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Natural Gas Production in East Africa: An Inevitable Resource Curse?

africa and resources and risk

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.

[1] Spector, Bertram I., Schloss, Miguel, Green, Sammi, Hart, Elizabeth, Ferrell, Tye, USAID Corruption Assessment: Mozambique Final Report, December 16th, 2005.

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