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What Pre-oil Economies in Africa must Consider!

Katindi Njonjo shares her reflections on African considerations following the Futures Forum on Post-Oil Economy held in Baku, Azerbaijan (June 2013).

 

Strong symbolism is attached to oil since this raw material was the foundation of economic systems in the 20th century and continues to be the fuel of global industrialization in the 21st. It is a key to the hierarchy that exists between countries from the richest to the least advanced. An oil based economy also involves incomparable sums of money (Magrin & Vliet, undated). That is perhaps why recent discoveries of commercially viable deposits of oil in the East African region and ‘the probability of the region becoming a global player in oil production’ (United States Geological Survey [USGS], 2012) has caused a lot of excitement.

It is envisaged that this ‘black gold’ could eradicate chronic poverty due to a likely increase in exports that results in additional revenue to finance poverty alleviation (DI, 2012 July 3). It could also enhance economic growth and the creation of jobs, enable the transfer of technology, improve infrastructure and encourage the flourishing of other related industries (Karl, 2007 January). After all, Africa’s oil exporting countries, although have the least diversified economies, have among the continents highest GDP per capita (MGI, 2010 June) as illustrated in figure 1.

 

Figure 1: Africa’s Diverse Growth Paths
Source: McKinsey Global Institute [MGI], 2010 June

For Kenya, it is envisaged that oil discovery will contribute towards the transformation of Kenya into a middle income country by 2030. According to an interview with Sumayya Athmani, Chief Executive Officer, National Oil Corporation of Kenya - featured by the 2013 Africa Energy Yearbook, petroleum is the single largest import by Kenya, accounting for 21% of the country’s total imports. Own production will certainly help in management of the balance of payments and stemming loss of foreign exchange. A commercial discovery would also spur a whole new economic sector and industrial development. An East African regional partnership for infrastructure development is also anticipated with South Sudan and Somali also having shown interest. There is already in place a regional refinery development plan of a gas pipeline from Tanzania to serve countries in the region. The Lamu Port and South Sudan Ethiopia Transport (LAPSSET) Corridor project which is being championed by Kenya is also aimed at regionally integrating petroleum and transport infrastructure. With the biggest obstacle being old and inadequate infrastructure hence significant bottlenecks in the effective distribution of petroleum in Kenya, the projects aim at positioning Kenya as the ultimate global petroleum logistics hub in the region.

While some countries rich in oil resources like Malaysia and Indonesia were able to improve economic performance, the experience of almost all other oil-exporting countries to date illustrates few of these benefits. According to Karl (2007, January: 2), ‘the consequences of oil-led development tend to be negative, including slower than expected growth, barriers to economic diversification, poor social welfare performance, and high levels of poverty, inequality and unemployment. Furthermore, countries dependent on oil as their major resource for development are characterized by exceptionally poor governance and high corruption, a culture of rent-seeking, often devastating economic, health and environmental consequences at the local level, and high incidences of conflict and war. In sum, countries that depend on oil for their livelihood eventually become among the most economically troubled, the most authoritarian, and the most conflict-ridden in the world’.

The challenges are certainly not due to the existence of the resource per se but due to the structures and incentives that oil dependence creates. For this reason, it is worth examining some of the assumptions pre-oil economies like Kenya make when they discover such resources. This is important for purposes of averting the proverbial ‘paradox of plenty’ or the ‘resource curse’ so that this ‘black gold’ once exploited, can be benefitial to the country.

 

The Assumptions

1. Accelerated economic growth will occur due to the oil finds

Kenya is categorized as a transitional economy whose GDP per capita is lower than the oil led or the diversified economies (see figure 1), but the economy is growing rapidly. Given that by the year 2020, the world oil consumption will rise by about 60% and transportation will be the fastest growing oil-consuming sector, there is rising global demand for oil. Expanding resource exports through oil is therefore an opportunity to ‘turbo-charge’ growth (MGI, 2010, June). However various factors can reverse that opportunity.

