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Developing countries and 'fools gold'


Foreign Affairs essay by UCLA professor Michael Ross titled "Why Oil Wealth Fuels Conflict":

The world is far more peaceful today than it was 15 years ago. There were 17 major civil wars -- with "major" meaning the kind that kill more than a thousand people a year -- going on at the end of the Cold War; by 2006, there were just five. During that period, the number of smaller conflicts also fell, from 33 to 27.

Despite this trend, there has been no drop in the number of wars in countries that produce oil. The main reason is that oil wealth often wreaks havoc on a country's economy and politics, makes it easier for insurgents to fund their rebellions, and aggravates ethnic grievances. Today, with violence falling in general, oil-producing states make up a growing fraction of the world's conflict-ridden countries. They now host about a third of the world's civil wars, both large and small, up from one-fifth in 1992. According to some, the U.S.-led invasion of Iraq shows that oil breeds conflict between countries, but the more widespread problem is that it breeds conflict within them.

The number of oil-producer-based conflicts is likely to grow in the future as stratospheric prices of crude oil push more countries in the developing world to produce oil and gas. In 2001, the Bush administration's energy task force hailed the emergence of new producers as a chance for the United States to diversify the sources of its energy imports and reduce its reliance on oil from the Persian Gulf. More than a dozen countries in Africa, the Caspian basin, and Southeast Asia have recently become, or will soon become, significant oil and gas exporters. Some of these countries, including Chad, East Timor, and Myanmar, have already suffered internal strife. Most of the rest are poor, undemocratic, and badly governed, which means that they are likely to experience violence as well. On top of that, record oil prices will yield the kind of economic windfalls that typically produce further unrest.

Oil is not unique; diamonds and other minerals produce similar problems. But as the world's most sought-after commodity, and with more countries dependent on it than on gold, copper, or any other resource, oil has an impact more pronounced and more widespread. ("Blood Barrels," by Michael Ross, Foreign Affairs, May/June 2008 - behind a pay wall, email me to send)

Foreign Policy Magazine essay on how the resource curse is threatening Africa's fragile economic gains ("Fool's Gold"):

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.

http://www.foreignpolicy.com/ story/cms.php?story_id=3914

Interesting WP story on oil wealth and women's rights titled "Petroleum Feeds Patriarchy":

Our gas-guzzling ways have long been associated with a variety of problems, but disturbing evidence now points to a new dimension of our love affair with petroleum: Oil consumption and high oil prices hurt the political, social and economic development of millions of women in oil-producing nations.

You read that right. The more gas you pump and the higher oil prices get, the more likely you are to harm women's empowerment.

The surprising finding, based on more than four decades of data from 169 countries, provides a novel explanation of why women in Middle Eastern countries such as Saudi Arabia and the United Arab Emirates still do not have the right to vote. Oil wealth, not Islam, is the primary reason that these nations have regressive gender policies, said political scientist Michael Ross at the University of California at Los Angeles.

As implausible as the connection between oil wealth and gender rights might seem, Ross's work is based on a widely observed pattern: As oil prices soar to more than $100 a barrel, oil-producing countries get rich atop a tidal wave of foreign currency. The tsunami of cash strengthens their currencies and makes it cheaper for them to buy everything from textiles to cars from other nations, instead of manufacturing such goods at home.

As a result, the economies of oil-producing nations invariably have stunted manufacturing sectors while boosting construction and services sectors. This pattern is now so familiar that it has a name -- the "Dutch Disease" -- following the reshaping of the Dutch economy after natural gas discoveries set off a boom in the Netherlands.

Ross's insight is that this realignment punishes women, because low-wage manufacturing jobs -- especially in the textile industry -- have long been the entry point into the workforce for millions of poor women across the world. Oil booms cause these jobs to vanish. By contrast, the boom in construction helps men, because the industry is heavily male-dominated. Oil booms do create retail jobs, but in many countries these are also closed off to poor women, either because they are uneducated or because traditional mores frown on women interacting with strangers.

The loss of jobs has profound consequences on women's political engagement and power. Several studies show that across the world, leaving home and entering the workplace produces greater political awareness and participation among women. These, in turn, help produce egalitarian family and inheritance laws, and increased voting, economic and legal rights.

"Patriarchal norms are often very deeply embedded in society, and it takes a very powerful force to begin to break them up," Ross said. "Women's employment in these industries has historically been that powerful force, that foot in the door, that first rung on the ladder."

