The Economics of the Paradox of Plenty Theoretical and Empirical Implications for Uganda s Oil Bonanza 1. Introduction Felix Meier zu Selhausen, Mountains of the Moon University Oil deposits had been suspected in the Albertine Lakes Basin on the border between Uganda and the DRC for almost a century. Since the confirmation of exploitable oil in 2006 there have been numerous voices predicting the future outcome of the Ugandan oil bonanza. Oil production is estimated to begin in late 2011, while full-scale production of 150,000 barrels per day may only be reached by 2016, providing rents between 10 and 15 percent of GDP for a period of 20 years (Gelb and Majerowicz, 2011). The estimated $50 billion worth oil resources (3 billion barrels of crude oil) were explored by Heritage Oil and Gas Limited in 1997 which sold off its operations to Ireland s Tullow Oil in 2010. That company sold licenses and assets to China National Offshore Oil Company (CNOOC), France s Total SA and London-listed operator Heritage Oil. These deals have already boosted revenues worth some $880 million of taxes for the Ugandan Revenue Authority even before any oil has been extracted from the ground (The Independent, 2011a). However, currently Heritage and the Ugandan government are disputing in London over the validity of a capital gains tax. There is a lot of talk and controversy about Sub-Saharan Africa s potentially largest onshore field to be exploited commercially. Perceptions range from relief that it was not discovered and exploited during the dark chapter of the Idi Amin era (1971-1979) to Norwegian hopes, turning the black gold into a catalyst to sustainable growth and improved development prospects for the benefit of the entire population. Uganda is joining the oil game late. For the youngest future oil and gas producing nation this grants an exclusive opportunity to identify the numerous lessons learned from a vast political and economic laboratory when it comes to natural resources, particularly oil and minerals. Consequently, Uganda s government can choose from distinctive development strategies, providing quite a range of cases that beckon hope and peril. These strategies range from diamond-rich Botswana, experiencing four decades of unprecedented economic growth (Acemoglu et al., 2001) to the Nigerian nightmare doubling poverty levels, sky-rocketing corruption and risen infant mortality rates in only four decades despite ballooning petroleum revenues of more than $340 billion (Sala-i-Martin and Subramanian, 2003). Certainly, Nigerians today are significantly poorer than before the oil-boom. Equivalent problems plague Africa s other petroleum producers, like Chad, Angola, Gabon, and Equatorial Guinea where petrodollars hardly trickle-down to the average citizen. Where and how will Uganda position itself and which lesson is the landlocked country advised to take from both past empirical experience and fundamental theory? This article aims to uncover the principle lessons learned from past natural resource management in the context of poverty, building on both theory and empirical evidence. The discussion is divided into three parts: Section 2 reflects on the status quo of oil production in Africa, Section 3 provides a theoretical introduction to the resource curse and identifies strategies built on empirical evidence. Section 4 concludes. 1
2. Oil in Africa Oil production refers to the actual extraction of oil from drilling operations, in contrast to the proven oil reserves a country is sitting on. Eleven African economies produce oil (Table 1), collectively making up 12 percent of world oil production while holding 10 percent of globally proven reserves. This is roughly the same amount of oil Saudi Arabia produces individually the world s major oil and natural gas producer. In terms of production Nigeria is the largest African oil producer, producing more than a fifth of the continent s crude (Table 1). It s closely followed by the trio of Algeria, Angola and Libya. All four African prime producers are OPEC members, making up for 76.5 percent of the continent s total production (Table 1). The Organization of the Petroleum Exporting Countries (OPEC) represents an intergovernmental oil cartel of twelve developing countries. These OPECcountries produced more than 41 percent of global crude oil in 2009 and hold more than 85 percent of globally proven reserves. Given that Ugandan oil production is predicted to reach 150 thousand of barrels a day by 2015, Uganda is estimated to find itself within the production levels ranks of today s Gabon and Chad (Table 1). In terms of globally proven oil reserves (Table 2), the Middle East (mainly Saudi Arabia, Iran, Iraq, Kuwait and the United Arab Emirates) sits on the lion share of around 57 percent; however production lies at over 30 percent. Latin America (mainly Venezuela and Brazil) produced close to 9 percent while accessing proven reserves of 15 percent, mainly due to Venezuela that alone holds 13 percent of worldwide reserves. Europe and Eurasia (including Russia) possess more than 10 percent of global reserves. Production lies at more than 22 percent. North America (Canada, USA and Mexico) produces close to 17 percent of global oil, while only 5.5 of world reserves belong to their territory. Asia and the Pacific produced more than 10 percent in 2010, while only holding 3.3 percent of global reserves. In terms of worldwide oil consumption (Table 2) no other country consumes as much oil and gas as the United States. In terms of world population this means 4% consumes more than a fifth (21.7%) of global oil. China s economic growth miracle and subsequent changing consumption pattern demanded a tenth (10.4%) of global oil (Figure 3), projected to rise in the future. Japan and India consumed 5.1 and 3.8 percent respectively. Thus, Africa (3.9%) consumes equally as much as India. Europe, Northern America and Japan consumed in the year 2010 more than half of world oil and gas (52.5%). Table 1: African oil producers, 2010 (as percentage of African production) *OPEC members. 1000 % barrels daily Nigeria* 2402 23.78 Angola* 1851 18.33 Algeria* 1809 17.92 Libya* 1659 16.43 Egypt 736 7.29 Sudan 486 4.81 Rep. of Congo 292 2.89 Equatorial Guinea 274 2.71 Gabon 245 2.43 Other Africa 143 3.41 Total 10,098 100,00 Source: BP (2011), BP Statistical Review of World Energy June 2011 2