Oil exporting countries face the macroeconomic instability that is linked to fluctuations in the global price of oil (Magrin & Vliet, undated). According to Karl (2007, January), the price volatility of oil is usually twice that of international primary commodities. As a result, oil economies are likely to face more frequent economic shocks and are thus susceptible to acute boom-bust cycles. Thus despite significant rises in per capita income, over the past several decades, all oil-dependent countries have seen the living standards of their populations drop, and sometimes drop very dramatically from the intial levels.

During the oil boom, windfall gains provoke a type of “feeding frenzy”. Budgets are based on optimistic projections and therefore the over investment and over spending creates vulnerability to commodity prices. When the never anticipated reversal of circumstances occurs due to the price volatility of petroleum, major economic tensions are created as government finds it difficult to moderate spending (Karl 2007, January). According to Soares de Oliveira (2007), oil states tend to be heavily indebted because they use their oil resources as guarantees during periods of busts. The funds from loans frequently land in private hands while the problem of debt repayment is left to the public thus affecting economic performance.

The loss of fiscal control measured by overspending and soaring debt are among the ingredients that cause unstable macro-economic environments.

 

2. There will be political will to ensure mutual benefit for all

According to Sala-i-Martin and Subramanian (2003), oil more than any other resource destabilizes institutions and absolutely corrupts. In fact the Corruption Perceptions Index (CPI) created by Transparency International each year ranks the oil states of the Gulf of Guinea among the ten worst. Because windfall gains that arise from petroleum encourage rent-seeking behavior, the state becomes a type of ‘honey pot’ in which competing interests try to capture a significant portion of resource rents by capturing portions of the state. A vicious cycle results in which all actors try to gain parts of the bureaucracy while governments, in turn, reward their supporters by funneling favors their way. This greater spending on patronage, in turn, weakens existing pressures for representation and accountability (Karl, 2007 January).

Karl further asserts that rulers often support policies that produce personalized rents even if these policies result in lower overall social welfare and because they need to share these rents with supporters and subordinates, the level of distortion can be very great. Officials tend to financing mega projects in which payoffs can be more easily hidden and the collection of bribes is easier like infrastructure and defense projects. Oil wealth also creates a class of rulling elite that consolidates power to benefit this small group of individuals. It is therefore not surprising that oil resources are closely associated with military spending and the creation of extensive repressive apparatuses. This is in part due to the fact that the rulling class are wary of letting oil reserves fall out of the control of their allies and into the hands of possible opposition groups.

Natural resources like oil will therefore have a negative impact on both economic growth and income levels of the population if governance institutions are weak.

 

3. The existence of oil and the internal social and demographic trends will help spur growth

According to MaKinsey Global Institute (MGI, 2010 June), Africa’s long term growth will be lifted by the growing labour force, urbanization and a rise in middleclass consumers. With provision of education and skills, this large workforce could account for a significant share of production and consumption.

However, according to Karl (2007, January) most jobs created by the petroleum industry are temporary or seasonal in nature, and because the growth in jobs generally occurs only during the exploration phase as land needs to be cleared, equipment transported, roads, pipelines and other infrastructure constructed, the industry actually offers comparatively few jobs over time than initially anticipated. Thus, while discoveries trigger changes, employment levels tend to decline dramatically when infrastructure construction is complete. These problems are compounded by the expropriation of arable land for resource extraction activity and environmental damage, which promote a shift away from subsistence agriculture especially when the small available male workforce abandons food production to go and get employed in oil fields (Pourtier 1989).The resulting instability in employment and income and food instability stress the local economy.

The promise of new jobs that new oil exploitation seems to offer typically attracts large numbers of migrants to an exploitation area. The rapid influx of people and the higher relative salaries of oil project workers inflate the local prices of key goods and services, bringing about a significant increase in the cost of living (sometimes up to 300 percent), even for those who do not share in the benefits of the oil project. The exodus often leads to rural crises of desertification as well as urban crises of large concentrations of rural poor with no urban employment opportunities (Karl, 2007 January).