Ross's data show that when a nation's oil profits soar, the number of women in the workforce invariably declines the next year. In turn, this leads to reduced political clout. For every $1,280 increase in per capita oil profits, Ross shows there is a 2 percent decrease in the number of elected female leaders, an effect that is powerful because it grows cumulatively over time. Oil wealth -- and perhaps mineral wealth in general -- similarly explains many other social, economic and political disparities between men and women in nations ranging from Azerbaijan and Russia to Chile, Botswana and Nigeria.

http://www.washingtonpost.com/ wp-dyn/content/article/2008/ 03/09/AR2008030901762_pf.html

NYT Magazine story on Venezuela's oil strategy titled "The Perils of Petrocracy":

Historically, almost every country dependent on the export of oil has answered this question in the same way: badly. It may seem paradoxical, but finding a hole in the ground that spouts money can be one of the worst things to happen to a nation. With one or two exceptions, oil-dependent countries are poorer, more conflict-ridden and despotic. OPEC's own studies show the perils of relying on oil. Between 1965 and 1998, the economies of OPEC members contracted by 1.3 percent a year. Oil-dependent nations do especially badly by their poor: infant survival, nutrition, life expectancy, literacy, schooling — all are worse in oil-producing countries. The history of oil-dependent countries has produced what Terry Lynn Karl, a Stanford University professor, calls the paradox of plenty.

Oil not only creates very few jobs, it also destroys jobs in other sectors. By pushing up a country's exchange rate, the export of oil distorts the economy. "Oil rents drive out any other productive activity," Karl says. "Why would you bother to produce your own food if you could buy it? Why would you bother to develop any kind of export industry if oil makes your money worth more and that hurts all your other exports?" The most successful societies develop a middle class through manufacturing; oil makes this extremely difficult.

Oil concentrates a country's wealth in the state, creating a culture where money is made by soliciting politicians and bureaucrats rather than by making things and selling them. Oil states also ask their citizens for little in taxes, and where citizens pay little in taxes, they demand little in accountability. Those in power distribute oil money to stay in power. Thus oil states tend to be highly corrupt.

...So perhaps the best strategy for resource-rich countries is to keep the oil private, watch it carefully and tax the hell out of it. Better yet, raise royalties, which are more straightforward and easier to collect. "If your objective is to maximize rent, then the best way is to have companies compete with one another in open bidding for access," Tissot says. "Angola and Libya have done this very successfully. Libya invited private companies to come back and is squeezing 90 percent of the profits out of them."

http://www.nytimes.com/2007/ 11/04/magazine/04oil-t.html

FT op-ed by Oxford economist Paul Collier and Nobel economist Michael Spench titled "Help poor states to seize the fruits of the boom":

There are five main decision points in determining whether assets removed from under the ground are replaced by assets above the ground. Step one is how the rights to resource extraction are sold.

...Step two is to tax the revenues.

...Step three is to save a reasonable proportion of the revenues.

...The challenge is to invest public savings productively within the country in education and infrastructure. But during the booms of the 1970s public investment was corrupt and inefficient. Standards could provide defences against these problems. The procedures for guarding against corruption are straightforward: when Oby Ezekwesili was put in charge of Nigerian public procurement and introduced competitive tendering, Nigerian procurement costs fell by 40 per cent.

Guarding against inefficiency is more difficult: approval has to become contingent upon the estimated return. The final international standard would en­able governments to commit themselves to such an approval process.

http://us.ft.com/ftgateway/superpage.ft?news_id=fto040920081413067964

A Guardian op-ed by Nobel Prize winning economist Joe Stiglitz titled "We can now cure Dutch disease":

There is a curious phenomenon that economists call the resource curse - so named because, on average, countries with large endowments of natural resources perform worse than countries less well endowed. Yet some countries with abundant natural resources do perform better than others, and some have done well. Why is the spell of the resource curse cast so unequally? 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. Indeed, Nigeria's (as measured in constant dollars circa 1995) has fallen.

A similar pattern holds true in Sierra Leone and Botswana. Both are rich in diamonds. Yet Botswana averaged 8.7% annual economic growth over the past 30 years, while Sierra Leone plunged into civil strife. The failures in the oil-rich Middle East are legion.

Economists put forward three reasons for the dismal performance of some richly endowed countries.

http://www.guardian.co.uk /print/0,,4995666-103677,00 .html

WSJ op-ed by Stuart Eizenstat and Nancy Kassebaum Baker titled "Cleaning Up Congo":

The future stability of central Africa, the interests of European and American investors, and the need to avoid another failed state all ride on the success of President Joseph Kabila in rooting out endemic corruption in the Democratic Republic of the Congo.

In June, President Kabila ordered the review of lucrative mining contracts that NGOs and international observers had long decried as a "license to loot." Signed during the country's six-year civil war and during a three-year transition government before Mr. Kabila was elected, these contracts allowed some unscrupulous investors to bilk billions from one of the world's poorest countries.

