With oil prices low, the region’s major oil-exporting economies have a chance to unlink their economies from natural resources.
As a whole, much of Africa’s economy is driven by oil. In 2018, the continent’s oil producers extracted, on average, more than 800 million barrels of crude oil per day, earning them $3.3 trillion in revenues between 2007 and 2017. This is more than seven times the amount of foreign aid it received over the same period.
Such vast oil income could have sown the seeds of economic success. In particular, it could have funded the infrastructure—electricity, transportation, paved roads, schools, water, sanitation, and information and communications technology—that would have paved the way for industrialization and prosperity.
But a quick glance suggests that the region has little positive to show for a decade of such oil proceeds. Instead, it is drowning under mounting debt. In fact, despite African countries benefiting from the G-8’s Multilateral Debt Relief Initiative, which was adopted by the International Monetary Fund in 2005 and called for the cancellation of debt to the fund, the International Development Association of the World Bank, and the African Development Fund for qualifying countries, debt stocks across the continent are again on the rise. They are quickly reaching unsustainable levels, as Justin Sandefur, of the Center for Global Development, has pointed out.
Another issue is rising levels of corruption. Transparency International cites estimates that African countries on average together lose at least $50 billion annually to illicit financial flows. And more than half of the continent’s citizens believe that corruption is getting worse, according to polling released in July.
At the same time, the continent faces an infrastructure funding gap of $31 billion a year and growing. The most pressing problems are in the power sector, with about large portions of Africa’s population lacking access to electricity despite a sharp increase in borrowing and spending to address the gap. A lack of electricity also hinders economic development: “The major development benefits come from energy for industry and commerce,” Todd Moss, the executive director of the Energy for Growth Hub, said in testimony to the U.S. Congress in 2017. “In a typical economy, the vast majority of electricity is used by industry and commerce, not households. No matter how many lanterns are delivered, Africa’s growing cities and industrial zones will require large-scale power for job creation and economic growth.”
All this may sound like the familiar consequences of overreliance on natural resources, known as the resource curse, in which extractive industries hinder economic growth in the absence of good institutions that can prevent rent-seeking. But in Africa, something else is happening as well. Price swings and a lack of other economic opportunities have also contributed to the continent’s woes.
The problem of price swings is demonstrated by the tight links between oil prices and GDP per capita. For instance, the world oil price bust of the late 1970s was followed by a long period of economic decline across the continent, which sent GDP per capita, a rough indicator of living standards, tumbling. Between 1981 and 1999, the continent’s economy shrank by about 1.15 percent per year on average. Following almost two decades of decline, the economy started to grow again, by about 3 percent per year. That growth coincided with a rise in world oil prices.
This implies that the continent has seen no real economic progress outside of whether oil happens to be more expensive.
To be sure, living standards and oil prices are not so tightly linked in all exporting countries. In fact, those that have escaped the resource curse have been able to unlink the two. Norway is one example. In the period after 2015, as oil prices plummeted, there was no clear impact on living standards. The reason is that, roughly two decades after it discovered oil, the Norwegian government set up an oil fund known as the Government Pension Fund Global to bank oil revenue with the primary aim of shielding its economy and currency from the ups and downs of the market. The fund invests the oil proceeds exclusively abroad. It now holds around $1 trillion, or over $200,000 per Norwegian.
Norway also benefited from the fact that it already had strong institutions before oil was discovered, which helped it minimize corruption—an advantage that can’t be replicated in Africa, where many of the bureaucrats and politicians who are tasked with building institutions also happen to be the primary beneficiaries of having weak ones. In fact, instead of rising prices leading to any greater investment in infrastructure, as in Norway, oil wealth in much of Africa seems to have given politicians motivation to quash institutions so that they can hoard the resources for themselves.
In these situations, elections have become ways to reaffirm power by whipping up support through handouts of small amounts of oil-financed benefits to loyal citizens.
It seems unlikely that African countries will soon break out of the resource curse. After all, three major oil booms have come and gone in the last several decades. None has really helped any of the oil-rich countries move into greater prosperity.
Yet there may be some good news, Dani Rodrik, a professor of economics at Harvard University, argues. The political and economic environments in the region are slowly improving. Even the Economist magazine, which once made a sweeping claim referring to Africa as a “hopeless continent,” is now more optimistic. In particular, Africa is now much more peaceful. Some of the worst military conflicts there, including the Angolan civil war, the Brazzaville and Pool wars in the Republic of Congo, and the Chad-Sudan conflict, to name a few, have ended, reducing the number of civil war casualties in recent years to historic lows.
Peace has political and economic dividends: Wars rip holes in public budgets, divert attention away from development efforts, and threaten democracy by disrupting elections and the ability of institutions to do their work. Since, as the Massachusetts Institute of Technology’s Daron Acemoglu and others have shown, democracy boosts economic prosperity by about 20 percent, any trends in Africa that can help consolidate it will also be a boon economically. And, given that oil prices are so low, politicians have less incentive now to stand in the way of political reform.
To give themselves the best chance of escaping the resource curse, the governments of oil-rich economies must first improve their responses to fluctuations in oil prices; specifically, they should refrain from overspending during times of rising rates and instead raise their savings in anticipation of when the prices may go bust. Having suffered the worst of low oil prices, new leaders may want to avoid repeating the mistakes of their predecessors.
Second, the governments should disburse at least some of the revenue as direct cash transfers to the public. In two separate but related Center for Global Development studies, Moss and his colleagues Shantayanan Devarajan and Marcelo Giugale have called for a universal basic income as a viable option for ending the problem of oil. “[J]ust give the money directly to citizens,” Moss and his co-authors write. “A universal, transparent, and regular cash transfer would not only provide a concrete benefit to regular people but would also create powerful incentives for citizens to hold their government accountable.” In that way, transfers play a similar role to taxes, which are generally low in oil-rich countries, as a way to incentivize citizens to pay attention to how governments earn and spend money.
Finally, these countries need to get their borrowing under control, especially from China and commercial creditors, whose lending has all too often intensified the impact of oil downturns. Flush with petrodollars in periods of rising oil prices, oil-exporting developing countries are often deemed to have sufficient collateral for loans they can’t actually afford when prices plummet.
If the oil-rich nations of Africa can follow these steps, they may be the next nations to break free of the oil curse. If not, any economic progress as oil prices eventually recover will be illusory.
Zuhumnan Dapel is a researcher at the Scottish Institute for Research in Economics in Edinburgh and a former IDRC fellow at the Center for Global Development.
Source: Foreign Policy