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Africa’s resource curse is more like a governance curse

SA’s huge offshore gas find could be a blessing or a curse.

South Africa has just come into a huge gas find south of Mossel Bay, estimated by Total at about one billion barrels. That’s the good news. The bad news is that oil and gas are often accompanied by conflict and ‘resource curse’. That’s when an over-reliance on commodity exports leaves a country prone to wild cyclical economic swings.

SA has a sufficiently diversified economy to avoid resource curse, but any benefit to the economy from gas-related tax and royalties could be squandered if we follow the examples of other oil-rich countries such as Nigeria, Equatorial Guinea and Angola. All three have huge oil deposits and massive corruption. Nigeria’s discovery of oil in the Niger Delta in 1956 fuelled ethnic tensions and coups. The agricultural sector was neglected to the point where Nigeria went from food exporter to importer, as all attention went on the easy money to be made from oil exports. It still has to import refined fuel.

Good examples

If we are looking at good examples to follow, Botswana and to a lesser extent Gabon are two countries worthy of mention – Botswana for diamonds and Gabon for oil.

Gabon has been ruled by a single family since 1967. There was an attempted coup in January this year, but the government managed to avoid fiscal deficits until 2015, when the once-lofty oil price that sustained government spending came tumbling down.

Botswana, despite its massive reliance on diamond exports, has likewise avoided the resource curse. It did this by avoiding external debt and promoting economic diversification. Speaking at a recent International Mining and Oil & Gas Law, Development, and Investment conference in Brazil, Peter Leon, a partner at law firm Herbert Smith Freehills, pointed out that the Botswana government accumulated international reserves and ran budget surpluses earmarked for stability spending in leaner periods. “This policy avoided having to drastically cut expenditures during bad years and reduced inflationary pressures.”

Checks and balances

Another key factor in avoiding resource curse is maintaining strong institutional structures, with checks and balances to root out corruption and maladministration.

When Norway discovered oil in the North Sea in the 1960s, it put in place policies to ensure that there would be economic benefits long after the oil was gone. Key among these policies was an insistence on developing the local oil and gas sector, rather than leaving it all to outsiders. Petroleum accounted for 43% of exports in 2018, and great care is taken to ensure that exports exceed imports – which in turn provides currency stability. Compare this to Venezuela, where oil accounts for 95% of exports, a key factor behind its current political instability.

Leon says one way countries attempt to inoculate themselves against resource curse is by creating sovereign wealth funds (SWFs). These are state-owned funds that invest in real assets such as precious metals and real estate, and financial assets such as stocks and bonds.

Saving and diversifying 

Norway has been particularly adept at using its SWF to hedge against oil price volatility and as a means of saving wealth generated from its petroleum sector for use by future generations. Another benefit of SWFs is to diversify away from cash holdings or low-yielding US Treasury bills.

“A well-managed and effective SWF can help protect the economy’s non-commodity sectors from destabilising currency fluctuations while helping to spread the country’s wealth more equitably across generations,” says Leon. “SWFs help to achieve this by aiming explicitly at developing a broader base for economic growth. Developing an efficient and diversified economy reduces the impact of commodity price volatility and helps to prepare the economy for a post-commodity era.”

The danger in any country running budget deficits is the temptation to raid SWFs to plug budgetary gaps.

One way to overcome this is to set firm rules for the withdrawal of funds, and to create governance structures to keep greedy politicians’ hands off the loot.

All this is becoming relevant as some political parties have started introducing SWFs into their party manifestos as a solution to economic growth and job creation. But experience over the last decade shows that when the government runs out of cash, it starts looking in the wrong areas, such as the Reserve Bank’s accumulated assets which are (frustratingly for some) unavailable for state spending.

Read: 170 billion reasons why the state would want to capture the Sarb

A government will inevitably look to the country’s sovereign wealth fund to bail itself out of a tight fiscal spot. These funds belong to future generations and have to be kept well away from the transients who occupy political positions.

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No country is cursed by being resource wealthy.

By allowing the the uneducated masses to vote and choose or militarily usurp a government to manage the resource is the curse. People are cursed by thinking they know whats good for themselves when they don’t.

If citizens had any better sense, they’d outsource the resource with sovereign wealth fund setup and full oversight from an international organisation like the world bank or similar that has the people’s best interests in mind. That way, they make sure the local leadership can’t touch it.

In Norway 68% of the people won’t believe that the government will know for which party they have voted. Neither will they believe the ancestors will know how they have voted either. This creates possibilities for an advanced and prosperous society with less corruption.

The curse is not one of being rich in resources. The curse is one of mismanagement of the economy and failure of responsibility and sound leadership.

The WHOLE of Africa has a governance curse and some have a resource curse.

But cursed by corruption is Africa’s biggest single issue.

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