Now, two months into the review of some 60 suspect contracts, the outside world is beginning to get a sense of what lies ahead, and to have confidence that this process will be the start of a broader anticorruption campaign. Commenting on the cancellation on Aug. 30 of contracts related to a key DRC cobalt mine -- a move that has hammered the stock of some mining companies in London -- Victor Kasongo, the country's deputy minister for mines, hinted that the case would "not be the only one" and promised to "put order to this country."

...A massive country of almost 60 million people that is the size of Western Europe, or of the U.S. east of the Mississippi River, nestled in the heart of Africa and home to some of the world's richest mineral deposits, the DRC could join South Africa as a motor for growth and development in Africa. But with a per capita GDP of $120 and widespread corruption, it could also fall back into chaos and become another failed state that is a danger to its neighbors -- as recently as 2002 Angolan, Namibian and Zimbabwean troops were fighting in the DRC -- and the world as a whole, as a potential haven for drug lords, organized crime and even terrorists. War continues to rage in the DRC's eastern reaches, threatening the lives of local populations and endangered gorillas alike.

The best way to guarantee the emersion of a Congo that is stable and prosperous is to reassert the rule of law, as Mr. Kabila is doing.

Transparency International continues to rank the DRC among the most corrupt countries in the world, and the International Crisis Group said in its most recent report on the DRC that "only a change in governance can provide the legitimacy and capacity to raise the revenues necessary to distribute peace dividends to all sectors of society."

...The lesson for Mr. Kabila is to be firm but fair. Cancel those contracts that were signed under duress or through corruption, but provide guarantees and certainty for legitimate investors that the current contract "revisitation" will offer legal certainty for long-term investments that pay off for the DRC, the Congolese and foreign investors alike. The transparent character of the review, together with the oversight of the Carter Center, assures the vigilance necessary to detect transgression.

("Cleaning Up Congo," by Stuart Eizenstat and Nancy Kassebaum Baker, WSJ, September 12, 2007 - behind a pay wall, email me to send)

Finally, with a slightly different perspective, here's a Naomi Klein column titled "A Noose, Not a Bracelet":

Gordon Brown has a new idea about how to "make poverty history" in time for the G-8 summit in Scotland. With Washington so far refusing to double its aid to Africa by 2015, the British Chancellor is appealing to the "richer oil-producing states" of the Middle East to fill the funding gap. "Oil wealth urged to save Africa," reads the headline in London's Observer.

Here is a better idea: Instead of Saudi Arabia's oil wealth being used to "save Africa," how about if Africa's oil wealth was used to save Africa--along with its gas, diamond, gold, platinum, chromium, ferroalloy and coal wealth?

With all this noblesse oblige focused on saving Africa from its misery, it seems like a good time to remember someone else who tried to make poverty history: Ken Saro-Wiwa, who was killed ten years ago this November by the Nigerian government, along with eight other Ogoni activists, sentenced to death by hanging. Their crime was daring to insist that Nigeria was not poor at all but rich, and that it was political decisions made in the interests of Western multinational corporations that kept its people in desperate poverty. Saro-Wiwa gave his life to the idea that the vast oil wealth of the Niger Delta must leave behind more than polluted rivers, charred farmland, rancid air and crumbling schools. He asked not for charity, pity or "relief" but for justice.

The Movement for the Survival of the Ogoni People demanded that Shell compensate the people from whose land it had pumped roughly $30 billion worth of oil since the 1950s. The company turned to the government for help, and the Nigerian military turned its guns on demonstrators. Before his state-ordered hanging, Saro-Wiwa told the tribunal, "I and my colleagues are not the only ones on trial. Shell is here on trial.... The company has, indeed, ducked this particular trial, but its day will surely come."

Ten years later, 70 percent of Nigerians still live on less than $1 a day and Shell is still making superprofits. Equatorial Guinea, which has a major oil deal with ExxonMobil, "got to keep a mere 12 percent of the oil revenues in the first year of its contract," according to a 60 Minutes report--a share so low it would have been scandalous even at the height of colonial oil pillage.

This is what keeps Africa poor: not a lack of political will but the tremendous profitability of the current arrangement. Sub-Saharan Africa, the poorest place on earth, is also its most profitable investment destination: It offers, according to the World Bank's 2003 Global Development Finance report, "the highest returns on foreign direct investment of any region in the world." Africa is poor because its investors and its creditors are so unspeakably rich.

http://www.thenation.com/ docprint.mhtml?i=20050627&s= klein

More reading on the oil curse in Russia, Cambodia, Nigeria (Vanity Fair), Nigeria (National Geographic), Ecuador, Angola and Ghanna.

