The Resource curse:oil problems

The Resource Curse’: Why Africa’s Oil Riches Don’t Trickle Down to Africans

⁠Published: 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.

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“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.”

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.”

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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.”

$15,000-a-Month Rentals

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.

Additional Reading

How Globalization Works — and Doesn’t Work — in Africa: Kmoweldge@Wharton

In Africa, Opportunity Takes Many Shapes, from Diamonds to IT to Political Reform: Knowledge@Wharton

The Entrepreneurship Challenge in Nigeria: Knowledge@Wharton

Here’s what you think…

⁠Total Comments: 9

⁠#1    Why Africa’s Oil Riches Don’t Trickle Down to Africans

I lived and worked in Angola for over a year providing private network telecom services to oil exploration and oil services firms. I formed a company, having to give up 49% equity to a shell company owned by the country’s president and his cronies. I saw underwater siphening pipelines connected to private oil company pipelines. These lines siphened off crude and took it directly to the state owned oil company’s storage. This, in addition to the fact that 80% of the private company’s reported production became property of the state as part of the concession agreement. I saw container ships with cargo marked as belonging to UNICEF (presumably, corn meal and rice shipments to feed the hungry and impoverished) being cleared at the port of Luanda by Angolan military personnel and then transported to feed military troops. Public school teachers had not been paid salaries in five years.

Do not lay this level of corruption and abuse of power on the oil companies. If you are poor in this part of the world, you have found the ninth circle of Dante’s Inferno.

By: Henry Pedroso,
Sent: 07:40 AM Thu Nov.01.2007 – –

⁠#2    Africa’s OIl – atrophying industries in lopsided econcomies

Oil is doing to these economies the same thing heroin production did in Columbia and Afghanistan for many years.

By: Claire Felong,
Sent: 03:08 PM Thu Nov.01.2007 – US

⁠#3    Solution to Nigeria’s Resources Curse

I’m a 28-year-old Nigerian male living in the country’s federal capital, Abuja. This is probably the first place you will hear this; but you’re going to be hearing a lot of it in the future. Sooner or later, oil production will be stopped onshore in the Niger delta region, and exploration and production will be limited to offshore areas. The costs at the moment far outweigh whatever income the government gets; there are serious environmental problems, and the violence is spiralling out of hand. So-called militants have used the cover of “freedom fighters” to perpetuate economic and human rights crimes that make Sierra Leonean blood diamonds seem like child’s play. Kidnapping of expatriate oil workers is now a booming industry, probably larger than Mexico’s or Columbia’s. In time, it would seem the only wise thing to do is to shutdown the oil rigs on land and declare the area a protected watershed or wetland. Then nobody will justify the actions of those fighting for “their share” of the oil wealth.

By: ik okechukwu, Abuja Property Development Co.
Sent: 04:17 PM Thu Nov.01.2007 – –

⁠#4    Where do we stand in this matter of the stolen wealth of Africa.

I am an Accountant and a Stock broker in Lagos Nigeria.

My take on the stolen wealth is that:
1. Crude is a unique commodity that we can trace from the production to the last buyer. The buyers know when they buy the stole crude and can identify their suppliers; the thief.
2. Like the Angolan case of the state stealing from the private explorers’, the explorers are aware of the robbery by the state, but because they are “taking more than was allotted and paid for,” they are not bothered: or who would incur such heavy cost on exploration and encourage a mere greedy idiot to steal from his labour.
3. In the case of Nigeria, all those involved are under the illusion of money. Otherwise, what is the use for stealing when you can not enjoy any peace or freedom with it. You spend and live all under cover.

Now, leadership is not understood, riches are misconceived, the people are living without a vision for their individual lives, and this means the whole nation where wealth is continually stolen by the state and a few people in power have no vision. they live by the day.

Let the leaders of the people stop conniving with the cheats of the West, who lure them with money, and see life as that to be enjoyed with others and not in isolation. Let us all realize that it is only when we share that we can multiply successfully and not by the evil design of stealing from each other.

Thank you for this opportunity.

By: Remi Akinwale, First Call Investment Options Limited
Sent: 02:38 PM Fri Nov.02.2007 – –

⁠#5    africa’s oil

I live in Uganda (East Africa) where new oil discoveries have been found. I don’t think Ugandans will benefit in this oil due to our corrupt leaders. Even the systems in place do not favour us. And I also don’t think that “a future generation fund can be airlifted to Uganda!”

In order for Ugandans to benefit from Africa’s oil, we need committed leaders who love their country and want to see it move an extra mile.

By: ALEX NANYONGA, Administrator
Sent: 12:42 AM Mon Nov.05.2007 – US

⁠#6    Transparency is part of the solution

I recently traveled to Nigeria and spoke with Niger Delta Development Commission and government officials. One step to help maintain accountability for government and stakeholders alike is to enable shared visibility of funds provided against respective infrastructure programs. This is one way of enhancing accountability to support needs of the oil bearing communities in the Niger delta. See more at the SAP Public Security Blog.

