Since the 1970’s resource rich countries in the developing world have consistently underperformed resource poor countries when it comes to economic growth, income inequality and good governance.
What if the best and only solution will be to:
KEEP THE OIL IN THE SOIL?
Looking back at 2013-2016 (SV)
Extract from the AfDB report: “Could Oil Shine like Diamonds? How Botswana Avoided the Resource Curse and its Implications for a New Libya”. Paula Ximena Meijia & Vincent Castel.
Governments depending on few commodities are particularly susceptible to a number of macroeconomic challenges. The first is the excessive volatility of commodity prices. According to Asfaha, this has had severe implications for commodity-dependent nations – that is, nations whose national revenue are mainly drawn from the export of a particular resource – because cycles of booms and busts in real national incomes create problems for macroeconomic management.
Perhaps one of the most problematic issues resulting from resource abundance and the poor management of resource wealth is institutional weakening. There is a tendency for large windfall revenues to weaken institutions. For instances, direct access to income from the commodity reduces the incentives for a government to establish a tax system. At the same time, however, the implicit reciprocity between tax collection and the social services provided by the state are severed. Commodity booms thus encourage rent-seeking and patronage networks by removing citizen participation in the creation of state revenues and therefore render the state decreasingly accountable to its citizens.
The Manifestation of the Resource Curse in Libya
Libya, like other resource rich countries in the MENA region, experienced particularly low and non-inclusive growth as well as high levels of macroeconomic volatility. Moreover, the Libyan economy was virtually undiversified and entirely dominated by the hydrocarbon sector, which generated close to 70% of GDP, more than 90% of government revenues and 95% of export earnings. The very limited backwards and forwards integration of the industry confined the wealth generated from oil riches to export and fiscal revenues, while it generated less than 5% of employment in Libya (Kolster and Mejia, 2011).
Perhaps the most obvious manifestation of the resource curse in Libya was the impact that oil had on state institutions. Libya’s clientalist state structure, which centralized economic power in the hands of the state, created an environment in which individual interests both outweighed and were in conflict with, the interests of the common good. As a result, government accountability suffered and the social contract depended on the state’s ability to provide rents to its people in exchange for their acquiescence.
In addition to poor citizen representation, the lack of transparency in government and the tendency for rent-seeking by the state also seriously affected the development of the private sector and consequently hindered the diversification of the economy.
It was in this context of poor representation and unequal distribution of wealth that the revolution took place, further aligning Libya with yet another common manifestation of the resource curse: propensity for violent conflict.
How Botswana Escaped the Resource Curse
Botswana has become renowned for its ability to manage its mineral wealth effectively and escape the resource curse.
At the heart of Botswana’s successful resource wealth management and its avoidance of the resource curse was a three-pronged approach:
1 / Botswana pursued economic diversification to render it less dependent on the volatility of the mining sector;
2 / the country de-linked expenditure from revenue and;
3 / finally it invested surplus revenue for use by future generations.
Botswana’s economic diversification has, since the implementation of the Action Plan, focused around the following 1) creating a business friendly environment; 2) providing the structures and incentives that serve to improve Botswana’s business capacity through training and business development efforts; 3) addressing policy and institutional matters such as ensuring the stability of the financial sector; 4) providing instruments of support for diversification initiatives including the promotion of privatization; and 5) creating projects to drive diversification through the support of agriculture and tourism among other sectors (Government of Botswana, 2009).
While Botswana has been successful in accruing assets as means of ensuring inter-generational equity through its sovereign wealth fund as well as using it to smooth commodity price volatility, it is important to take into account that the creation of a commodity fund does not necessarily ensure politicians will not take its assets when it is flush. Indeed, part of the reason Botswana has been successful in preventing these practices by adhering to the rules that prevent the government from interfering in the investments of the funds as well as in using its assets.
The presence of voice and accountability, which is the sum of the protection of civil liberties and rights as well as the political process, is necessary for the management of resource wealth because it permits society to discipline those in authority who abuse resource extraction. By involving society in maintain a government accountable for its wealth management practices, they are better able to prevent the establishment of a rent-seeking culture. In the case of Botswana, its track record on voice and accountability is especially strong. The government has a written constitution to which all branches of government are subjected. Moreover, executive actions are subject to review. Transparency International has consistently ranked Botswana in the top 25% of countries and always at the top of the list for African states.
Good Governance: A Pre-Condition to Successful Wealth Management
Botswana’s success has been enabled by its stable political system, and most importantly its culture of good governance.
Good governance, epitomized in the form of its legitimate and accountable government, has fostered long-term decision making. Moreover, the presence of a vocal and integrated civil society has encouraged broad consensus in the formulation of economic policies. It is in this way that good governance has provided the right incentives for the government to uphold its own fiscal rules and respect its savings and investment institutions and promote economic diversification.
READ Full AfDB Report: Could Oil Shine like Diamonds – How Botswana Avoided the Resource Curse and its Implications for a New Libya
REVISED Version – Three Years Later, Reflecting and Learning
Three years later and we ask ourselves should we really ask oil producing countries to avoid hydro carbon development to the maximum extent possible, or should we better ask governments to keep the oil in the soil?
Why Should we Ask African Governments to Keep the Oil in the Soil?
“If governments are determined to implement their climate policies [eg. Paris Agreement], a focus on efficiency, although important, will not achieve absolute reductions. According to the UK’s Carbon Tracker Initiative and the Grantham Research Institute on Climate Change, part of the London School of Economics, the world’s ‘carbon budget’ is about 1.000 gigatons (Gt CO2) between now and 2050.
Total proven international fossil-fuel reserves already contain about 3 times as much carbon, according to the International Energy Agency’ ‘World Energy Outlook’. Most of the reserves are owned by governments or state energy firms; they could be left in the ground by public-policy choice, i.e., if governments took their own policy objectives seriously. Exploring and exploiting new sources of fossil fuels now means to propel CO2 emissions above 550 ppm. It is an irresponsible waste of money, and policy is called upon to stop this squandering of resources.
Oil and gas extraction, and coal mining, even using the most modern techniques, will always be dirty business. There is no ethical, environmental or social justification for mobilising reserves with above-average environmental and social impacts, including deep sea oil, tar sands, or fracking for shale gas, destroying riverine delta ecosystems and other wetlands, densely populated farmland, biodiverse forests or coral gardens.”