By An Chunying

Senior research fellow of IWAAS

ancy@cass.org.cn

Since the mid 1990’s, breakthroughs have been made in oil exploration around the Gulf of Guinea in Central and Western Africa. Following Nigeria, Angola and Gabon, other countries like Equatorial Guinea, Chad and Sao Tome and Principe also became emerging oil producing countries. Despite the booming oil industry, it is still doubtful whether these African countries with favorable natural endowments will realize their economic take-offs through resource development.

“Resource Curse”

Many developing countries including some African countries are resource-based economies. Their economic activities, export in particular, are heavily dependent on natural resources. Their national economies have largely developed on the base of abundant natural resources. The fact that countries rich in natural resources can create wealth leads to the theory that resources are the fundamental factor for the wealth of a nation. According to this theory, countries with more natural resources enjoy advantage in further exploitation and processing, making it easier to develop their economies.

But reality shows the opposite. A number of economists found out that countries that develop fast are those that relatively or absolutely lack of resources in the developing world, while the countries with slow economic growth are usually those that are rich in natural resources. Professor Joseph E. Stiglitz named this strange phenomenon the “resource curse”. [1] Professor Chen Zhiwu of Yale University divided 45 case countries into three groups to observe the relationship between national income and resource endowments. His major parameter is per capital GDP vs. per capital oil and natural gas reserves. His research showed that in 2001, per capita GDP of countries with the highest per capita reserves of oil and natural gas stood at $11546; that of countries with medium reserves stood at $12739; and that of countries with the lowest level of oil and gas reserves stood at $10901. From the research he drew a conclusion that per capita natural resources is not strictly related to per capita GDP, and a country’s national income does not have direct bearing on its resource endowment.[2]

Why some countries with rich natural resources do not enjoy corresponding growth? In brief, the economic research community offers four explanations:

First, discovery of oil and other natural resources has made them the most wanted source of wealth in national economy. This bonanza brings the related governments huge profit and these governments gradually lose the incentive for innovation and growth, hence gradually losing international competitiveness in many areas.

Second, oil export brings a large amount of foreign reserves, which leads to inflation at home, making the cost of imported goods much lower than domestically manufactured goods. As a result, these countries are not willing to develop their own manufacturing industry, leaving it to decay. Therefore, the development of resources actually squeezes out development opportunities of other economic sectors, leading to stagnation of the national economy in general, or what we call “the Dutch Disease”. [3]

Third, development of natural resources has its fluctuations, the management of which is very difficult. Investors are always making investment when the energy prices are high and withdraw their money when prices drop, causing fiscal tension in oil-exporting countries. “Economic activities therefore have stronger fluctuations than prices of commodities. Profits during the boom are thus offset by economic recession that follows.”[4] As natural resources flow in the international market, the countries that only provided primary products gain very low and fluctuating values, making sustained and rapid economic growth out of the question.

Fourth, in many developing countries, systems are immature with inadequate legal framework, low governance capacities and ambiguous property rights. This easily gives rise to variable phenomena detrimental to sustained economic growth, such as unequal distribution of wealth created by resource development, rampant corruption and rent-seeking[5], inadequate input in human capital, frequent civil unrests, etc. These phenomena are especially prominent in Africa.

Through our study on the paths of economic growth in different countries in the past decades, we can see that resource-lacking countries have generally grown faster than resource-rich countries. However, it does not say that resources itself is “curse” or “blessing”. The core of the “resource curse” theory is that resource endowment is not the adequate condition for economic development. If, in the course of resource development, a country fails to properly coordinate resource-related industry with other industries and manage resource-generated income well, then the negative values of resource development will occur, making it hard to sustain short-term economic growth and improve people’s living standard.

Case study on the effect of oil resource development in Africa

Oil is God’s gift for Africa. About 30 countries in sub-Saharan Africa have oil reserves, among which those with most reserves are Nigeria (with proven reserve of 4830 million tons), Angola (740 million tons), Gabon (340 million tons), the Republic of Congo (210 million tons), Sudan (77.12 million tons) and Cameron (54.79 million tons).[6] Oil exploration in sub-Saharan Africa started in the 1950’s. In recent years, Equatorial Guinea and Chad along the Gulf of Guinea have become emergent oil-producing countries. Currently, oil exploration has become a pillar of the national economy of these countries. In 2003, in Nigeria, the biggest oil producing country in sub-Sahara Africa, oil revenue accounted for 32% of GDP, 80% of government revenue and 90% of foreign exchange revenues.[7] In Angola, the second largest oil producing country in the region, oil revenue accounted for 54% of GDP, 90% of government revenue, and 90% of export revenue.[8] But what has 50-year oil development brought to African countries? Are they proofs of the “resource curse”?

