Oil wealth: Can we avoid the pitfalls?
Dec 20, 2006
IN the last 20 years, Uganda has taken a positive political direction. However, with the discovery of oil, we may still remain poor because of a phenomenon called the ‘Dutch Disease’.
By Patrick Oyulu
IN the last 20 years, Uganda has taken a positive political direction. However, with the discovery of oil, we may still remain poor because of a phenomenon called the ‘Dutch Disease’.
Many oil-rich countries share one striking similarity: They have weak, or in some cases, non-existent political and economic institutions. While this may not be surprising, it is also a problem for the newly independent, oil and gas-rich republics of the former Soviet Union. These countries have done little to consolidate property and contract rights and to ensure competent management of judicial independence.
Concentrated oil wealth at the top has forestalled political change in even richer oil economies, so can Uganda avoid such pitfalls?
Yes, we can but only if we are willing to implement a novel arrangement for managing the oil wealth, with the help of good and well-intentioned friends internationally.
When Holland discovered gas in the North Sea, its economy became de-industrialised because this raised the value of its currency, making its manufactured goods less competitive with those from other nations, increasing imports and decreasing exports. It created what is called the ‘Dutch Disease’ which affects many countries that discover oil and other natural resources differently.
There is a curious phenomenon called the resource curse — so named because, on average, countries with large endowments of natural resources perform worse than less endowed countries.
Thirty years ago, Indonesia and Nigeria — both dependent on their oil — had comparable per capita incomes. Today, Indonesia’s per capita income is four times Nigeria’s.
This does not apply to oil alone. Look at diamonds in Botswana and Sierra Leone — it is a similar pattern, but why is it so?
Corruption.
It increases officials’ desire to seize a larger share of the pie, rather than create a larger pie. This often results into wars. In many cases, it is cheaper to bribe officials to provide resources at below-market prices than to invest and develop an industry, so it is no surprise that some firms succumb to this temptation.
Second, natural resource prices are volatile, and managing this is hard. Lenders provide money when times are good, but want their money back when, say, energy prices plummet. Therefore, most of the gain made in a boom unravels in the bust that follows.
Thirdly, oil, as a source of wealth, does not create jobs by itself, and often crowds out other economic sectors. For example, an inflow of oil money often leads to currency appreciation, which affects exports vis-a-viz imports.
Lesson: abundant natural wealth often creates rich countries with poor people.
Whatever steps Uganda has to put in place as tests go on in Waraga and the Mputas in Bunyoro, we must be mindful of this, and we should not raise our hopes too high.
All we ask the Government to do is to take a leaf from Botswana, which ensured democratic, consensual and transparent processes more likely to ensure that the fruit of its diamond wealth is equitably distributed and well spent.
The Dutch Disease, however, is one of the more intractable consequences of oil and resource wealth, at least for poor countries.
In principle, it is easy to avoid currency appreciation by keeping the foreign exchange earned out of the country. Invest the money abroad. Bring it in only gradually. But in most developing countries, such a policy is viewed as using oil money to help someone else’s economy.
Countries like Nigeria are trying to implement these lessons.
They proposed creating stabilisation funds and selling natural resources in transparent and competitive bidding processes.
Most importantly, the Nigerians are taking measures to ensure that the fruits of this endowment are invested, so that as the country’s natural resources are depleted, its real wealth — fixed and human capital — is increased.
Oil can and should be a blessing, not a curse. I am sure we have the people who know what must be done.
Ugandans are optimistic at the direction President Yoweri Museveni has taken in this sector but I would rather they privatised the oil resource and created special oil funds that limit government discretion in spending the dime and transferred the proceeds directly to benefit the economy and Ugandans in general.
Privatising the oil sector is disappointing in countries with weak institutions. This is why there is need to invest in that area, to avoid assets being sold at give-away prices to a lucky few who happen to have good financial and political connections.
In Russia, the privatisation of the Soviet oil companies and other resources only brought about economic imbalances of the status quo. The resulting oligarchic capitalism has undermined its market economy, making it difficult to foster public trust in market institutions such as private property, the rule of law and the sanctity of contracts.
The creation of a special oil fund with constitutional and other restrictions on the use of the revenue has been used in Kuwait and Norway for several decades and in Colombia and Venezuela since the 1990s.
Azerbaijan created such a fund and East Timor and Sao Tome too. Although they vary in detail, all these national oil funds represent an attempt to insulate and make the spending of the oil revenues transparent.
Unfortunately, apart from Norway, the experience of a national fund has not been encouraging. In Venezuela, for example, rules on how money in the fund should be spent have been changed countless times. As a result, there is no prudent revenue management or improvement in the quality of spending.
In Azerbaijan, ad hoc expenditures from the fund have raised questions about its long-term promise and in Chad, where the oil fund was created as a condition for a World Bank loan to help finance an oil pipeline, the President still managed to use the first wave of revenue to buy a presidential jet.
Oil funds, therefore, seem unable to insulate oil revenues from misappropriation by weak governments. They are no substitute for public accountability or for checks and balances provided by the press and a healthy democracy.
