Akintunde Akinleye / Courtesy Reuters A man works at an illegal oil refinery in Bayelsa, Nigeria, November 2012.

Avoiding Africa's Oil Curse

What East Africa Can Learn From Past Booms

East Africa is the global oil and gas industry’s hottest frontier. Barely a month goes by, it seems, without a major discovery in Mozambique, Tanzania, Uganda, or the eastern Democratic Republic of the Congo.

This new African windfall is hardly without precedent. Several west and central African states -- most notably Angola and Nigeria -- have already experienced petroleum booms of their own. Over the last decade, they benefited from a spectacular jump in oil prices, which rose from $22 per barrel in 2003 to $147 per barrel in 2008 and remained high, for the most part, until recently. The spoils were enormous: from 2002 to 2012, Angola’s GDP jumped from $11 billion to $114 billion and Nigeria’s went from $59 billion to $243 billion.

The opportunity afforded by this extraordinary decade was unprecedented and is unlikely to recur. Sadly, however, decision-makers have mostly squandered it. If the new east African producers are not to repeat the mistakes of the established ones, then, they should heed the lessons of Africa’s last oil boom.

GREASING THE WHEEL

The last decade did see some improvements for Africa’s oil producers, especially when compared to the continent’s earlier boom in the 1970s and early 1980s. Under the stewardship of a handful of reform-minded technocrats, countries such as Angola, Gabon, and Nigeria tamed inflation, stabilized their economies, and wiped debt burdens clean. They subjected chaotic banking sectors to new regulatory discipline. And in response to criticism from the likes of Oxfam, Global Witness, and the Open Society Foundations, they instituted some limited governance reforms that increased, albeit marginally, the transparency around opaque oil dealings.

Yet these improvements, though praiseworthy, failed to transform Africa’s oil producers. The emphasis by many observers on the need for capacity building was misplaced. The key challenge was not that elites in these countries lacked the skills or structures to properly manage the boom; it was their unrestricted access to billions of petrodollars. Most were already sophisticated, worldly decision-makers with the ability to rationally pursue their own interests. And many of them gladly paid lip service to voluntary reform efforts such as the Extractive Industries Transparency Initiative, a program created in 2002 to prevent corruption in resource-rich states. By centralizing and modernizing the management of natural resource wealth, these technical overhauls in fact made it easier for elites to exercise control over oil revenues.

Angolan leaders, for example, talked up economic diversification and even a commitment to industrialization. The country built up some necessary infrastructure. But the government directed much of the oil money toward sports stadiums, shopping malls, skyscrapers, and other vanity projects. Most states built up foreign exchange reserves, but politicized their management. Venal state governors raided Nigeria’s Excess Crude Account, which was intended to put away oil profits for a rainy day, to help win elections. And last year, Angola named José Filomeno dos Santos, a son of the country’s president, to manage the $5 billion in its new sovereign wealth fund. 

Human development indicators, meanwhile, have barely budged. Nigeria actually saw an increase in poverty by some measures. A decade on, Africa’s petrostates remain some of the most resource-dependent in the world, deriving the lion’s share of government revenues from hydrocarbons. Elites have siphoned much of the region’s oil money offshore; the principal beneficiaries of the oil bonanza have been Lisbon, London, New York, and Zurich, not Abuja, Libreville, Luanda, and N’Djamena. Africa’s oil-rich states have been run by many of the same people for decades. These decision-makers lack both developmental ambitions and a concern for their poorer countrymen. Now flush with petrodollars, they have become even less accountable to their constituents at home or to their critics abroad, using oil revenues to stave off political reform.

This outcome should not surprise experts, who know that long-running fiscal windfalls do not incentivize bold, politically difficult reforms, especially when those proposals conflict with vested interests. As a result, Africa’s booming economies are now woefully unprepared for lower oil prices, with analysts predicting a major fiscal crisis if oil falls below $60 per barrel. That possibility is becoming more and more likely; given the newfound abundance of cheap U.S. shale gas and the slowdown of emerging economies, African petrostates risk entering a post-boom era without the means of addressing festering pre-boom development challenges. 

A WAY FORWARD

In countries such as Nigeria and Angola, corruption and patronage make reform especially difficult. But the international community can still help prevent East Africa’s new producers from taking the same path, provided it embraces a new approach. Voluntary initiatives have consumed too much attention and political capital over the last decade, often allowing non-reformist states and firms a free ride. It’s time to embrace tougher reforms.

For starters, foreign governments must continue to pass and enforce strong regulations on extractive industries. The 2010 Dodd-Frank bill, for example, requires that all U.S. and foreign firms reporting to the U.S. Securities and Exchange Commission disclose payments made to any government for the commercial development of natural resources. The European Union has passed similar legislation and the Canadian government has committed to doing the same. Outsiders should also help stem the interminable exodus of capital from Africa’s oil-rich economies to Western capitals. 

Capacity building, of course, remains essential for states that have no previous experience dealing with extractive industries or managing the dynamic economies that will accompany the windfall. But because the problems of resource wealth are fundamentally political in nature, the solutions need to be more than merely technical. Putting oil money at the service of development in Africa means tackling the increasingly criminalized character of political leaders and their global networks of resource extraction, not peddling yet another package of technocratic reforms.

In that vein, Western donors should leverage their influence in countries such as Mozambique, Tanzania, and Uganda, where they still provide extensive budgetary support, to encourage stronger regulatory and institutional oversight mechanisms. Such reforms would first and foremost have to diminish the discretionary power of political elites -- an important goal for civil society groups, many of which have expressed fears that donor countries are downplaying their concerns about corruption in favor of capitalizing on the coming boom.

But however important the role of outsiders, the struggle to channel resource wealth into development will mostly play out in the domestic arena. That’s where lawmakers decide on key legal and regulatory frameworks that allow for greater oversight over oil revenue and empower local communities.

In the end, success depends most on popular mobilization. Domestic proponents of reforms need to push questions surrounding oil and gas to the center of political life and foster large-scale activism against bad governance. They will need help from the media and from civil society. If past experiences are any guide, these organizations should prepare for adversarial relationships with increasingly intolerant and well-funded regimes and rulers who are enamored of Nigerian- and Angolan-style governance. (Mozambicans, in fact, have already come to fear the creeping “Angolanization” of their country.) Such organizations must have strong global connections and benefit from extensive outside support if they are to survive, let alone thrive.

None of this can wait much longer: within the next five to eight years, Kenya, Mozambique, Tanzania, Uganda, and others will have joined the club of major African energy exporters, and the window of opportunity for shaping these sectors will have narrowed considerably, if not closed outright. Whatever system for distributing oil profits is established by then will define these states -- and the prospects of their people -- for generations to come.

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