The social fabric of oil localities also changes due to migration as disparities in income emerge and increase in prostitution, HIV/AIDS infection rates and crime also escalate. After the construction phase has been completed and the initial oil boom begins to decline, the original residents who may not have been able to share in oil benefits increasingly clash with ‘newcomers’ as they see their own ways of life greatly disrupted. Resource wars that are secessionist in nature are likely to occur especially during bust cycles when economic opportunities dry up. They may be triggered by longstanding grievances over land expropriation, environmental damage, corruption, or earlier mal-distribution of resources that adversely disadvantage the local communities while all the benefits accrue to non-locals or to the nation. Oil resources are also associated with civil wars that last long durations. Wars are expensive to pursue, and both governments and rebels can use oil rents to finance their armies (Karl, 2007 January; Magrin & Vliet, undated).

The string of discoveries in Kenya’s coastal areas is reigniting historical separatist agitation by the Mombasa Republican Council (MRC) that is demanding a review of the historical agreement binding the coastal region to the central government (Control Risks, undated). The prospect of missing out on a share of lucrative exploration contracts with foreign companies is a major reason for these protests.

 

4. The oil will help forge new types of economic partnerships that further enhance growth and development

While Africa’s natural resources are attracting new economic partnerships, these agreements may not necessarily lead to growth and development. Exploitation of oil requires more and more sophisticated technologies that are accessible to only a small number of foreign players. The strong competition between oil companies from America, Europe and emerging Asian countries like China and Malaysia to secure access to African oil fields leads to secrecy and non-transparency. The extraction of oil therefore remains in the hands of a small number of large foreign companies and a small group of the rulling elite. This explains why very little information is available about the amount of resources generated (Soares de Oliveira, 2007).

Soares de Oliveira (2007) also asserts that revenues coming from oil exploitation are often siphoned off as a result of non-transparency. This is compounded by the structure of the now widely applied variant of production sharing contracts, the principle of which is first and foremost to reimburse the oil company’s input costs (Shaxson 2005). Squandering oil profits through ostentatious consumption and other types of unproductive spending like military, further cements the unproductive system of the oil economy thus jeopardizing development.

 

5. The assumption that oil will continue to be the main source of global energy in the future

The world’s population growth will certainly increase the demand for energy hence the increase in demand for oil. However, the coming cycles may certainly not be as simple as imagined. A drop in global demand could occur due to an international economic crisis tied to the increase in energy prices thus accelerating developments in alternative energies that are more reliable, affordable and less volatile. Under such circumstances, oil would be buried as a main source of energy in its own grave.

In projecting the share of oil reserves, it is apparent that oil reserves in non-Middle East countries are being depleted more rapidly than those of Middle East producers. It is projected that by 2020, 83% of global oil reserves will be controlled by Middle Eastern regimes as illustrated in figure 2, particularly Saudi Arabia (25%), Iraq (11%), Iran (8%), UAE (9%) and Kuwait (9%). The dependence on oil from one supplier puts in place an international system that is not sustainable due to the fact that a handful of Middle East suppliers would regain the influence they had in the 1970s and once again be able to dictate the terms on world oil markets and manipulate oil prices and world politics. For national security purposes, this would necessitate a revolutionary change that would lead us all away from depending on a diminishing resource and find more sustainable alternatives.

 

Figure 2: share of global oil reserves
Source: Based on projection of 2002 production levels, BP Statistical Review of World Energy

 

6. That oil excavation will not have any environmental consequences

According to Karl (2007, January), localities where oil is actually located over time tend to suffer from lower economic growth and lower per capita incomes than the rest of the country, greater dislocations as well as higher environmental and health hazards.

The environmental dimension of oil exploration is a chief cause of social dislocation. Hazardous wastes, site contamination, and the lack of sufficient protection of surface and subsurface waters, biodiversity and air quality (both in the immediate vicinity of the oil project and in relation to global concerns such as ozone depleting substances and greenhouse gases) have endangered the health of local populations near oil installations and pipelines and destroyed local livelihoods such as farming and fishing. Local communities, for example, report a sharp rise in infantile leukemia near oil facilities.

 

Conclusion

For Kenya not to repeat the mistakes earlier made by others, it must put in place pre-requisite measures that would enable it to escape the ‘profit-redistribution-consumption structure’ and embrace a ‘profit-investment-structure’ (Pourtier 2005).

