Replicating Middle East Oil Exploits in Africa

 

Tullow Oil has made two new discoveries in Northern Kenya, boosting the prospects of turning Kenya into a potential major oil exporter by 2016. These discoveries have been done in several other countries like western Uganda, Tanzania, Ghana and Mozambique. Can the benefits experienced in the Middle East oil-rich nations be replicated in Africa?

There is huge literature in both economics and political science that explains the “resource curse”, theory. Resource-rich countries tend to have strong currencies, which impede other exports because resource extraction often entails little job creation. Volatile resource prices cause unstable growth, aided by international banks that rush in when commodity prices are high and rush out in the downturns.

Resource-rich countries rarely pursue sustainable growth strategies but instead fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.

The antidotes to these problems include: a low exchange rate, a stabilisation fund, careful investment of resource revenues, a ban on borrowing and transparency. But there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing”.

The countries must ensure that citizens get the full value of resources since there is an unavoidable conflict of interest between foreign owned companies (who form the majority) and host countries. The former want to minimise what they pay while the latter need to maximise it. Efficiently designed, competitive, and transparent actions can generate much more revenue than “sweetheart” deals. Unfortunately, many countries sign bad contracts that give a disproportionate share of the resources’ value to private foreign firms.

While oil firms repulse renegotiation for win-win deals by emphasising the sanctity of contracts and threatening to leave, they rarely do this. A fair renegotiation can form basis of a better long-term relationship. Botswana's renegotiated contracts have laid the foundations of its remarkable growth for the last four decades. Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries like Israel and Australia have done so as well.

The money gained through natural resources must be used to promote development. The old colonial mentality that regarded Africa as a place to extract resources and get them out of the country cheaply without an agenda to process the resources in the country should cease. Real growth requires training locals and ensuring small and medium-size enterprises development to provide inputs for mining operations, domestic processing, and integrating the natural resources into the country’s economic structure.

Some will argue that countries should stick to their strengths. From this perspective, these countries’ comparative advantage is having other countries exploit their resources. That is fallacious. Forty-five years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be an industrial tiger today. It might have been the world’s most efficient rice grower, but still be poor.

Kenya, Uganda and Ghana must be cautious. There is good reason to deliberately move slowly. These resources are infinite, and commodity prices have been rising. In the meantime, let us put in place reliable institutions/policies in order to ensure that the wealth generated trickles down to the most vulnerable members of the society and the public at large. But until that becomes a reality, Africa’s black gold will remain a curse. – The African Executive

• The author Okwaro Oscar Plato is an analyst with Quadz Africa Consulting. This Op-Ed is his own views. He can be reached on oscarplato2000@yahoo.com

February 2014
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