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

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  • bobutne
    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
    Message 1 of 1 , Nov 1, 2007
      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.

      "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."

      $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.

      http://knowledge.wharton.upenn.edu/article.cfm?articleid=1830
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