Oil is a strategic energy. Oil development becomes the driving force behind economic growth of oil-producing countries.

First, oil resource development has accelerated growth rate of oil producing countries. With huge foreign investment, resource development goes constantly deeper and the positive effects of oil production have been gradually demonstrated. According to a report of the African Development Bank in September 2004, in 2003, growth rates of Equatorial Guinea and Chad stood respectively at 14.7% and 9.1%, among the top three in Africa.[9] In 2004，growth rate of oil-producing countries in Sub-Saharan Africa was 8%, higher than the average 4.75% growth rate of non-oil producing countries in the region. Chad enjoyed the rapidest growth in Africa, with its DGP increasing 30.8% in real terms. In the same year, the growth rates of Equatorial Guinea (13.6% of DGP growth in real terms), Angola (11.2%), Sudan (6.6%), and Sao Tome and Principe (6.5%) stood at the second, fourth, ninth and tenth places respectively,[10] which were largely due to their increase in oil production.

Second, increase in oil export revenue and oil-related taxes improved the fiscal situation of oil-producing countries. In 2004, the oil revenue of the Republic of Congo was $378.7 billion.[11] Such a huge amount of oil dollars played an important role in reducing fiscal deficit, covering expenses and paying off foreign debt.

Third, the storage and transportation of oil resources boosted development of the transportation industry. Due to the import of oil, oil products and related equipment, major ports along the Gulf of Guinea such as Pointe Noire, Douala and Lagos saw rising business and expanded construction. Oil has thus injected tremendous vigor in the transportation industry. The development and utilization of resources have brought foreign exchanges to African countries, promoting the development of the securities market and foreign trade in Africa. It is this resource effect that lays a solid material foundation for short-term economic growth of Africa.

It cannot be denied that oil development has also created some negative impacts, which some scholars call “oil diseases of Africa”. It is mainly reflected in the following aspects.

First, due to single-minded pursuit of oil profit, some oil-producing countries suffer from simplified economic structure, shrank agriculture, slow development of manufacturing industry and inadequate domestic supply of grain and industrial products. Even in Nigeria, the largest oil-producing country in Sub-Saharan Africa, its gasoline relied on import and it once suffered from oil shortage. In Gabon, 60% of food supply comes from abroad.[12] All these are reflections of the “Dutch disease”.

Second, in some oil-producing countries, civil wars and other disputes are related to resource grappling. Many oil-rich countries such as Angola, the Republic of Congo, Nigeria, and Sudan have seen conflicts, turmoil and secessionist struggles. Angola’s turmoil lasted for 25 years. Its oil-rich Cabinda province is struggling for independence for its own interests. Even since French company ELF successfully developed the Nkossa offshore oil field, the conflicts between government troops and anti-government troops in the Republic of Congo erupted one after another in frequent civil wars. In 2003, oil resources were found in the Mbanie Island between Gabon and Equatorial Guinea, followed by disputes over the ownership of the island between the two countries. Despite complicated reasons behind these conflicts and disputes, they are all somewhat related to resources, especially oil revenues.

Third, in the face of the oil bonanza, some senior government officials made personal gains while the public did not benefit from oil exploration, hence leading to the acute problem of the uneven distribution of oil wealth. According to a survey by the International Monetary Fund, from 1997 to 2002, the total oil revenue of Angola was around $17.8 billion, but about $4.22 billion was not registered in national account, equivalent to the annual social expenditure of the country.[13] In Equatorial Guinea, one of the poorest countries in Africa, there were a privileged few who made their fortune from oil revenue. Although oil resources are constantly drilled and creating tremendous wealth, the living standard of the ordinary people in oil-producing countries has not been improved. For example, in traditional oil-producing country Nigeria, per capita income in 1980, 1990 and 2002 stood at $780, $270, and $300 respectively. The figures for emerging oil-producing country Chad were $240, $280 and $220.[14] Therefore, we should not fail to see worsening poverty in oil-producing countries despite their economic growth rates.

