The pitfalls of the paradox of plenty
*Oil discovery brings significant risks to Namibia
There’s barely an African country where oil has been discovered that is flourishing, or peaceful. To mention but a handful: Libya is in chaos and has been for some time with Nigeria losing up to 25 percent of its oil production due to theft, and that is not taking into account the rampant corruption, and pollution, in that country. In Angola, years after the civil war, the rich became super-rich and the country barely has a middle class. Mozambique isn’t faring much better and Senegal’s recent oil and gas discoveries have led to civil unrest and violence. And here we are… Enter Namibia, the latest African country to announce what appears to be massive offshore oil reserves.
Sub-Saharan Africa is the poster child for the resource-curse phenomenon – an abundance of natural resources, low economic development, and rampant misuse. The region suffers from Dutch disease. This describes the apparent paradox which occurs when good news, such as the discovery of large oil reserves, harms a country’s broader economy. Generally, it is linked to a spike in the value of the country’s currency but, it is far broader than that. In 2021, Ahmed Sabry Abu Zeid and Iman Ali Mahfouz Al Agouza published a review of the resource curse in sub-Saharan Africa in the Journal of the College of Politics and Economics. The authors assert that the evidence of the ‘resource curse’ and Dutch disease in Africa, is telling. “Oil-rich economies experience a significant decline in the efficiency of their domestic capital compared to non-oil economies. Hence, the discovery of oil leads to slower economic growth.”
Due to the concentration in effort in the extraction of the resource, other sectors deindustrialise. The discovery suddenly leads to an increase in the inflow of external funds as countries try to extract the oil. However, this inflow changes the relative prices in favour of non-traded goods such as construction and services, while affecting non-oil traded goods such as manufacturing and agriculture. Hence, non-oil traded goods are crowded out of the market. “Essentially, such countries experience deindustrialisation in sectors such as manufacturing and agriculture. These sectors have historically been known to be growth-enhancing. Hence, a decline in such sectors affects the development of the country.” A decline in these two sectors is something Namibia can ill-afford.
UCLA Professor Michael Ross, an expert in the study of the resource curse, writes that “there is now robust evidence that one type of mineral wealth, petroleum, has at least three harmful effects: It tends to make authoritarian regimes more durable, to increase certain types of corruption, and to help trigger violent conflict in low- and middle-income countries, particularly when it is located in the territory of marginalised ethnic groups. Only one type of resource has been consistently correlated with less democracy and worse institutions: Petroleum.”
Ross adds that strong democracies allow better extraction and thus, greater benefit per capita – weaker democracies actually see a slow-down in extraction and thus, less benefit.
The bottom line is that corruption, bad leadership, weak institutions and more, have led to the underdevelopment on the continent, even with an abundance of natural resources. It is thus, the paradox of plenty. In 2020, it was estimated that Africa lost about US$88.6 billion, 3.7 percent of its gross domestic product, annually in illicit financial flows.
Papyrakis and Gerlagh in 2004 conducted a study into the transmission mechanisms through which natural resources affect growth. The research which was published in the Journal of Comparative Economics was performed with data covering about 39 countries. Their findings indicate that natural resources impact economic growth indirectly through corruption, which is an indicator for institutional quality. They show that natural resources increase corruption which in turn negatively affects economic growth. Several other researchers concur, concluding that there is an inverse correlation between abundant natural resources and economic growth. The greater the abundance, the more sluggish the growth.
According to Graham Hopwood, director at the Institute for Public Policy Research, the discovery of oil in the country “poses significant corruption risks because at the moment there is little transparency in the upstream petroleum industry”. He says there is already concern in the way Petroleum Exploration Licences have been awarded by the line ministry in the past, “where we saw briefcase companies linked to the politically connected often included in licence deals, and thus, there is considerable possibility that the production phase would also be marked by corruption”.
He says the institute has called for open contracting where all contracts between government and private sector be made public, as well as for beneficial ownership registers that show who exactly owns what in our extractives industries. In his view this would “help Namibia avoid secret deals and the dubious involvement of politically connected individuals in the upstream petroleum industry”.
