Avoiding Africa's Oil Curse
What East Africa Can Learn From Past Booms
April 24, 2014
East Africa
is the global oil and gas industry’s hottest frontier. Barely a month
goes by, it seems, without a major discovery in Mozambique, Tanzania,
Uganda, or the eastern Democratic Republic of the Congo.
This new African windfall is hardly
without precedent. Several west and central African states -- most
notably Angola and Nigeria -- have already experienced petroleum booms
of their own. Over the last decade, they benefited from a spectacular
jump in oil prices, which rose from $22 per barrel in 2003 to $147 per
barrel in 2008 and remained high, for the most part, until recently. The
spoils were enormous: from 2002 to 2012, Angola’s GDP jumped from $11
billion to $114 billion and Nigeria’s went from $59 billion to $243
billion.
The opportunity afforded by this
extraordinary decade was unprecedented and is unlikely to recur. Sadly,
however, decision-makers have mostly squandered it. If the new east
African producers are not to repeat the mistakes of the established
ones, then, they should heed the lessons of Africa’s last oil boom.
GREASING THE WHEEL
The last decade did see some improvements for Africa’s oil producers,
especially when compared to the continent’s earlier boom in the 1970s
and early 1980s. Under the stewardship of a handful of reform-minded
technocrats, countries such as Angola, Gabon, and Nigeria tamed
inflation, stabilized their economies, and wiped debt burdens clean.
They subjected chaotic banking sectors to new regulatory discipline. And
in response to criticism from the likes of Oxfam, Global Witness, and
the Open Society Foundations, they instituted some limited governance
reforms that increased, albeit marginally, the transparency around
opaque oil dealings.
Yet these improvements, though praiseworthy, failed to transform
Africa’s oil producers. The emphasis by many observers on the need for
capacity building was misplaced. The key challenge was not that elites
in these countries lacked the skills or structures to properly manage
the boom; it was their unrestricted access to billions of petrodollars.
Most were already sophisticated, worldly decision-makers with the
ability to rationally pursue their own interests. And many of them
gladly paid lip service to voluntary reform efforts such as the
Extractive Industries Transparency Initiative, a program created in 2002
to prevent corruption in resource-rich states. By centralizing and
modernizing the management of natural resource wealth, these technical
overhauls in fact made it easier for elites to exercise control over oil
revenues.
Angolan leaders, for example, talked up economic diversification and
even a commitment to industrialization. The country built up some
necessary infrastructure. But the government directed much of the oil
money toward sports stadiums, shopping malls, skyscrapers, and other
vanity projects. Most states built up foreign exchange reserves, but
politicized their management. Venal state governors raided Nigeria’s
Excess Crude Account, which was intended to put away oil profits for a
rainy day, to help win elections. And last year, Angola named José
Filomeno dos Santos, a son of the country’s president, to manage the $5
billion in its new sovereign wealth fund.
Human development indicators, meanwhile, have barely budged. Nigeria
actually saw an increase in poverty by some measures. A decade on,
Africa’s petrostates remain some of the most resource-dependent in the
world, deriving the lion’s share of government revenues from
hydrocarbons. Elites have siphoned much of the region’s oil money
offshore; the principal beneficiaries of the oil bonanza have been
Lisbon, London, New York, and Zurich, not Abuja, Libreville, Luanda, and
N’Djamena. Africa’s oil-rich states have been run by many of the same
people for decades. These decision-makers lack both developmental
ambitions and a concern for their poorer countrymen. Now flush with
petrodollars, they have become even less accountable to their
constituents at home or to their critics abroad, using oil revenues to
stave off political reform.
This outcome should not surprise experts,
who know that long-running fiscal windfalls do not incentivize bold,
politically difficult reforms, especially when those proposals conflict
with vested interests. As a result, Africa’s booming economies are now
woefully unprepared for lower oil prices, with analysts predicting a
major fiscal crisis if oil falls below $60 per barrel. That possibility
is becoming more and more likely; given the newfound abundance of cheap
U.S. shale gas and the slowdown of emerging economies, African
petrostates risk entering a post-boom era without the means of
addressing festering pre-boom development challenges.
A WAY FORWARD
In countries such as Nigeria and Angola, corruption and patronage
make reform especially difficult. But the international community can
still help prevent East Africa’s new producers from taking the same
path, provided it embraces a new approach. Voluntary initiatives have
consumed too much attention and political capital over the last decade,
often allowing non-reformist states and firms a free ride. It’s time to
embrace tougher reforms.
For starters, foreign governments must continue to pass and enforce
strong regulations on extractive industries. The 2010 Dodd-Frank bill,
for example, requires that all U.S. and foreign firms reporting to the
U.S. Securities and Exchange Commission disclose payments made to any
government for the commercial development of natural resources. The
European Union has passed similar legislation and the Canadian
government has committed to doing the same. Outsiders should also help
stem the interminable exodus of capital from Africa’s oil-rich economies
to Western capitals.
Capacity building, of course, remains essential for states that have
no previous experience dealing with extractive industries or managing
the dynamic economies that will accompany the windfall. But because the
problems of resource wealth are fundamentally political in nature, the
solutions need to be more than merely technical. Putting oil money at
the service of development in Africa means tackling the increasingly
criminalized character of political leaders and their global networks of
resource extraction, not peddling yet another package of technocratic
reforms.
In that vein, Western donors should leverage their influence in
countries such as Mozambique, Tanzania, and Uganda, where they still
provide extensive budgetary support, to encourage stronger regulatory
and institutional oversight mechanisms. Such reforms would first and
foremost have to diminish the discretionary power of political elites --
an important goal for civil society groups, many of which have
expressed fears that donor countries are downplaying their concerns
about corruption in favor of capitalizing on the coming boom.
But however important the role of outsiders, the struggle to channel
resource wealth into development will mostly play out in the domestic
arena. That’s where lawmakers decide on key legal and regulatory
frameworks that allow for greater oversight over oil revenue and empower
local communities.
In the end, success depends most on popular mobilization. Domestic
proponents of reforms need to push questions surrounding oil and gas to
the center of political life and foster large-scale activism against bad
governance. They will need help from the media and from civil society.
If past experiences are any guide, these organizations should prepare
for adversarial relationships with increasingly intolerant and
well-funded regimes and rulers who are enamored of Nigerian- and
Angolan-style governance. (Mozambicans, in fact, have already come to
fear the creeping “Angolanization” of their country.) Such organizations
must have strong global connections and benefit from extensive outside
support if they are to survive, let alone thrive.
None of this can wait much longer: within the next five to eight
years, Kenya, Mozambique, Tanzania, Uganda, and others will have joined
the club of major African energy exporters, and the window of
opportunity for shaping these sectors will have narrowed considerably,
if not closed outright. Whatever system for distributing oil profits is
established by then will define these states -- and the prospects of
their people -- for generations to come.
Source: foreignaffairs.com
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