Table 2: Global oil production, proved oil reserves and oil consumption (as percentage), 2010. Production* Proved reserves** Consumption*** Middle East 30.3 54.4 8.9 Europe & Eurasia 21.8 10.1 23.5 North America 16.6 5.1 25.8 Africa 12.2 9.5 3.9 Asia & Pacific 10.2 3.3 31.5 Latin America 8.9 17.3 7 * Production of oil by region (as percentage of world production), 2010. ** Distribution of global proved oil reserves (as percentage of world reserves), 2010. *** Consumption of oil by region (as percentage of world consumption), 2010. Source: BP (2011), BP Statistical Review of World Energy June 2011 3. Theoretical and Empirical Lessons Learned Natural resource wealth forms an important determinant to which extent African nations have been able to integrate themselves into the world markets, regardless of their countries institutional development and choice of policies (Meier zu Selhausen, 2009). Yet, in many African oil and mineral exporting countries natural resource abundance appears to be a curse rather than leading to favourable economic outcomes (Sachs and Warner, 2001). In other words, African oil producers score as a group lowest on global governance indicators. Radelet (2010) for example identifies those non-oil exporting Sub-Sahara-African (SSA) countries to have grown by an average of 3 percent during the period 1996-2008, while for the same period SSA oil-exporting countries only grew by around 1.8 percent. However, on the other end of the spectrum SSA produced also contrasting examples, such as mineralendowed Botswana and South Africa that managed to avoid such curse, through the adoption of good policies and a successful government resource-management, turning natural-wealth into sustained economic growth (Acemoglu et al., 2003). These scarce African success stories simply highlight that natural resources have not been the royal road to growth for Africa, unless pre-existing institutions had been exceptional (e.g. Botswana and Norway), whereas institutions refer to rule of law, private property rights, independence of the judiciary, bureaucratic capacity, personal liberty and political stability. The so called natural resource curse or paradox of plenty describes the failure of natural resource-endowed countries to benefit from its natural wealth. The resource curse is a phenomenon for which at least three processes may come into play. First, the vast revenues of the resource exports cause the country s currency to rise in value against other currencies. Hence, it makes imports cheap to the point of undercutting local producers and economic diversification. As a result it makes other export activities uncompetitive, in particular manufacturing industries and agriculture. This effect is called Dutch Disease after the effects of North Sea gas on the Dutch manufacturing economy in the late 1960s. Given, that the Ugandan food markets (with the exception of tea and coffee) and manufacturing are not well connected to global markets this potentially represents less of a problem. However, prospective manufacturing and associated foreign direct investment could be hurt when manufactured products are not competitive in the global market. Furthermore, Uganda is advised to use its petrodollars for investment into its public infrastructure, agriculture and diversification of its economy rather than consumption to avoid Dutch Disease problems. 3
The second is the high volatility in commodity prices (boom and bust cycles) having irregular effects on revenue inflows and hence economic growth for a country that bases its exports mainly on primary resources. Hence, the export revenues ultimately depend on the global market price. The third is the corrosive effect oil and gas often has on governance and institutional capacity, also referred to as rent-seeking (Karl, 1997; Ross, 2001). Rent-seeking, the income of men who love to reap where they never sowed (Smith, 1789), is a concept for which two stages come into play: First, the state extracts so called rents, which in fact are the influx of windfall oil revenues from the international arena. If we take a barrel of oil out of the ground, it costs about $7 to get it out - it s worth about $80 in the market, so the rents are about $73. Second, these rents then are allocated internally by means of political criteria. Consequently, in these states, rulers have no interest to decentralize power to other stakeholders but undermine efficiency, responsibility and accountability (Karl, 1999). Moreover, in a rentier-economy the government relies on rents instead of taxes for the bulk of their revenues which erodes gradually the social contract of accountability between government and citizens. In order to minimize such negative institutional outcomes a new publish what you pay law, the Dodd-Frank Wall Street Reform