Fool’s Gold

Check out this article of mine that ran in Foreign Policy on the peril’s of oil development in Africa:

July 2007
Fool’s Gold
You may not have noticed it, but Africa is booming. Yet just when the world’s poorest continent is finally starting to see real economic growth, the resource curse threatens to snatch it all away.

By Stephan Faris

Things seem to be looking up for Africa these days, and especially in sub-Saharan Africa. For the third year in a row, the region’s economy has grown 5 to 6 percent. The recent commodity boom has improved its allure to potential investors, particularly China. And the world is relying increasingly on the continent’s petroleum; last year, Africa surpassed the Middle East to become the largest exporter of crude oil to the United States, providing 22 percent of imports. Even everyday African citizens, their views usually lost amid gloomy economic statistics, are feeling better about their lot in life. A recent poll conducted by the New York Times and the Pew Global Attitudes Project found that most sub-Saharan Africans say they are better off than they were five years ago, and that life will continue to improve for the next generation. They’re right, at least for the near future. Economists predict that economic growth will inch up to 7 percent in 2007, mostly because of higher production in oil-rich countries.

But the blessing of oil might turn out to be a curse in disguise. In a study published earlier this year, Paul Collier, a professor of economics at the University of Oxford and former director of development research at the World Bank, examined the historical relationships between commodity prices and economic growth in Africa to understand what the ongoing resource boom means for the world’s poorest continent. “Generally these increases in commodity price produce short-term effects that are positive,” says Collier. “And then the long-term effects are just dreadful.”

Collier’s model shows that producers of oil, timber, and minerals would on average see their gross domestic products rise by 10 percent in the first seven years, only to have them crash two decades later to only 75 percent of where they started. Sudden cash flows in unprepared countries, he says, lead to unsustainable public consumption, rising inflation, soaring inequality, trade protectionism, and a real danger of civil war.

Take Nigeria, for example, where the country has lost nearly $400 billion, by one government estimate, to waste and corruption since it began pumping oil in 1960. (By comparison, Western aid to all of Africa during the same period amounts to roughly $650 billion.) In the oil-producing Niger Delta, schools and hospitals are crumbling. Much of the region is better navigated by boat than by its beat-up roads. Oil spills are common, and flaring natural gas lights the skies in nightlong artificial sunsets. “The result is prodigious flows of cash with very, very little to show,” says Stephen Morrison, director of the Africa Program at the Center for Strategic and International Studies.

The disparity between the wealth underground and the poverty above has fanned anger into full-scale revolt. Militant groups have launched attacks on Nigeria’s oil sector. By bombing pipelines and kidnapping foreign workers out of bars, restaurants, and hotels, they’ve shut down a third of the country’s oil production. Their speedboats have struck as far as 40 miles from the coast, demonstrating that offshore production is also at risk. Shortly after national elections in April, gunmen bombed the riverside home of the vice president-elect, killing two policemen. Each operation sends tremors through the international oil market. “Oil is a curse, and not just in Africa,” says Morrison.

Further east, Chad may be headed for a similar implosion. Seven years ago, Chad’s new pipeline promised to forge a new standard for oil development in Africa. Carefully designed to protect the environment and lift the country out of poverty, the $4.2 billion project came with a series of safeguards to protect the oil money from corrupt politicians. Revenues would be kept in a London account, where 10 percent would be held for future generations. Four fifths of the remaining income would be earmarked for development, spent on education, infrastructure, health, and social services.

But the optimism surrounding the project was short-lived. Since construction on the pipeline began in 2000, Chad has dropped from 167 to 171 on the United Nation’s Human Development Index. Rebels based in neighboring Darfur have twice threatened the capital. President Idriss Déby used the first $4.5 million from his signing bonus from the pipeline deal to buy arms, including two helicopters. Then, two years ago, Déby simply rewrote the laws. He abolished the London account, scrapped the fund for future generations, and added “security” to the list of development earmarks.

If Collier’s projections pan out, Chadians may find that despite all the safeguards, they would have been better off if the wells had never been tapped. “If a type of country like that, a dictatorship, wants to weaken rules, it doesn’t matter how cast-iron they are,” says Robert Goodland, who oversaw the World Bank’s environmental and social assessments of the project.

If even a country as geopolitically weak as Chad can’t be forced into spending its money wisely, what can be done? One approach is to continue to throw lifelines to reformers within the governments. Accordingly, human rights campaigners have made transparency—the disclosure of payments by oil companies to governments—a centerpiece of their efforts.

Another approach is to focus on the oil companies themselves. “Twenty years ago with apartheid, the strategy was disinvestment,” says John Sealey, the provincial assistant for social and international ministries in the Wisconsin Jesuit Province, a religious investor that has championed a shareholder resolution calling on Chevron to develop a comprehensive, transparent, and verifiable human-rights policy. “Our strategy now is more like investment. If you don’t have a seat at the table you don’t have a voice.”

Surprisingly, it’s the oil-poor countries that might want to count their blessings. When Collier looked at other commodities—studying rises in the prices of sugar, coffee, cocoa or cotton—he found the boom without the bust. “One big difference is that agricultural money goes to farmers,” says Collier. “It’s revenues that are running through governments that seem to matter.” But aside from government control over revenues, the key difference between oil and the other commodities is that sugar, coffee, cocoa, and cotton can be ecologically sustainable; someday the oil will run out.

In which case, the top standard for oil development in Africa may turn out to be Gabon. The small West African country has largely avoided civil strife, but oil production peaked in 1997 and reserves are dwindling. The best thing that four decades of pumping petroleum has given Gabon is an industrial and agricultural sector so undeveloped that the country boasts some of the most pristine rainforests on the continent. If the Gabonese couldn’t benefit from oil, perhaps they will profit from tourism.

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