East African nations such as Mozambique, Uganda, Tanzania, and Kenya
are experiencing a boom in oil and natural gas production that is
increasingly exported by Western production companies to meet growing
global demand. While these activities may appear to be an economic boon
to these countries, the problem is that they could potentially cause
natural gas to be a “resource curse”
for these developing nations.
A resource curse, or a “paradox of
plenty,” can occur when the extraction of natural resources like fossil
fuels and minerals in resource-rich countries contributes to slower
economic growth than countries that are less abundant in these same
natural resources. This effect could be mitigated if the government
takes proactive steps to grow the rest of the economy, facilitate skills
transfer, and combat corruption.
Several economic mechanisms
contribute to the resource curse. The import of foreign currency needed
for foreign firms to invest in projects like infrastructure,
construction and other services needed to extract the resources causes
the real exchange rate to appreciate. That is, one unit of foreign
currency translates to less domestic services in the local economy.
As
a result of this change in exchange rate, other economic sectors suffer
in losing their competitiveness overseas. That is, developing nations
that are subject to the resource curse now rely upon imports of other
goods, causing unemployment, loss of skills, poorer infrastructure and
other domestic services. If the natural resource approaches depletion,
the nation will have few or no other competitive local economic sectors
to rely upon.
In addition, one of the reasons why many countries
fall into the resource curse is because the local skills and capital
necessary are lacking. In the case of natural gas, this means the skills
and capital required to find reserves, implement processing plants, and
process the gas are typically not found within the developing nations
harboring the abundant gas, but rather are found overseas. Therefore,
international companies that provide these services reap the benefits of
trading it in the global market. Overreliance on resource exports
increases the volatility of domestic government revenues due to exposure
to a global commodity market as well. Government mismanagement of
resources and corruption frequently exacerbate these problems.
Several countries in East Africa have already experienced the effects of resource curses, including Nigeria, Angola, Equatorial Guinea, and the Democratic Republic of Congo. These countries have abundant natural resources but are also among the poorest nations in Africa.
The
Republic of Congo is a representative example of a country that has
experienced the resource curse; it contains one of the largest natural
resource reserves in the world, with minerals like coltan, tin, diamonds
and gold. In fact, the market value of these minerals equals the
economic value of these same minerals in the U.S. and E.U. combined.
However, rather than relying on such natural wealth to boost the
economy, these nations became reliant upon imports in other economic
sectors. More significantly, the Republic of Congo has one of the lowest
“control of corruption” scores in the world; that is, it is identified
as having one of the most rampant instances of government corruption.
Resource rents encompass 64%
of The Republic of Congo’s GDP and the central government does not
oversee extraction or allocate revenue into local programs bolstering
education and infrastructure. In contrast, Botswana,
known for its abundance in minerals like diamonds, was able to maintain
a higher GDP and is identified to have lower corruption and less of an
import-based economy.
It is unclear whether East African countries
like Mozambique, with booming oil and gas production, will suffer from
the resource curse. Mozambique’s economy has experienced an average
annual GDP growth of 7.4%
over the past two decades due to foreign investment and recent
political stability. Given the large volumes of natural gas reserves, it
is unclear whether it will be able to use such wealth to bolster its
economy or it will succumb to the resource curse. Mozambique has
corruption within its government and its judiciary system, where bribery
is persistent and the courts are understaffed[1].
Currently, Mozambique has levels of corruption greater than the average
in Sub-Saharan Africa and this could be a hindrance in preventing a
resource curse.
Mozambique may experience significant growth as
long as the expected increase in natural resource revenues are used
effectively. For example, it could invest revenues from natural gas
extraction into programs that train the local population in the skills
required for resource extraction rather than importing skills via
foreign companies. In addition, commodity taxes could be levied to
establish programs that promote skills in other economic sectors to
prevent over-reliance on imported goods. Most importantly, corruption
needs to be addressed to allow for resource revenues to flow
appropriately to the sectors most necessary for domestic growth and
sustainability. To combat corruption, Mozambique and similar countries
could promote development of human resource management systems focused
on merit-based hiring, promotion and performance standards, and take
advantage of any existing donor programs that fund anti-corruption
programs1. The large reservoirs of natural gas in Mozambique and other
East African countries can be extremely beneficial to the economic
growth and social welfare of the region, so long as it can change their
regulatory framework and prevent a resource curse.
http://www.theenergycollective.com/nnkumar/2242895/natural-gas-production-east-africa-inevitable-resource-curse