Crude realities

By Matthew Green
Published: August 27 2008
The Financial Times

The world needs Africa's oil, but the stuff has a habit of ruining the places that produce it. From the civil war battlefields of southern Sudan to the slums of Angola and the swamps of the Niger Delta, the discovery of crude has done little to improve local lives. Often, it has destroyed them.

Yet a fisherman who makes his livelihood in Africa's newest oil province – a deep-water field off Ghana's Atlantic coast – can hardly wait for it to start flowing. "With God's help, I'll be a rich man," says Joseph Cudjoe, one of a chain of young men hauling a net into a brightly painted longboat beached at the village of Axim. "If the oil is coming, we'll get a lot of money, just like the Saudis."

Ghana, while no match for Saudi Arabia's roughly 9.5m barrels a day, aims to start pumping 120,000 b/d from the Jubilee field operated by the Anglo-Irish Tullow Oil in 2010 and perhaps double that a few years later – becoming the latest to join the club of African oil exporters. Autocracy, instability and poverty afflicting the existing members reveal the corrosive effects the industry can bring. But Ghana could be different. Regarded as a pace-setter in economic and political reform, the country of 23m holds Africa's best hope of proving that oil's curse can be broken.

The revenue could transform Ghana's economy. According to economists at South Africa's Standard Bank, gross domestic product growth could rise from some 5-6 per cent in the past few years to top 20 per cent in the first few years of output, assuming oil prices stay above $100 a barrel. The dollar incomes will help stabilise the cedi – the currency has fallen by more than 20 per cent in the past 12 months – and reassure holders of Ghana's eurobond, which matures in 2017. "We dare not fail," says Kwaku Appiah-Adu, an adviser to President John Kufuor. "It will not only be the hopes of a nation being dashed but the hopes of Africa."

The first test will come before a drop is pumped. Presidential and parliamentary elections in December will decide who controls billions of petrodollars. With Mr Kufuor stepping down after two terms, whoever wins will rapidly have to devise a plan to ensure Ghana avoids oil's pitfalls.

The world will be watching. As fields from Russia to the North Sea and the Gulf of Mexico begin to decline, energy companies from Houston to Beijing are betting on Africa to help make up the shortfall. The continent produced 12.5 per cent of the world's oil last year and is projected to account for almost one-third of the growth in global production over the next two years. Success in Ghana would augur well for a new generation of foreign investors who argue that Africa's commodities boom will drive unprecedented economic progress by the continent. Failure would at best mean more uncertainty.

For a lesson in how not to do it, Ghana need only peer a few hundred miles along the coast to Nigeria, the continent's biggest oil exporter. The insurgency in the Niger Delta, where attacks on oil installations have helped spur oil prices to record highs, shows how the world economy can suffer when a big producer goes bad.

Many of Nigeria's problems can be traced to the advent of oil production half a century ago. The prize of capturing the flood of dollars accruing to the state turned politics into a no-holds-barred contest that fostered coups and secessionist civil war in the 1960s. Oil encouraged a culture of corruption where political connections rather than business acumen were the key to overnight riches. Fraud and violence at elections last year suggest the competition has become only slightly less raw.

Ghana, by contrast, has regarded itself as a torchbearer for African aspirations ever since 1957, when it became the continent's first colony to win independence. Ghana endured its own share of coups in the early years until Jerry Rawlings, the half-Scottish flight lieutenant and military ruler, restored the multi-party system by quitting the armed forces and winning an election in 1992. As limb-chopping rebels marauded their way through other west African countries such as Sierra Leone and Liberia, Ghanaians queued up to vote.

December's elections will reveal how far democracy has matured. Mr Kufuor's New Patriotic party will battle it out with the National Democratic Congress, the main opposition grouping, in a contest that many in Accra, the capital (pictured above), expect to be a nail-biter. High prices for Ghana's gold and cocoa exports have boosted growth in recent years but global food and fuel inflation has hurt the poor. Evidence of growing involvement by the security forces and politicians in trafficking cocaine from South America to Europe has also bolstered opposition feeling. An MP from the ruling party was sentenced to 10 years in jail in New York in February for smuggling heroin. John Atta Mills, the NDC candidate, bills himself as "Mr Clean".

Mr Mills, who has lost twice to Mr Kufuor, was quoted this year as warning of a Kenya-style crisis if the result was rigged. Ghana lacks the ethnic polarisation that fuelled the recent killings in Kenya but a regional bias in the parties' support base has raised concerns among some analysts about potential friction if the outcome is disputed. The big unknown is how much impact the lure of oil may have, but it seems likely to sharpen the competition.

