'The Resource Curse': Why Africa's Oil Riches Don't Trickle Down to AfricansPublished: October 31, 2007 in Knowledge@Wharton
Africa is cursed -- with riches. In an era of rising petroleum prices, African oil is drawing new interest from major companies around the globe, says John Ghazvinian, author of Untapped: The Scramble for Africa's Oil. They see the continent as the most promising place in the world for new production. It doesn't have the huge deposits that the Middle East and Russia do, but what it does have is accessible and largely unexploited. And the oil's high quality makes it relatively inexpensive to refine.
"Since 1990 alone, the petroleum industry has invested more than $20 billion in exploration and production activity in Africa," writes Ghazvinian, a visiting fellow at the University of Pennsylvania, who spoke at a recent event sponsored by the Wharton African Students Association. "A further $50 billion will be spent between now and the end of the decade, the largest investment in the continent's history."
But most Africans are seeing little benefit from this influx of oil drillers and investment. In fact, because of an economic paradox known as the "Resource Curse," they are often hurt by exports of their countries' oil. "Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil," Ghazvinian notes, adding that oil exports inflate the value of a country's currency, making its other exports uncompetitive. At the same time, workers flock to booming petroleum businesses, which saps other sectors of the economy. "Your country becomes import-dependent," he says. "That decimates a country's agriculture and traditional industries."
Consider Gabon, which produces about 300,000 barrels of oil a day. "It's covered with tropical rainforest, but it's hard to find bananas that are grown there. They are mostly imported from Cameroon. At one point, Gabon was the world's largest per-capita importer of champagne." The oil -- and the champagne -- will eventually run dry. Gabon, with relatively small reserves, is already coming to terms with that possibility. By then, much of the rest of the country's economy may have atrophied, Ghazvinian says. Economists also call this phenomenon "the Dutch Disease" because it was observed in the Netherlands after natural gas was discovered in the 1960s in that country's portion of the North Sea. The Dutch manufacturing sector withered as the gas industry grew.
In addition, oil money tends to corrupt politicians. They end up vying to pocket a share of the finite petroleum riches, rather than looking for ways to invest in their country's long-term prosperity. "The governments aren't dependent on income taxes and therefore don't have to do what the citizens want," he says. "The state isn't an engineer of economic growth, but a gravy train. None of the money gets down to the people."
Some Westerners chalk up all of Africa's problems to corruption, thus absolving themselves of any responsibility, he suggests, adding that the truth is often far more complicated. Some local leaders do abscond with ill-gotten funds, but they then stash that money in Western banks where the bankers look the other way. Western governments, too, overlook bad behavior, as long as the oil flows reliably through the pipelines. "There are incentives on both ends. At the moment," Ghazvinian says, "there are no incentives for the resource-rich governments to do the right thing."
Living in the Stone Age
An historian by training and a journalist by trade, Ghazvinian isn't an anti-corporate crusader or an oil-industry apologist. Rather, he set out to portray a region that, thanks to its oil riches and its debilitating poverty, is increasingly occupying a place in economic and political debates in developed nations.
Africa's oil belt lies mainly along its Western coast in the countries abutting the Gulf of Guinea. "One third of the world's new discoveries of oil since 2000 have taken place in Africa," Ghazvinian notes.
The world's two most energy-hungry economies, the United States and China, are vying to stake out spheres of influence in the oil-producing areas. Chinese oil firms, which typically don't face the same quarterly earnings pressure that Western ones do, are pouring billions into all sorts of infrastructure projects across the continent, Ghazvinian says. At the same time, politicians like Tony Blair, Britain's former prime minister, and activists like Bono, singer for the rock band U2, and Jeffrey Sachs, an economist at Columbia University, are calling for multinational efforts to relieve African poverty and kick-start the continent's oft-sputtering economies.
Some commentators have pointed to Norway as a possible example of the way in which Africa's oil-rich countries might conduct themselves. Norway, the world's third largest oil exporter behind Saudi Arabia and Russia, salts away a large share of its wealth in a national pension fund, now worth more than $300 billion. The fund is expected to grow to about $900 billion in the next decade and invests only passively, in non-Norwegian stocks and bonds. That limits the temptation of politicians to use the money for pork-barrel projects. It has been nicknamed "the future-generations fund."
Ghazvinian doubts whether a comparable vehicle would work in Africa. Norway is a small, homogeneous country of about five million people that was relatively advanced when its oil began to gush, he points out. It already had the sorts of public institutions that enabled it to prudently manage its newly found wealth. "I'm not sure that a future-generations fund can be airlifted to Chad. You would need a lot of healthy, functioning civil institutions before you could do that. Chad is one of the world's poorest countries," with 80% of its citizens living below the poverty line.
Even Nigeria, where the oil industry has operated for decades, probably wouldn't be able to adapt the Norwegian model, he says. While its oil wealth is vast -- it has the world's 10th largest reserves -- so are its problems. It's both an enormous country, with about 135 million people, and an ethnically diverse one, with hundreds of distinct ethnic groups. And its reserves lie in the poor, rural Niger Delta. "People in the Niger Delta live almost as if it's the Stone Age," Ghazvinian says. "They live in stick huts on little islands in the mangrove swamps. Many of the villages are accessible only by boat. Nearby, you will have these multibillion oil facilities, with executives being dropped in by helicopter."
Little of the oil wealth gets invested back into the delta and few of the companies employ local people, he points out. That has contributed to civil unrest and lawlessness. "A thousand people a year are killed in small-scale guerilla warfare in the delta," he says. "Boys will drill holes in the pipelines at night and suck out the oil: 100,000 to 200,000 barrels a day were disappearing like this at one point. The money is siphoned off to arm the guerilla groups."
The situation in other African oil-producing countries is just as difficult. Equatorial Guinea is "a family business masquerading as a country," Ghazvinian quips. "It's one of the most closed societies on earth."
As he researched his book, Ghazvinian visited all of the major sub-Saharan oil producers and typically found the same situation in each. The sizzling oil sector was enriching a clique of politically connected people and creating boomtowns catering to the industry but seldom providing much wider economic benefit or even employing many local people. "It's a capital-intensive industry, not a labor-intensive one," he points out. "So they don't need to hire a lot of people, and the ones they do hire are petroleum engineers. You have local people hired to be security guards, but that's about it."
On top of that, the flow of oil riches can create bizarre contrasts. Luanda, the capital of Angola and also the center of its oil industry, is just one example. Luxury high-rises are being built there despite the country's extreme poverty, and oil companies are paying $15,000 a month to rent apartments for their employees. For expatriates, "it's one of the most expensive cities in the world," he says. "The disparity between rich and poor there is like nowhere else in the world." Oil companies are flocking to the country because its reserves lie offshore, allowing for safer drilling than in, say, the Niger Delta.
These same firms often argue that their role in Africa is simply getting oil out of the ground, maximizing profits and paying taxes. Politicians, they contend, are responsible for investing the tax revenues in education and infrastructure.
"The oil companies will often say that they would like to invest in infrastructure or schools, but they don't have the expertise," Ghazvinian notes. "That's glib. Exxon Mobil is making billions and can hire consultants. They could do more. They don't have to usurp the role of government to do something useful in the countries where they are operating." At the very least, he adds, the oil companies might come together and fund some sort of petroleum engineering university so more Africans could work in the industry.