Will East Africans benefit from their natural resource discoveries?
Luck has struck the East African region: for a few years now, new announcements of natural resource discoveries have been made every few months. Mozambique has discovered some of the largest deposits of natural gas in the world, while Tanzania, Uganda and Kenya have also discovered gas and oil. Exploration is still ongoing, so even more discoveries may be to come. Luck has definitely hit the region, but the main question is: how will the people of these countries benefit?
In many parts of the world, one can find examples of countries where natural resources have brought wealth to the majority of citizens. The discoveries of oil made the Norwegians one of the richest people in the world (although they were quite well off even before the discoveries); Malaysia is on the cusp of joining the group of “high income” countries and oil is part of its success; Qatar and UAE turned their oil resources into vibrant service economies, etc.
The people of the 14 countries of Sub-Saharan Africa (SSA) that the IMF has called resource-rich have not all been so lucky. In many ways, the “lucky 14” people are no better off than other Africans. For example, they have a shorter life: they have a lower life expectancy than inhabitants of non-resource-rich countries (55 years for the lucky 14, compared to 59 years for other Africans, according to 2013 data; see graphic). In addition, people without natural resources have experienced a faster improvement in life expectancy since the turn of the century! Another example is that extreme poverty (the percentage of those living on less than PPP $ 1.25 per day) appears to be higher among the lucky 14 (the availability of poverty data is somewhat sketchy). Ironically, one of the richest countries on the continent in terms of GDP per capita, Equatorial Guinea, also has the highest level of extreme poverty. Third, people in resource-rich sub-Saharan Africa have below-average education levels.
Note: non-resource rich countries (green), resource rich countries (purple), East African countries with discovered resources (orange).
Source: UNDP Human Development Index
The link between pumping oil and increasing life expectancy and reducing poverty is not straightforward. The main channel through which natural resources promote shared prosperity is the budget. Oil revenues flow into state coffers and must be used for social and infrastructure spending, which in turn reduces poverty and increases human capital and life expectancy. This is where the bond usually breaks and natural resources benefit only the lucky few. Several global studies point to the fact that natural resources tend to harm both education spending and economic growth (which in turn supports the above results). In addition, a recent IMF paper shows that resource rents are likely to reduce other tax revenues – lack of pressure on tax collection being one reason – so taxing resources does not necessarily mean more public spending. The above literature does not suggest that resource wealth is the only, or most important, determinant of the above development indicators. That said, there is no doubt that in many of the fortunate 14 sub-Saharan African countries, development outcomes could have been higher if their resources had been better managed. Botswana is the exception of Africa, as it has managed its diamond wealth almost ‘Norwegian style’ and used its natural resources to achieve the highest life expectancy and lowest poverty among the 14 fortunate.
Considering East Africa’s newcomers to the lucky countries list, the main question is not whether their citizens should consider themselves lucky to have discovered resources under their feet – of course they should do it. More importantly is the question of what will determine whether these citizens will actually experience increased wealth from their natural resources? It doesn’t matter how many times other countries have been successful or not, just as the odds of hitting red on a roulette table are the same (48.8%), regardless of previous spins. What matters is how governments manage their natural resources.
In East Africa, the first signals were not always encouraging. Development of oil discoveries in Uganda is taking much longer than average due to protracted discussions about building a large oil refinery in the absence of sound economic logic. The Tanzanian government has yet to complete its gas master plan – a key part of the institutional framework – for the gas sector, a fact that hinders foreign investors from making their investment decisions. In Kenya, social tensions in the area where the finds were made – an area that happens to be among the poorest parts of the country – escalated in 2014, when local people halted exploration activities.
The ball is now in the hands of East African governments. Resources have been (in part) found, investors are eager to invest, and development partners, with the World Bank playing a leading role in several countries, are helping countries build institutional capacity to manage their new industry. The factors for success, including transparency, clear and predictable legislation, an independent regulator and oversight mechanisms, are well known. What remains is that each of these factors is reflected in the legislation that parliaments enact and in the institutions that are put in place and mandated to manage the sector. On that note, although 9 out of 10 East Africans were born today after Clint Eastwood’s cult 1971 film “Dirty Harry” was screened on screen, Harry’s words echo in their heads: you must ask yourself a question … are you feeling lucky [that your government will get the most for you out of your natural resources]?