There would be need to integrate the petro-dollars into other revenue sources like agriculture, service and manufacturing sectors in order to diversify the economy. This is less problematic as it reduces economic and political effects of oil price fluctuations.

The reduction of existing asymmetries between oil companies, the states, and civil society are critical. The central issue of transparency cannot be gainsaid.

The need for extensive capacity building to provide the skills that will be required for driving the oil industry forward (2013 Africa energy year book) is critical in reducing foreign domination in the industry and enhancing opportunities for local labour.

The creation of policies that ensure local involvement in decision making as well as the mutual benefit of these resources between the local people and the national government will be the domestic glue.

Without the implementation of reforms, the consequences of oil dependence will continue to be adverse.

Katindi Sivi Njonjo
Guest Editor

 

Katindi Sivi Njonjo, a futurist with joy and passion for foresight
Designation: Programme Director (Kenya)
Organization: Society for International Development – East Africa

Read more about the author and her view on being a futurist.

 

 

 

References

Africa Energy Yearbook. (2013). The Africa Energy Yearbook Interview. http://africa-energy-forum.com/webfm_send/200 (Accessed 31st July 2013)

Control Risks. (undated). A New Frontier: Oil and Gas in East Africa. http://www.controlrisks.com/Oversized%20assets/east_africa_whitepaper_LR_web.pdf (Accessed 31st July 2013)

Development Initiatives [DI]. (2012, July 3). A 4-Point Policy message to East Africa on the discovery of oil and gas in the region. http://www.devinit.org/wp-content/uploads/A-4-Point-Policy-Messge-to-East-Africa-on-the-discovery-of-oil-and-gas.pdf (Accessed 31st July 2013)

Karl, T. L. (1997). The paradox of plenty: Oil booms and petrostates. Berkeley, CA: University of California Press.

Karl, T.L. (2004). Oil-Led Development: Social, Political and Economic Consequences. Encyclopedia of Energy 4: 661-667. http://politicalscience.stanford.edu/sites/default/files/documents/KarlEoE.pdf (accessed 31st July 2013)

Magrin G. and Vliet G.V. (Undated). ‘The Use of Oil Revenues in Africa’. http://www.ifri.org/files/Energie/MAGRIN.pdf (accessed 31st July 2013)

McKinsey Global Institute [MGI]. (2010, June). Lions on the move: The Progress and potential of African Economies. http://www.google.co.za/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CCsQFjAA&url=http%3A%2F%2Fwww.mckinsey.com%2F~%2Fmedia%2FMcKinsey%2Fdotcom%2FInsights%2520and%2520pubs%2FMGI%2FResearch%2FProductivity%2520Competitiveness%2520and%2520Growth%2FLions%2520on%2520the%2520move%2520The%2520progress%2520of%2520African%2520economies%2FMGI_Lions_on_the_move_african_economies_Exec_Summary.ashx&ei=FE75UZPBCImXhQejnoC4BQ&usg=AFQjCNEny4vMjnV3KIs93D0MIF5994PvEw&sig2=_1_9j_JlBe7-w7TPadrG7g&bvm=bv.49967636,d.ZWU (accessed 31st July 2013)

Pourtier, R. (1989). Le Gabon 2: Etat et développement. Paris: L’Harmattan.

Sala-i-Martin, X. and A. Subramania. 2003. Addressing the natural resource curse: An illustration from Nigeria. IMF Working Paper No. 139. Washington, DC: IMF. http://www.imf.org/external/pubs/ft/wp/2003/wp03139.pdf (accessed 31st July 2013)

Shaxson, N. (2004). The Elf trial: Political corruption in the oil industry. In Transparency International, ed., Global Corruption Report 2004, 67–71. London: Pluto Press

Soares de Oliveira, R. (2007). Oil and politics in the Gulf of Guinea. New York: Columbia University Press.

United States Geological Survey [USGS]. (2012). Mineral Commodity Summaries 2012. http://minerals.usgs.gov/minerals/pubs/mcs/2012/mcs2012.pdf (accessed 31st July 2013)

 

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