Nana Akufo-Addo, who served Mr Kufuor as foreign minister and is now the NPP flagbearer, reckons the country could earn $15bn (£8bn, €10bn) in the first five years of production alone. "The person who, as it were, gets hold of these resources and uses them well could be in power for a very long time," says Mr Akufo-Addo. "You're playing for probably more than for one election in December. You're playing for power for a generation."

Standard Bank projects that oil income could wipe out Ghana's trade deficit, which stood at $1.1bn in the second quarter of this year, and cancel out the budget deficit, projected to stand at about 8 per cent of GDP in 2008, providing a healthy boost to the macroeconomic outlook. Donor officials say the present government seems committed to finding a transparent mechanism to ensure oil is managed wisely, but so far there is little public detail on what it might look like. "Oil has generated too much excitement and too much expectation," says Kwesi Aning, a senior researcher at the Kofi Annan International Peacekeeping Training Centre in Accra. "Ghana is already rich in mineral resources, but that has not translated into public welfare."

The government says its record in economic management proves it can cope with an influx of oil money. The country has experience in allocating funds freed up by debt relief. Foreign investors gave their seal of approval in September last year by snapping up Ghana's $750m eurobond issue while Vodafone of the UK has just spent $900m to buy a 70 per cent stake in the previously state-owned Ghana Telecom.

But crucial questions remain: should the oil be used for infrastructure or simply added to the budget? Should a fund be set up to counter price shocks? Or should Ghana simply invest its earnings and spend the interest? A new oil policy, circulated to MPs this month and seen by the FT, commits the government to use the funds to develop Ghana for current and future generations but is silent on precisely how revenues will be managed. Energy exporters from Norway to Malaysia and Trinidad and Tobago are offering advice, but as Felix Owusu-Adjapong, the energy minister, admits: "If you are not used to good management of money and you win a lottery, you can still become a pauper."

Nigerian history shows the passions that oil can ignite. Most of today's militants in the Niger Delta may be motivated more by money than ideals, but the sense of alienation in a region that thinks leaders in a faraway capital have squandered their treasure allows the conflict to persist.

With Ghana's oil facilities located reassuringly far out to sea, and little history of violence on the adjacent coastline, few are predicting a Nigerian-style scenario. But demands for preferential treatment echo the discourse in the delta. In his home near the 16th century Portuguese slave fort in Axim, Awulae Attibbrukusu III, the leader of 22 western chiefdoms, says the area deserves an extra slice of oil funds to avoid the problems of Nigeria. "A greater share of the cake should be given to us," he adds, speaking in quarters decorated with chiefly symbols from a hyena skin to a staff topped by a brass eagle.

Both main parties have pledged to invest in industries that will help achieve broad-based prosperity. But as Nigeria has learnt, oil tends to undermine the very sectors that could be capable of providing mass employment. Nigeria's oil dollars caused exports to become less competitive and imports to surge. Farming and manufacturing collapsed and idle youths crammed into ever more chaotic cities.

The scale of Ghana's oil income suggests it will have to be careful to avoid a similar fate. The International Monetary Fund projected in an internal report in June that oil production would be worth $3.5bn by 2013, with the state's take reaching $1.3bn. Oil income could thus outweigh both gold and cocoa earnings, which totalled about $2.8bn in 2007. Plans to create jobs by encouraging local companies to service the oil industry are likely to prove tough to implement. "I worry about our capacity to benefit from this resource," says Thomas Manu, director of exploration and production at Ghana National Petroleum Group, the state oil company. "How much Ghanaian goods and services will be used in this whole thing?"

Oil executives heading to Ghana have an interest in ensuring the country gets it right. Tullow Oil, whose discovery in Ghana helped hoist it into the FTSE 100 index last year, says it is taking steps to soothe local feeling, such as not flaring gas. "We need to manage public expectations," says Gert-Jan Smulders, Tullow's country manager. "Tullow Oil is committed to grow and maximise the number of national staff, but the size of the operation isn't such that you'll get hundreds of people employed."

Working with the US private equity backed Kosmos Energy, Tullow has a world-class find in Jubilee – estimated to hold 500m-1.8bn barrels. Mr Manu says that with companies including Vanco Energy and Amerada Hess planning to drill this year, there could be a lot more. Walking past rusting cannon in Axim's fort, Kingsley Quayson, the curator, reflects that in centuries past, Ghana's slaves helped build America. "We are proud of oil," he says. "Now Ghana will be rich." Everyone hopes he is right.

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