse'."

16 Outside the resource curse literature, natural resources are seen by many authors as not crucial to long-run growth (e.g., Nordhaus, 1992; Meier and Rauch, 2000), considering the important growth records achieved by several resource-poor countries, such as Japan. The argument is that scarcity of resources, along with pollution, can be overcome through technological progress, forces of substitution and structural change when natural resources have market prices (Meier and Rauch, 2000); if there is open access to those resources, then adequate policies and institutions should force economic agents to consider their social value. This is disputed namely by ecological economists. In fact, environmental effects related to climate change are much more difficult to reverse, posing tremendous immediate challenges in order to avoid aggravated future economic costs (e.g., Stern, 2008). However, this kind of analysis relies on the social discount rate, and climate changes are difficult to predict despite science advances. (Torres, Afonso, and Soares, 2013)

17 Sachs, Jeffrey, and Andrew Warner. "Natural Resource Abundance and Economic Growth." 1995. doi:10.3386/w5398.

18 Sachs, Jeffrey, and Andrew Warner. "Natural Resource Abundance and Economic Growth."

19 Sachs, Jeffrey, and Andrew Warner. "Natural Resource Abundance and Economic Growth."

20 Thompson, Derek. "Meet Nauru, Once the World's Richest Island, Now With 90% Unemployment." The Atlantic. June 17, 2011. Accessed May 18, 2019.

21 Thompson, Derek. "What Dutch Disease Is, and Why It's Bad." The Economist. November 05, 2014. Accessed May 18, 2019. bad.

22 Corden, W. Max, and J. Peter Neary. "Booming Sector and De-Industrialisation in a Small Open Economy."The Economic Journal 92, no. 368 (1982): 825-48. doi:10.2307/2232670.

23 Corden, W. Max, and J. Peter Neary. "Booming Sector and De-Industrialisation in a Small Open Economy." 831-833

24 Corden, W. Max, and J. Peter Neary. "Booming Sector and De-Industrialisation in a Small Open Economy." 833-836

25 Kaldor, Nicholas. "The Role of Increasing Returns, Technical Progress and Cumulative Effects in the Theory of International Trade and Economic Growth."Applied Economy, 1981.

26 The International Monetary and Financial Committee is a committee of the Board of Governors of the International Monetary Fund, comprising representatives—typically ministers of finance and central bank governors— of all 185 International Monetary Fund member countries.

27 Gylfason, Thorvaldur. "Nature, Power and Growth."Scottish Journal of Political Economy 48, no. 5 (2001): 558-588. doi:10.1111/1467-9485.00215.

28 Ploeg, Frederick Van Der. "Natural Resources: Curse or Blessing?"Journal of Economic Literature 49, no. 2 (2011): 366-420. doi:10.1257/jel.49.2.366.

29 Cappelen, Ådne, and Lars Mjøset. "Can Norway Be a Role Model for Natural Resource Abundant Countries?"Development Success, 2012, 44-72. doi:10.1093/acprof:oso/9780199660704.003.0003.

30 Cappelen, Ådne, and Lars Mjøset. "Can Norway Be a Role Model for Natural Resource Abundant Countries?"Development Success, 2012, 44-72.

31 "Copper Futures End of Day Settlement Price." IndexMundi. Accessed May 18, 2019.

32 Spilimbergo, Antonio. "Copper and the Chilean Economy, 1960-1998."IMF Working Papers 99, no. 57 (1999): 1. doi:10.5089/9781451847758.001.

33 NOW, Oil. "Economist Urges Guyana Not to Use Oil Money for "make-work Jobs"." YouTube. September 28, 2017. Accessed May 18, 2019. rpsQAcqqJv4qJUyLxkY4W_0&index=3.

34 Lieuwen, Edwin, and Gustavo Coronel. "The Nationalization of the Venezuelan Oil Industry: From Technocratic Success to Political Failure."The Hispanic American Historical Review 64, no. 2 (1984): 394. doi:10.2307/2514548.

35 Wilpert, Gregory. "The Economics, Culture, and Politics of Oil in Venezuela." September 14, 2007. Accessed May 18, 2019.

36 Cust, James, and David Mihalyi. "Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments."Policy Research Working Papers, 2017. doi:10.1596/1813-9450-8140.

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Guyana's Oil. The Resource Curse and How to Overcome It
City University of New York John Jay College of Criminal Justice
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resource curse, dutch disease, presource curse, guyana, opec, oil, exxon, economic, economic development
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Anoushka Shookoonsingh (Author), 2019, Guyana's Oil. The Resource Curse and How to Overcome It, Munich, GRIN Verlag,


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