Africa and Aboriginal Tuesdays: Oil Discovery At Lake Albert Is A Curse by Patrick Asea

A few weeks ago I lamented what passes for public discourse on economic issues. Economics is fundamentally a quantitative subject. However, several surveys have shown that most people can't interpret graphs, don't understand statistical notions, are unable to model situations mathematically, seldom estimate or compare magnitudes, are immune to mathematical beauty and, most distressing of all in a democracy, hardly ever develop a critical, skeptical attitude toward numerical, spatial and quantitative data or conclusions.

Politicians take advantage of this "math phobia" to peddle economic half-truths. The ever-gullible media follow blindly like sheep to the slaughter. The country ends up hostage to tired ideologies and gimmicky economic policies. We are all left scratching our heads and wondering why our cities are filthy, roads full of potholes, hospitals have no drugs and villagers eke out a wretched existence in grass thatched huts.

Here are two more popular myths:

Oil discovery in Lake Albert is good for development

The truth is that oil is a curse for development. Most countries do not benefit from their natural resource riches. Nigeria is a scary example. The number of people living on less than one US dollar a day increased from 19m in 1970 to a staggering 90 million in 2000.

This is puzzling. How can "riches" cause poverty? Economists love puzzles so there has been a string of academic papers looking into this one. The evidence is overwhelming and not just for Africa. Owning oil resources depresses economic growth. But countries that are rich in other natural resources such as agricultural products are not subject to the curse.

But how does the curse work? It works by destroying domestic economic and political institutions. The presence of oil gives rise to corruption and what economists call "rent-seeking" which adversely affects the climate for investment and growth. Governments with huge oil revenues do not need to promote wealth creation that they can sustainably tax: in turn citizens have less incentive to hold governments accountable.

From Angola to Nigeria, Gabon to Sudan, oil riches have ended up in the pockets of the ruling elite, inciting conflict over the spoils.

Nigeria's sordid history acts as a cautionary tale. The Biafran war of secession - which led to one million deaths - was in part an attempt by the eastern, predominantly Igbo region to gain exclusive control over oil reserves. Nigeria has witnessed the assassination of two leaders, six successful coups and four failed ones and 30 years of military rule.

In Chad, a US $4.2 billion oil pipeline built with a World Bank loan and backed by a law to deposit the money in an offshore account has generated US $399 million since 2004. Sadly, the money has been seriously mismanaged and spending marred by allegations of graft. The largest amount of money - $51 million - has been devoted to infrastructure, mainly roads. Of that, $48 million went to a company led by President Déby's brother, Daoussa Déby, according to the independent oversight committee.

The hope that Chad would chart a pro-poor development path collapsed when its Parliament voted recently to amend the oil revenue law, allowing a hefty share to be used to fight a rebellion by former soldiers seeking to overthrow Idriss Déby.

Déby started out as a warlord in the Chadian civil war. In 1990, Déby's troops marched unopposed into N'Djaména. Déby was 're-elected' in 1996 and 2001, amid allegations of widespread rigging. In 2005, a successful referendum was held to eliminate a two-term constitutional limit, which will allow Déby to run again in 2006.

Does that mean we should leave our oil in the ground? No, it means we must first stamp out corruption, stop nepotism, end armed conflicts and promote reconciliation. Only then can we avoid a Chadian nightmare.

East African Federation will reduce poverty

The truth is that the proposed East African Federation is neither necessary nor sufficient to reduce poverty. Just as political independence in the 1960s yielded little economic prosperity expect the same from the political federation.

How about the huge market the politicians talk about? Yes, an East African Federation will have a market of about 100 million people, second only to Nigeria with its 140 million. But they are largely poor people. Zero plus zero equals zero. Moreover, you don't need a political federation to increase market size. You can achieve the same goal by forming a customs union such as the East African Community.

How about the effects through increased trade? Again, if there are any benefits to be enjoyed through increased trade it can be achieved within the existing East African Community. You don't need a political federation.

Furthermore, even within the EAC the bad news is that the gains from increased trade are likely to remain limited because Kenya is the largest exporter to the region and Uganda is the largest importer. This has been the case for the past 30 years and is unlikely to change just because of the Federation. Furthermore, our production structures (the things we produce) are pretty much the same: agricultural products. The first thing you learn in international trade is that countries trade different things: coffee for machines. Not coffee for coffee.

How about the effects through foreign investment? Yes, when you look at regional groupings such as SADC and COMESA and ASEAN you do see an increase in investment but these are not political federations but just simple economic communities like the EAC. Furthermore, the catch is that any benefits go to the biggest economies in the regional grouping. So just like in the old EAC you can expect Kenya (the largest economy in the region) to reap most of the benefits of increased investment.

But why should it matter to the average Ugandan if Kenya reaps the most benefits from the Federation? The unemployed woman in Moyo can just hop on a bus to Mombasa and start working as easily as if she was moving from Moyo to Arua. Right? Wrong. The reality is that even in a Federation "all politics will be local". No politician will want her constituents to vote with their feet and flee poverty. Therefore, in their zeal to attract foreign investment you will see a "race to the bottom" with regional governments (Kenya, Uganda and Tanzania) offering tax breaks and subsidies to attract foreign investors. Study after study has shown that these incentives are unnecessary, ineffective, and, in some cases, counterproductive.

The fact is that even a loose form of regional integration such as the EAC is unlikely to drive economic growth and eliminate poverty in a place where 50 percent of the people are infected with malaria or half of the kids are malnourished or a third of the mothers are dying of AIDS. There is little hope that a political federation can do any better.

How about the political benefits? Will a Federation give us a bigger "political voice" in the international arena and make us less dependent on donors? Unlikely. The most powerful economic organisations (World Bank, IMF, ADB) allocate voting shares as a function of countries' GDP. Thus the East African Federation with a GDP of only $30 billion (just 8 per cent of South Africa's) will not even merit its own Executive Director at the World Bank. We will continue to share one seat with 22 other African countries on a rotational basis.

The writer has been Senior Economic Advisor to the Deputy Prime Minister of Iraq and a Professor of economics at University of California. This article appears in The New Vision.

Patrick Asea

Tuesday, April 18, 2006