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Sunday, May 26, 2013

Africa’s New Resource Rich Countries Can Avoid the Resource Curse

Nigeria and Angola are Africa’s top oil producing countries. In 2011 Nigeria and Angola produced 2.2 million and 1.8 million barrels of oil a day. In 2011, Nigeria’s oil revenues totaled 50.3 billion while Angola’s oil injected $40 billion into the economy.

The Resource Governance Index of the of the Revenue Watch Institute released on May 15, 2013 ranked Nigeria and Angola 40 and 41 respectively out of the 58 countries, which produce 80% of the world’s oil. The index found both countries woefully weak four key governance areas: institutional and legal setting; reporting practices; safeguards and quality controls and enabling environment. 

In both Nigeria and Angola, lack probity, corruption and moribund institutions exclude citizens from benefiting from resource revenues. Nigeria’s rural populations have limited access to water, schools and health care. Moreover, about 70% of Nigerians live on less than $1.25 a day. Angola has a life expectancy of 48.1and an average of school years of 4.4 years

The economies of Angola and Nigeria have followed the trajectory of resources rich economies. Economists have long held that resource rich countries are prone to rent seeking, conflict, corruption, weak public intuitions and policies. Paul Collier, Oxford University Economist, has argued that like aid resource abundance makes other export activities uncompetitive and stifles economic diversification. This phenomenon is known as the Dutch disease, after the effects of the North Sea gas, which left the Dutch economy uncompetitive and dependent on natural gas.

Ethiopia, Kenya, Uganda, Mozambique and Tanzania are just about to enter the exclusive league of resource rich countries. The oil and gas resources in Eastern Africa are phenomenal. Tullow Oil has characterized East Africa’s oil finds as Africa’s most significant. Similarly, US Geological Survey estimates that natural gas reserves off the coast of Mozambique, Tanzania and Kenya are larger than those of their oil-rich West African neighbors.

Africa with its weak and ill-structured investment regulatory regime is the perfect target of potentially exploitative accessions and opaque practices of multinational extractive companies. More often than not the extractive companies are beholden to political class and tend to front the narrow business interests of the political elite. The relentless global quest for new energy sources will make it impossible to stop the exploitation of Africa’s vast unexplored mineral wealth by global multinationals. The challenge will be how to ensure that such exploitation is equitable and humane. But we could learn from Russia and Latin America who have avoided the predacious reach of global multinational corporations.

As Africa mints new resource rich countries we must ask hard questions: Can these new generation of resource rich countries escape the resources-curse? How can resource rich countries use mineral wealth to build diversified economies and ensure equitable economic and social development for its people? Can the new generation of Africa’s resource countries rich learn from countries that have avoided the resource curse?

To avoid the path of a resource curse, Africa’s new resource rich countries must be strategic, pragmatic and anticipatory. Much greater investment in physical, human, and institutional capital is needed to ensure sustained and equitable benefits. While investors may bring foreign technical and skilled personnel, African governments must insist on employment of local labour for tasks that do not require specialized training. Moreover, it should be mandatory for global multinational companies investing in Africa to train local people in managing, operating and maintaining facilities. Over a period of time, this will enable Africa to build highly skilled trained and skilled workforce. There is opportunity to link with local universities to strengthen teaching and research in science, technology, engineering and math.

Strong institutions help prevent rent seeking behavior and ensure transparency in contracting, hence holding governments and investors accountable. All contracts must be awarded through a transparent international competitive bidding process buyers must disclose the price quoted by the successful bidder. Strong institutions will also ensure that regulatory agencies publish timely, comprehensive reports on their operations, including detailed revenue and project information.

Contracts for resource exploitation should be bundled with associated infrastructure development, including refineries, petrochemical industries, fertilizer plants and power plants. This will liberate African economies from the morally reprehensible practice of exporting raw materials. Contracts could also be bundled with social investments such as roads, airports, schools and hospitals.

This resource bonanza can and must catalyze socio-economic and institutional change necessary to break the yoke of poverty,which has held back Africa’s progress for more than half a century. 

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