Much as the oil tests here seem positive, the management of the benefits is still cloudy.
However, we should be optimistic.
The writer is the production manager, QG Saatchi & Saatchi
IN the last 20 years, Uganda has taken a positive political direction. However, with the discovery of oil, we may still remain poor because of a phenomenon called the ‘Dutch Disease’.
Many oil-rich countries share one striking similarity: They have weak, or in some cases, non-existent political and economic institutions. While this may not be surprising, it is also a problem for the newly independent, oil and gas-rich republics of the former Soviet Union. These countries have done little to consolidate property and contract rights and to ensure competent management of judicial independence.
Concentrated oil wealth at the top has forestalled political change in even richer oil economies, so can Uganda avoid such pitfalls?
Yes, we can but only if we are willing to implement a novel arrangement for managing the oil wealth, with the help of good and well-intentioned friends internationally.
When Holland discovered gas in the North Sea, its economy became de-industrialised because this raised the value of its currency, making its manufactured goods less competitive with those from other nations, increasing imports and decreasing exports. It created what is called the ‘Dutch Disease’ which affects many countries that discover oil and other natural resources differently.
There is a curious phenomenon called the resource curse — so named because, on average, countries with large endowments of natural resources perform worse than less endowed countries.
Thirty years ago, Indonesia and Nigeria — both dependent on their oil — had comparable per capita incomes. Today, Indonesia’s per capita income is four times Nigeria’s.
This does not apply to oil alone. Look at diamonds in Botswana and Sierra Leone — it is a similar pattern, but why is it so?
Corruption.
It increases officials’ desire to seize a larger share of the pie, rather than create a larger pie. This often results into wars. In many cases, it is cheaper to bribe officials to provide resources at below-market prices than to invest and develop an industry, so it is no surprise that some firms succumb to this temptation.
Second, natural resource prices are volatile, and managing this is hard. Lenders provide money when times are good, but want their money back when, say, energy prices plummet. Therefore, most of the gain made in a boom unravels in the bust that follows.
Thirdly, oil, as a source of wealth, does not create jobs by itself, and often crowds out other economic sectors. For example, an inflow of oil money often leads to currency appreciation, which affects exports vis-a-viz imports.
Lesson: abundant natural wealth often creates rich countries with poor people.
Whatever steps Uganda has to put in place as tests go on in Waraga and the Mputas in Bunyoro, we must be mindful of this, and we should not raise our hopes too high.
All we ask the Government to do is to take a leaf from Botswana, which ensured democratic, consensual and transparent processes more likely to ensure that the fruit of its diamond wealth is equitably distributed and well spent.
The Dutch Disease, however, is one of the more intractable consequences of oil and resource wealth, at least for poor countries.
In principle, it is easy to avoid currency appreciation by keeping the foreign exchange earned out of the country. Invest the money abroad. Bring it in only gradually. But in most developing countries, such a policy is viewed as using oil money to help someone else’s economy.
Countries like Nigeria are trying to implement these lessons.
They proposed creating stabilisation funds and selling natural resources in transparent and competitive bidding processes.
Most importantly, the Nigerians are taking measures to ensure that the fruits of this endowment are invested, so that as the country’s natural resources are depleted, its real wealth — fixed and human capital — is increased.
Oil can and should be a blessing, not a curse. I am sure we have the people who know what must be done.
Ugandans are optimistic at the direction President Yoweri Museveni has taken in this sector but I would rather they privatised the oil resource and created special oil funds that limit government discretion in spending the dime and transferred the proceeds directly to benefit the economy and Ugandans in general.
Privatising the oil sector is disappointing in countries with weak institutions. This is why there is need to invest in that area, to avoid assets being sold at give-away prices to a lucky few who happen to have good financial and political connections.
In Russia, the privatisation of the Soviet oil companies and other resources only brought about economic imbalances of the status quo. The resulting oligarchic capitalism has undermined its market economy, making it difficult to foster public trust in market institutions such as private property, the rule of law and the sanctity of contracts.
The creation of a special oil fund with constitutional and other restrictions on the use of the revenue has been used in Kuwait and Norway for several decades and in Colombia and Venezuela since the 1990s.
Azerbaijan created such a fund and East Timor and Sao Tome too. Although they vary in detail, all these national oil funds represent an attempt to insulate and make the spending of the oil revenues transparent.
Unfortunately, apart from Norway, the experience of a national fund has not been encouraging. In Venezuela, for example, rules on how money in the fund should be spent have been changed countless times. As a result, there is no prudent revenue management or improvement in the quality of spending.
In Azerbaijan, ad hoc expenditures from the fund have raised questions about its long-term promise and in Chad, where the oil fund was created as a condition for a World Bank loan to help finance an oil pipeline, the President still managed to use the first wave of revenue to buy a presidential jet.
Oil funds, therefore, seem unable to insulate oil revenues from misappropriation by weak governments. They are no substitute for public accountability or for checks and balances provided by the press and a healthy democracy.
Much as the oil tests here seem positive, the management of the benefits is still cloudy.
However, we should be optimistic.
The writer is the production manager, QG Saatchi & Saatchi