Editorial | Avoiding the resource curse

It has been a month since Damien King, economist and public commentator, declared his hope that Jamaica doesn't find oil, and that if it does, that the oil is left where it is. Oil exploration is taking place in the sea off the island’s southern coast.

Dr King’s fear is that if Jamaica comes into oil wealth, the island will soon be consumed by the so-called resource curse, an inevitability he predicts for Guyana, one of Jamaica’s Caribbean Community (CARICOM) partners, and among the world’s fastest-growing producers of oil.

This newspaper appreciates Dr King’s concern, even if we suspect that his declarations were deliberately infused with attention-grabbing hyperbole:   an effort perhaps to highlight the real risks often faced by countries that achieve sudden wealth from natural resources. And especially countries with weak and divisive political cultures and poor systems of accountability.

Unlike Dr King, The Gleaner’s Editorial Board does not believe that if oil and/or natural gas were found that they should stay below the ocean bed.  Instead, a conversation should begin now on building and strengthening, with mechanisms for oversight and accountability, institutions to manage the financial flows from oil. Additionally, the possibility of oil must not detract from simultaneously pursuing the development of renewable energy sources. 

Jamaica has home-grown examples from which it can learn and avoid mistakes. These include the government’s recent passing of legislation to establish the National Reconstruction and Resilience Authority (NaRRA), to manage the island’s post-hurricane reconstruction, with deliberately weak oversight and governance mechanisms.

Jamaica has, on and off, been searching for oil for decades. Recently, there has been a spurt of optimism that the island is on the cusp of a breakthrough, after an announcement by the energy minister, Daryl Vaz, that the current exploration company, United Oil and Gas, had returned “very positive” scientific results from its latest onsite research.

“They have seen traces,” Mr Vaz said last month.  “They haven’t seen or touched the real deal.” 

He expected that United could, by early 2028, begin drilling up to 14 exploratory wells in Walton-Morant Basin, the 22,400-square-kilometer offshore area for which the company has an exploration licence.  Mr Vaz was “cautiously optimistic” that the area contains commercial quantities of oil.

With Jamaica importing over 90 per cent of its energy needs and the crisis in the Strait of Hormuz causing the price of petroleum to rocket, the flutter of over the possibility of discoveries here has triggered discussion of what it would mean for the island’s economy, long trapped in anaemic growth.

Dr King, who formerly taught economics at The University of the West Indies, Mona, doesn’t want to find out. 

“I hope commercially viable oil is not found, because I don’t want to put this in front of our political parties,” he told this newspaper. “There are too many examples of local institutions that become weak, undermined and corrupt when resources start to flow through them.”

The possibility for the natural resource curse is real. There are numerous examples of the paradox of countries pulling in enormous earnings from resources like oil and gas, metals or minerals, but of the riches unleashing or exacerbating corruption and undermining accountability, leading to instability and conflict - and, ultimately, national impoverishment.  

Another potential spinoff from their fiscal flows is the so-called “Dutch disease” of strong foreign exchange earnings causing an appreciation of the domestic currency that makes exports uncompetitive. A Jamaican manufacturer’s product might be too expensive in foreign markets, or a tourist may not be able to afford a vacation in Jamaica because of the value of the island’s dollar.

This curse is what Dr King expects to reach Guyana, a country with no oil production in 2019, but now exports nearly a million barrels of crude per day.  He told the Jamaica Observer newspaper: “You mark my words; Guyana is going to go nowhere.” 

The Gleaner does not support this pessimism, especially for Jamaica, particularly if the island’s stakeholders begin to confront the potential challenges now. Not when, or if, the phenomenon of oil exports and earnings is upon Jamaica.

For example, the full details of any agreement the government has with United Oil and Gas must be made public, opening it to critical analysis. The government would be in a position to explain, or defend, the deal.

Further, Jamaica should begin to debate the design of a sovereign wealth fund to manage any windfall from oil or any other resource, while avoiding the pitfalls of the Capital Development Fund (CDF) into which Jamaica placed the bauxite production levy, the production tax on raw bauxite introduced in 1974.

The levy, especially in its early days, caused Jamaica to earn significantly more from a resource from which it previously received relative pittance. The levy funded free education, up to the university level, as well as other services that were critical to advancing social equity.

But the CDF, which has many of the elements of a sovereign wealth fund, contains critical flaws:  It is not independently managed and the finance minister has a free call on its resources. It is, even now its inflows are diminished, often used for general budgetary support. 

Those errors are to be avoided.