The negative effects of oil resource development cannot be simply blamed on oil resources itself. There are many reasons behind. Most African countries are former colonies, whose borders were set randomly by Western colonialists based on their spheres of influence, which planted the seeds for future civil wars and border conflicts. In addition, some African countries are still in the process of forming a unified national culture, making civil unrests inevitable. Oil development is only the fuse of civil unrest, while a shaky political foundation is the deep-rooted reason. Since government power are not exercised in standardized procedures and checked under a defined legal framework, it is often abused or eroded, leading to rampant corruption in some African countries. Of course, policy errors are also at work. The governments’ overdependence on oil dollars has denied them opportunities for industrial restructuring. Besides, in terms of the development mode of oil resources, many countries are confined to oil exploitation and transportation, with weak oil refining capabilities. In Nigeria, the production of crude oil by its state-run oil companies is only 5-6% of the total.[15] Its short industrial chain deprives it of gaining more through resource procession. These countries also rely on external help for oil exploitation. Because of the lack of large investment and advanced technology, they have to turn to big foreign oil companies. Currently, the control of oil in African countries largely lies in the hands of multinational corporations of France, the UK, Italy and the US, while the host countries only receive part of the benefits. As a result, development in these countries sees no improvement despite rising oil production while the number of poor population is rising.

Redefinition of “concept on resources” and “concept on development”

There is a lot to think about the economic and social development paths of oil-producing countries. Over the past half a century, those countries which rely only on their rich natural resources have had to see their relative position of wealth declining and those resource-lacking countries rising. Here is a thought-provoking contrast. Thirty years ago, both Indonesia and Nigeria relied on the oil industry as a pillar and had similar per capital national incomes. But now, the per capita income of Indonesia is about 4 times that of Nigeria.[16] So why does rich resources bring disasters to some but good luck to others? More and more African countries began to realize that while oil, natural gas and other resources may serve as an important impetus for economic growth and social development, they alone do not necessarily bring wealth and wellbeing, so oil-producing countries should abandon their blind faith in resources. While developing the resource industry, African countries should also participate in international division of labor and competition and develop other industrial sectors to sustain coordinated and rapid development of the national economy. The fundamental purpose for economic growth should be to improve the living standard of most African people, so governments should pay more attention on the quality of economic growth.[17] Therefore, how to turn the underground treasure into real wealth will determine the future of resource-rich countries.

Based on a sober understanding of the relationship between resource development, economic growth and the improvement of people’s living standard, African countries have taken measures to give full play to the role of resource development in sustainable economic development and social progress.

First, strengthen the government’s crackdown on corruption and transparency in project operation. For cost review of engineering companies, the Nigerian government has initiated a “proper procedure mechanism” and a new “operation review plan” to improve transparency and credibility of the government in project implementation. At the same time, the Economic and Financial Crimes Commission (EFCC) of the Nigerian government also stepped up its work to curb economic corruption.

Second, improve the government’s expenditure structure to strive for sustained economic growth and reduced number of poor population. In 2003, investment in infrastructure of the government of the Republic of Congo accounted for 65.4% of total government investment, while investment in social security, health care and education accounted for 14.2%,[18] demonstrating the government’s wish to use oil revenue to improve the general level of the national economy, ensure stability of the country and improve the living standard of the people.

Third, use the opportunity of oil development to readjust industrial structure and seek new economic growth points. Deeply aware that oil resources will exhaust someday, decision-makers of the Equatorial Guinea government are trying to develop farming, forestry, fishery and the mining industry. The government has formulated a plan aimed at improving food producing capacity of the country. It provides micro credit to farmers and fishermen with certain production capacities to support their development.

Fourth, stabilize domestic prices and realize value increase of oil dollars by reinvesting gains from oil resource development. To prevent rapid increase in oil dollars from driving up inflation rate, oil producing country can divert rapid cash flow from running into their countries by investing them in the stock markets, securities market and real estate sector and take the gains gradually. Nigeria is implementing this method to ensure that the gains from resource sales will be reinvested. Nigeria has set out to establish a fund for economic stabilization and sell resources in the future with more transparency and competitive bidding in the hope that when natural resources finally drain, fixed capital and human resources, true resources of the country, will increase.

