Africa and the curse of oil

I have been doing exchange rates with my AS class and we talked about the problems some countries have when they are blessed with natural resources – the resource curse. Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. Take for instance Gabon which produces 300,000 barrels/day but although the vast majority of the country is covered in a tropical rainforest it is hard to find bananas that are grown there – most are imported from the Cameroon. In a book entitled “Untapped: The Scramble for Africa’s Oil” John Ghazvinian states that over $20bn has been spent on exploration and production of oil since 1990. This figure is estimated to climb to $50bn by the end of 2010, the largest investment in the continent’s history. Click here for a very good review of the book.

Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.

Norwegian Model
Norway, the world’s third largest oil exporter behind Saudi Arabia and Russia, puts away a large share of its wealth in a national pension fund, now worth more than $300 billion. The problem here is that Norway is a small, homogeneous country of about five million people that was relatively advanced when its oil started to flow. It already had the sorts of public institutions that enabled it to cautiously manage its newly found wealth. Countries like Chad where 80% of its citizens living below the poverty line and Nigeria with hundreds of distinct ethnic groups living
in civil unrest, would not be able to adopt to the Norwegian model. The situation in other African oil-producing countries is just as difficult. Equatorial Guinea is a family business camouflaged as a country and is seen as one of the most closed societies on earth. Look at the two graphs below – Nigeria and Norway have similar oil revenues but this is very different when you look at the GDP/Capita. In Nigeria it is thought that as much as two-thirds of all economic activity takes place in the informal sector

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