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The ‘resource curse’ means the discovery of oil and...

Defend Truth

Opinionista

The curse of oil and gas, and the unfulfilled promises of resource-based economic development

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Gillian Hamilton is an economic researcher with The Green Connection.

The discovery of oil is not always a boon for countries. In many nations, the ‘resource curse’ means that the proceeds of such finds do not make their way into development that benefits the public good.

This week, as South Africa awaited the budget speech to hear what the government deems as the country’s financial priorities for 2022/23, small-scale fishers from the West Coast were preparing to go head-to-head with Searcher Geodata in the Western Cape High Court on Thursday.

The goal is to end the company’s seismic operations, which pose a significant threat to coastal livelihoods. Anyone who still touts oil and gas as a positive game-changer is conveniently ignoring how “resource curses” have already led to a significant deterioration in living conditions in a number of African countries. Research showing this should be evidence enough that investing in oil and gas will not improve South Africa’s economy.

Research indicates that on average, countries with an abundance of non-renewable resources (or minerals) tend to suffer from the resource curse, which means they have lower levels of economic development and growth than those without such resources. In addition, countries rich in extractive resources – such as South Africa – tend to have higher levels of inequality, lower levels of democracy and increased levels of corruption.

The reality is that these countries tend not to reinvest their wealth to develop their own economies. This is largely the result of weak political institutions and underdeveloped civil societies which make it possible for political elites within mineral-rich countries to monopolise the ownership of these resources, thus redirecting much of the income to themselves. This often-deliberate mismanagement of resource revenues means that mineral resource-rich countries tend to underinvest in education and other important public goods, much as we see in South Africa. This underinvestment is exacerbated by the neglect of taxes as a source of revenue because extractive revenues are so high.

In addition, resource-rich countries fail to adequately diversify their economies, often prioritising the quick gains that come from extraction, over more sustainable, long-term economic planning. This often results in the agricultural sector being neglected, leading to increased poverty in rural populations. It also leads to underemployment as jobs are not created in other economic sectors. All of this is further compromised by the volatility of mineral resource prices, which causes unstable revenue streams, a situation made worse by commodity trading, since this attracts more speculative and short-term trading activity.

It is therefore unsurprising that this unstable and chaotic context gives rise to conflict between different political forces within countries over access to mineral profits. Seriously compounding the problem of the resource curse is the phenomenon known as “Dutch Disease” – the paradox that occurs when non-renewable resources, such as the discovery of large oil reserves, harm a country’s broader economy – which more often than not leads to economic recession.

The oil and gas industry exemplifies this disturbing trend in Africa. But more than this, African countries also tend to suffer a double whammy, because, coupled with the “resource curse”, this resource-rich continent also suffers from the “presource curse” as it is dubbed by a World Bank Working Paper. This is where countries that are targeted by oil and gas companies, such as those in Africa, experience slower economic growth but more social problems than those with fewer mineral resources. The World Bank’s research analysed 12 sub-Saharan African countries which had found oil and gas deposits during the period 2001-June 2020, and it was found that all these countries fell short of the inflated forecast  expectations.

There were three reasons for their “presource curse”. 

First, the commercial viability of the oil and gas resources for all countries was overvalued. These overestimations result from companies wanting to emphasise positive results to inflate their share prices. This, of course, results in governments and other companies exploring the same areas and being misled by these inflated potential results.

Second, oil and gas projects frequently run late and end up costing more than budgeted. In Africa especially, these overruns are likely to make extractive projects even less commercially viable. 

Finally, African government revenues tend to fall significantly short – as much as 63% lower than initial forecasts – due to incorrect production rates, which are always lower than what was initially forecast. There are also challenges associated with taxation on production.

Nigeria, for instance, the largest oil producer in Africa, is an excellent example of the resource curse in action. For a long time, Nigeria was one of the top 10 global oil producers and the country’s estimated earnings are said to be between R5,822-billion and R8,733-billion in oil revenue since 1960. However, despite the enormous wealth oil has generated for this country, Nigeria’s Human Development Index (HDI) value for 2019 was 0.539, ranking at 161 out of 189 countries and territories. Compare this with Costa Rica, a country with considerably fewer mineral resources, which ranks 62 on the HDI. 

The World Bank calculates that Nigerian per capita income is R32,456, compared with a global average of R266,349, while the adult literacy rate is only 62% (2018). According to a 2019 Poverty and Inequality in Nigeria report, 40% of the total population, or almost 83 million people, live below the country’s poverty line of 137,430 naira (R5,556) per year (National Bureau of Statistics, 2020).

To reiterate, investing in an oil and gas industry does not bode well for South Africa, a country with unprecedented poverty and unemployment levels, which continue to deteriorate. The time has come to stop the madness of chasing after elusive “game-changers” – which are in fact game-spoilers – and being naive or ignorant about the curse that oil and gas will bring to South Africa. 

The time has come for the government to look at the evidence around us and to consider what it is our society really needs: to focus on the real game-changers such as investing in South Africa’s care economy and the just transition. DM

 

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