However, not all the news is bad. Hopwood says the government is currently exploring the possibility of joining the Extractive Industries Transparency Initiative which is the global standard for transparency in the mining, oil and gas sectors. Mention of this was made in Harambee II and the mines ministry has started the process to investigate options for Namibia. If the decision is made to join this initiative, all contracts and licences would have to be published and beneficial ownership registers be created, while details about revenues, taxes and production figures would also have to be made public.
“The institute is hoping that government will commit to implementing the initiative in the near future, although already those in government and the private sector who want to keep things secret are trying to make sure this doesn’t happen.”
Corruption aside, the research also shows that there could be a direct impact on democracy. In terms of autocracies, oil supports the strengthening of that system but the impact on democracies is more ambiguous. Ross reports that one set of studies has found that oil has prodemocratic effects, stabilising governments while another set finds no such evidence at all. But there is a third set of data that finds the effect of oil to be conditional. According to Ross, it may stabilise democracies that are wealthy and have strong institutions, but foster the breakdown of accountability in democracies that are poorer or have weaker institutions.
Caselli & Cunningham did research on leader behaviour and in 2009 they published their work in Oxford Economic Papers. The authors argue that increasing resource rents – the profit generated from oil – generally decreases total value added in the economy and hence slows growth. With more income, governments could make investments in the country but if those resource revenues and their accompanying rents induce the leader to invest in staying in power or maximising his survival function, the results will be catastrophic.
There is concern that Namibia could slide into what is known as rentier capitalism, an economic practice of gaining large profits without contributing to society. A rentier is someone who earns income from capital without working, much like resource rents from oil, and without investment into the country, joblessness will increase and economic growth decline. Ross spoke exclusively to Kosmos News Investigates and is of the view that good journalists and a strong free press can make a big difference. “Non-profit organisations, independent interest groups and civic organisations are also important, anything that can push back against the power of a well-funded incumbent government.”
Democracy is important in oil-producing countries because it generally provides stronger institutions and theoretically limits the ability of public officials and private business people to amass personal wealth.
Weak political institutions in turn allow poor contract enforcements and thus allow an array of evils to accompany oil extraction. A weak financial sector leads to weak markets which slows economic growth and development. Most African countries have poor institutions, and that includes Namibia. The governor of the Bank of Namibia, Johannes !Gawaxab, recently warned about the resource curse saying the country must build “competent and accountable institutions because resource-rich countries tend to be more prone to corruption due to their large rents coupled with weak governance structures”.
The effects of natural resources on economic performance are conditional on the quality of state institutions. It is said that where institutions are “grabber friendly” (and more prone to corruption), resource wealth tends to lower aggregate income; where they are “producer friendly” (and less prone to corruption), it raises aggregate income.
Eben de Klerk, researcher at the Economic Policy Research Association asks if any new institution will have more credibility than our current institutions? In his view, we need to “depoliticise our current institutions, or else no institution will be of any value”. He adds that there should be complete transparency, no ‘one man decides’ structure and the large body of decision-makers must be appointed solely on merit – experience and qualifications – and with no ties to the government. No preferential procurement or treatment should be permitted.
Most importantly, De Klerk says that neither Angola nor Nigeria is in a position to teach Namibia about oil. “Both countries suffer deep corruption due to oil and their GDP to capita is still substantially lower than Namibia, while Namibia had no oil in the economy.” Minister Tom Alweendo recently met with his Angolan counterpart, Diamantino Azevedo, who said that oil is a blessing and that it will not widen the gap between rich and poor. Namibia has the second highest Gini-coefficient in the world, second only to South Africa, and measured at 59.1 The two signed a partnership with Azevedo declaring that Namibia is fortunate to in the position to learn from Angola’s mistakes.
According to Ross, some of the characteristics of successful institutions include ones that have merit-based recruiting and promotion, that offer good compensation to employees and so can attract highly talented applicants, and transparency in their operations so corruption is easier to deter.
He adds that it is critical that government officials working in the regulation of the oil industry have some training so that their “knowledge base is not dependent on information they get from the companies themselves, and they are less easily swayed by the companies’ propaganda”. He says that foreign oil companies like to portray themselves as ‘allies of the host countries’, and are often quite skilled at that kind of commercial diplomacy.
“But don’t be fooled. Namibians should know that these companies are not their friends, they are at best there to provide an important service to the country, but they are overwhelmingly focused on their own interests which are different from those of Namibian citizens.”