and Consumer Protection ACT will force all companies dealing with oil, gas or minerals (copper, diamonds, coltan etc.) which are listed on American stock exchanges to release information on their payments (profit taxes, royalties, entry fees, benefits to host governments etc.) that they are making to host governments to the US Securities and Exchange Commission (SEC) (The Independent, 2011). The new lay aims at once these payments become public knowledge they it increases transparency and counters corruption. History has supplied us with manifold cases of how valuable natural resource-revenues exacerbated existing institutional weaknesses, leading to greater corruption and poor overall governance. Jensen and Wantchekon (2004), find that for the period 1970 to 1995 African countries with high resourcedependence were negatively correlated with democracy and tended to be more authorial than lessendowed African countries. In addition, the quality of institutions is a reliable driver of economic development and foreign investment. Corruption and rent-seeking scare-off oil-related processing industries and manufacturing business and therefore diversification of its economy. In sum, whether oil will reveal itself as curse or blessing for Uganda is likely to be dependent on its institutional capacity. Gelb and Majerowicz (2011) suggest that any alternatives for using rents should anticipate both their indirect effects on accountability and their direct benefits through future investment. They propose the distribution of oil rents to the population through mobile cash transfer in order to mitigate some of the accountability risks associated with oil revenues. They calculate if oil-revenues account for 10 percent of GDP that would translate into $50 per head annually a significant contribution to reducing poverty levels. However, transfers through community-based programs and to individuals bear their own limitations and leakages. Yet, there is no infrastructure for institutionalised individual cash distributions, for instance past per-student cash grants allocated to Ugandan schools ended up in the pockets of district officials (Reinikka and Svensson, 2004). However, this simply shows the importance of transparency to reduce leakages, e.g. through regular newspaper publications of money distributed to institutions, and including a following check-up on how much money actually reached its destination. Furthermore, South Africa successfully introduced a system of cash-transfers for the wide distribution of pensions, child allowances and disability payments, which beckons hope to implement such a cash transfer system also in a smaller SSA-country like Uganda along with investment into its public infrastructure, agriculture and economic diversification. 4
4. Conclusion If Uganda manages it key asset responsibly it will power its ascent to prosperity, which will affect the lives of ordinary Ugandan for decades to come. In the words of Paul Collier (2010): We are ethically obliged to pass on to future generations the equivalent value of natural assets that we were bequeathed in the past. In the end, the decision must be found on a proper sense of responsibility toward the global poor and the future, not pure self-interest. Hence, institutions that invest transparently rather than succumb to corruption and rent-seeking will be key for mitigating the risk of the resource curse and harnessing Uganda s enormous natural wealth for the benefit of the entire society. Literature Acemoglu, D.; S. Johnson and J. Robinson (2003): An African Success Story: Botswana In Dani Rodrik, ed., In Search of Prosperity: Analytic Narratives on Economic Growth, Princeton University Press, Princeton. British Petroleum (2011): BP Statistical Review of World Energy June 2011, London. Collier, P. (2010): The Plundered Planet, Oxford University Press, Oxford. Collier, P. (2008): The Bottom Billion, Oxford University Press, Oxford. Gelb, A. and Majorowicz, G. (2011): Oil for Uganda or Ugandans? Can Cash Transfers Prevent the Resource Curse?, Working Paper 261, Centre for Global Development, Washington D.C. Jensen, N. and L. Wantchekon (2004): Resource Wealth and Political Regimes in Africa, Comparative Political Studies No. 37 (7). Karl, T. (1999): The Perils of the Petro-State: Reflections on the Paradox of Plenty, Journal of International Affairs, Vol. 53, No. 1. Karl, T. (1997): The Paradox of Plenty Oil Booms and Petro-States, University of California Press, Berkeley. Meier zu Selhausen, F. (2009): On Geography and Institutions as Determinants of Foreign Direct Investment a cross comparative analysis of sub-saharan African relative to developing countries, Working Paper No. 6, Universidad de Cantabria. Sala-i-Martin, X. and A. Subramanian (2003): Addressing the Natural Resource Curse: An illustration from Nigeria, NBER Working Paper, No. 9804. Radelet, S. (2010): Emerging Africa: How 17 countries are leading the way, Brooking Institution Press, Baltimore. Reinikka, R. and Svensson, J. (2004): Information: Evidence from a Newspaper Campaign to Reduuce Capture, Working Paper, IIES, Stockholm University. Ross, M. (2001): Does Oil Hinder Democracy?, World Politics, Vol. 53, pp. 325 61. Sachs, J. and Warner, A. (2001): The curse of natural resources, European Economic Review, Vol. 45. Smith, A. (1789): An Inquiry into the Nature and Causes of the Wealth of Nations, Kessinger Publishing, Whitefish. 5
The Independent (2011a): Balancing the inflation budget, No. 164, May - June 2011, pp.30-31. The Independent (2011b): Oil, Issue 180, September 16-22, 2011, pp. 11-13. 6