Problems concerning resource development in developing countries have also caught attention of the international community. In December 2003, the World Bank signed the Initiative to Improve Transparency in Excavation Industry, promising to work with developing countries and MNCs to explore ways of publishing incomes from oil, natural gas and the mining industry to improve income transparency. In September 2004, the World Bank released the Realizing the Best Balance—the World Bank Group and the Excavation Industry: Final Review on the Excavation Industry, which clearly outlined two measures. First, improve governance structure and transparency in resource-developing countries. While discussing country specific aid and providing loans, the World Bank and other international organizations should touch upon the excavation industry. For example, while negotiating with the Republic of Congo on “HIPC” status, it stressed on transparent management of the oil industry. The IMF made it clear that if the ROC did not strictly control its use of extra-budgetary oil income and continued to use oil to pay off debt, it would not be qualified to receive aid under “HIPC” agreement. Second, establish an independent supervision mechanism composed of investors, government of the resource country and civil society under the oversight of international organizations and agencies and set up a system of indicators that reflect how the excavation industry helps reduce poverty in order to ensure that the poor get real benefits from resource development[19]. The Chad-Cameroon oil pipeline project, the largest oil project in Africa, is a good example of supervising oil income planned by the World Bank, the purpose of which is to use the project proceeds to improve the wellbeing of all Chadians. The World Bank set a clear-defined guarantee plan, such as sending all oil income into a custody account in London, which is completely open and under audition. After paying debt to the World Bank and the European Development Bank, Chad must devote 10% of oil revenue to the “future” fund; 70% to prioritized development areas including health, education, infrastructure, rural development, water supply and environment; 15% to daily maintenance and management of the pipelines, and 5% to the oil-production area for development projects. Expenditures from the oil account must be approved by a supervisory committee composed of people from the administrative department, the parliament, civil society, human rights organizations and religious organizations.

The priorities of measures by the African countries and international organizations alike lie in the transformation of management models of resource revenue and its expenditure structure, with inadequate attention to the independent development capacities of resource countries and their crude oil processing capabilities, hindering them from benefiting from resource development to the largest extent. Therefore, while practicing new “concept on resources” and “concept on development”, resource-rich countries should strive for new resource development models, added value from resource processing and the extension of the industrial chain.

Conclusion

1. As one of the basic factors for economic development, natural resources only provide a potential capability of economic development. Under modern economic conditions, the influence of natural resources on sustained economic growth of a region is weakening. Natural resources are only the “initial beneficial factor”. In the process of economic growth, natural resources are one of the primary endowments for the formation of productivity, which is subject to many constraints before being unleashed. For example, the administrative capacity of the government will decide the development effect while human resources will determine whether they can be fully utilized. In the final analysis, natural resources is only a “raw material” for a region to carry out production, which in itself will not automatically bring a bright future for Africa. In today’s world of economic globalization, natural resources can flow freely in the international market. As a result, resource development can bring wealth, but it will not automatically drive sustained economic growth.

2. The civil unrests, corruption and other disharmonious phenomena in the process of resource development in Sub-Saharan African oil-producing countries are rooted in multiple historical and realistic reasons, such as colonial legacy and immature legal system. They cannot be attributed to oil alone. Black gold is not the source of all evils. “Resource curse” is not an irreversible rule. We have no reason to say that an oil-rich country cannot enjoy good development. However, without a full-fledged legal system and a proper economic structure, oil may serve as the source of ill luck.

3. Oil revenues should be used to improve the quality of economic development to reverse increasing poverty. Oil is not renewable. African states should “think about potential dangers before they arrive” and consider their countries’ development in the “pose-oil era”.

4. In order to achieve the goals of getting rid of poverty and realizing prosperity, African countries should grasp the opportunities for political and economic development brought about by the new wave of oil development through improving laws, regulations and mechanism, improving government administration, making the best use of oil revenues, developing science and technology and improving people’s living standard. If African oil-producing countries can take effective measures, they will be able to give full play to their resource advantage, grasp the opportunities of economic development, reduce poverty and realize the strategic goal of economic and social sustainable development in Africa. According to the latest survey by geologists on African countries, it is estimated that the proven oil reserves of Sub-Saharan Africa is around 56 billion to 60 billion barrels and that its potential oil resources can be between 100 billion to 120 billion barrels between 2004 and 2025.[20] Experts predict that the next 25 years will be a golden period for the oil and gas industry in Africa.