By: Anthony McKinney, SAP/ Director Public Security
Sent: 04:10 PM Sat Nov.10.2007 – US

⁠#7    The Resource curse – Africa’s oil

It is fashionable for some economists to lament the fate of Africans and the ‘resource curse’ inflicted on them by the abundance of natural resources. It is not only about oil but others like diamonds, minerals and ores. Paul Collier of Oxford University, formerly with the World Bank, has produced some papers. So has Arvind Subramanian.

They portray a situation where rebels seize control over resources and fund their internecine warfare. Indeed, this is so. But they fail to go into the historical background which led to it and the current global context which sustains it.

Exploitation of natural resources is not new to Africa. The occupation of Africa and the scramble for Africa among the European powers in the 19th century were the consequence of resource abundance. Until African countries were liberated around the 1960s, European powers controlled them by force and their companies exploited the resources to feed their mills back home. The African people had no share in them except the low wages as sweated labour. There was apparent political stability ensured by the colonial powers. Except for a handful of countries, no country in Africa had acquired the administrative capability to govern itself. Most of them had very low levels of literacy. Congo, for example, had twelve graduates when the Belgians left.

When the colonial powers departed, internal fissures developed among the tribes, clans and other groups. A good deal of this was also the consequence of the artificial borders which the colonial powers had drawn to divide the Continent among themselves. These began to take a toll on the political stability of the newly independent countries.

The Cold War created another aberration. Dictators who were friendly to the West, especially the U.S., had their total support through military and other forms of aid. Congo’s Mobutu was the classic creation of the Cold War. American policy strongly favoured authoritarian regimes in Africa to fend off communism and Soviet influence. Western companies could continue to operate under the umbrella of these dictators and the paternal protection of governments like the U.S., U.K. or Belgium.

With the collapse of the Soviet regime and end of the Cold War, the African dictators were abandoned and had to fend for themselves. Political rivalry turned violent and rival groups had to get arms in pursuit of their goals.

In countries rich in natural resources, oil or other resources, the rival groups had to seize control over them to finance their operations. Western companies began to operate under the ‘protection’ of regional despots. Sierra Leone was the worst example which stirred the global conscience. Natural resources, instead of being a boon to promote economic growth, turned into a ‘curse.’ Corruption, siphoning of funds, etc. are the seamy side of this scenario and flow out of control over resources and their sharing with MNCs from the west. African countries and leaders are critcised for all the sins – not a word is uttered about the Western companies which bribe them and gain ultimately from the sale or utlisation of natural resources in other parts of the globe.

Those who propagate and lament the curse of natural resources in Africa send out a wrong message – some of them are well meaning economists who are sympathetic to African countries and people. They should rather try to provide alternative arrangements for the extraction and utilisation of these resources and how to turn them into a boon. This is a very complex issue and calls for regional and global cooperation. If there is a genuine will to promote African development, it is not difficult to arrive at solutions.

By: Kandaswami Subramanian, Not employed
Sent: 12:56 AM Mon Nov.12.2007 – AU

⁠#8    The Resource curse – Africa’s oil

In my earlier comments, I failed to draw attention to the scourge of private military corporations (PMCs). These modern equivalents of buccaneers loom large in the African continent — as the novelist Frederick Forsythe ably described in his popular nove, “The Dogs of War.” They are engaged by rebel groups who seize power and also by MNCs to safeguard their interests. PMCs are paid out of the sales proceeds of natural resources. There is an unholy alliance between rebel groups, MNCs and PMCs.

There has been no progress in global negotiations in the U.N. to ban PMOs. Western countries find them to be of great help in their strategic objectives whether in Iraq or elsewhere. African resources will continue to remain a ‘curse’ as long this nexus is not broken up. How many of the economists who bemoan the natural resource ‘curse’ have taken note of this factor?

By: Kandaswami Subramanian, Not employed
Sent: 11:17 PM Wed Nov.14.2007 – AU

⁠#9    More than meets the eye?

Reading the article ‘The Resource Curse…’ and the comments, especially Kandaswami’s, it seems to me that there is more than meets the eye to resource exploitation in Africa. Apparently, mining/oil giants and foreign governments have found it advantageous to engage in a ‘divide and rule by proxy’ policy that, through its control over African governments, warlords, militias and mercenary group, suppresses the development and exploitation of mineral resources. This policy impoverishes African nations and forecloses their future while serving interests of capitalists and the foreign policy goals of the western world. This confluence of capitalistic exploitation and neo-colonial political strategy will result in the economic enslavement of an entire continent. Is anyone taking heed?

By: Prasad Rao,
Sent: 02:33 AM Thu Mar.06.2008 – AU

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