In an analysis by Ross in 2015, he writes that a study of five petroleum-rich states of the former Soviet Union (Russia, Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) concluded that oil wealth leads to weakened state institutions only when the government has a dominant role in the petroleum industry; when the private sector and foreign investors have a more prominent role, governments are likely to have stronger fiscal institutions.
Civil unrest is also relatively common when oil is discovered and many studies have been done on this phenomenon. What was found was when researchers accounted for location, the results indicate that when the resource is offshore, as is the case in Namibia, there is no real effect on the risk of conflict but, onshore, the picture looks different, and it is more like to exacerbate the risk of conflict when it is found in regions that are poor relative to the national average, such as the two Kavango regions.
The Namibian mines and energy minister Tom Alweendo has been quite vocal of late about local content in the blossoming oil industry and has launched a local content policy as well as warning about safeguarding against corruption in the industry. While saying that local content is complex, job creation must at least be prioritised. He also made mention of forward linkages for local prosperity. Ross tells Kosmos News Investigates that there are three economic spillovers from a booming extractive sector: backward linkages, forward linkages, and fiscal linkages. He says backward linkages refer to the businesses that benefit from supplying the extractive industry with the raw materials and infrastructure it needs, and can include things like providing food and meal services to company employees, infrastructure like roads and power so the company can operate, and all types of simple materials, sometimes as mundane and as wooden pallets or cooking utensils. He says these are important and can provide the necessary benefit for locals.
“Forward linkages are the kind that the minister seemed to suggest but these are almost never successful in countries where incomes and development levels are quite low. Most African oil exporters, to my knowledge, have given up on these, with the exception of Nigeria which has tried and squandered billions of dollars over the last five decades trying to build oil refineries and other processing infrastructure.”
Fiscal linkages, Ross says, are those that come from the government’s deployment of the revenue collected and shared with citizens.
According to Hopwood, there will be expectations that benefits from oil should flow to the public.
Hopwood says: “If these don’t arise in the form expected, then public frustration will inevitably increase. Namibians already have lost much of their trust in government (as shown by recent Afrobarometer surveys), so there is a danger that the apparent blessing of commercial oil discoveries could lead to societal unrest. This is more so because the upstream petroleum industry will not produce thousands of jobs for young Namibians who are already facing a joblessness rate of nearly 50 percent (as it is not a labour-intensive industry and will to a large extent depend on imported, high-level skills). It’s important that Namibians share some of the cake through a local content policy or law which will encourage Namibian companies to be involved in the various supply chains for the industry. However, local content is also fraught with corruption risks and we have already seen how Namibianisation efforts in the fisheries sector have turned into corrupt schemes such as Fishrot.”
He adds that a key element in the so-called resource curse is that governments begin to rely heavily on oil and lose interest in diversifying their economies. Hopwood says this will exacerbate the country’s unemployment crisis. “Given the country’s faltering efforts to move away from dependence on extractive industries since independence, the risks arising from ‘putting all our eggs in one basket’ are pertinent.”
Zeid and Agouza also warn of this. The world prices of natural resources such as minerals and other agricultural resources are highly volatile. Countries which are heavily dependent on exports of these resources, make their economies vulnerable to price shocks. A case in point is the pressure on Saudi Arabia that requires at least US$80 for a barrel of crude to meet its fiscal requirements.
There are several, multi-dimensional challenges to the country to extract its resources to the benefit of all, and not the elite. It is also quite clear that oil cannot be the primary source of revenue for the Namibian government and neither should it rely on this resource for that. Unam economist Dr Omu Kakujaha-Matundu recently told New Era that the greatest risk to the expected oil revenue for Namibia is the accelerated adoption of cleaner technology replacing fossil fuels. “Predicting with some certainty the price level in the next seven years [by when Namibia should start extracting oil] is not a sure thing. Thus, one would think that Namibia should not bet on expected oil revenues. Namibia should aggressively pursue its current diversification and value-addition strategy so as to expand its revenue base.”
Ross says large oil revenues will make it possible for Namibia to significantly invest in the education of its young people. Since the education system today, at least higher education, is weak at home, sending students to universities in other countries can be a way to quickly build up ranks of a well-educated citizenry and should be taken advantage of.
“Other countries with resource blooms will sometimes guarantee a university education abroad to all of their high school students that qualify, and they can easily afford this and in the long run will benefit enormously.”