BY ANAND RAJARAM.
20th November 2013
Travelling across Africa these days you are likely to run into increasing numbers of mining, oil, and gas industry personnel engaged in exploration, drilling, and extraction across the continent. Although commodity prices are moderating, the discoveries being made in Africa offer the real prospect of significant revenue to many cash-poor, aid-dependent governments in the decade ahead. If you care about development, the question is whether these revenues will catalyze broad economic development and whether they will benefit the poor in Africa.
Conventional economic thinking would say yes, with suitable qualification. As long as governments allocate the revenues to viable public investments, particularly in economic infrastructure which countries lack (roads, power systems, hospitals, ports), income and employment growth would be stimulated and the poor would benefit, so the theory goes.
Conventional political thinking would say, probably not. Those who believe in the rentier theory of the state would argue that rents from natural resources would strengthen the incentive for mis-governance, for political elites to divert revenues to patronage and corruption and away from public goods that would benefit the poor. In countries such as Uganda, Tanzania and Mozambique, that are expecting significant revenues from hydrocarbons, political analysts see the risk of reversal of nascent improvements in accountability which would set back efforts to reduce poverty.
Both arguments presume that governments actually collect a reasonable share of the revenue from oil, gas and mining concessions. While governments can be (and often are) skillfully duped by sharp legal, accounting and transfer pricing practices, basic neglect of public stewardship can also play a role. A recent article in the New Yorkerdescribes how Guinea’s ageing President Lansana Conte gifted away, for a pittance, the right to mine the extraordinarily rich iron ore in the Simandou Mountains to an Israeli company, in effect losing almost five billion dollars that rightfully belonged to the people of Guinea.
Economists and political scientists appear to be converging to the view that the quality of institutions is the critical factor for countries to develop successfully, and to make effective use of natural resources. Institutions matter because they shape the incentives of politicians and political elites and determine the capacity of the state to perform. Politicians are unlikely to spend resources on public goods or on targeted subsidies to the poor if they can hold on to power by buying off key constituencies or if their political time horizon is short. Acemoglu and Robinson (2012) distinguish between “inclusive” and “extractive” institutions and demonstrate with vivid historical examples how, for much of history, powerful elites have established extractive institutions to capture resources for their narrow benefit, to the exclusion of the many. But we know very little about how inclusive institutions emerge and far less about how to create them over relatively short periods of time.
More than a decade ago, the World Bank tried to create a set of institutions in Chad, to ensure that the government would allocate oil revenues to benefit the broad population of Chadians, 62 percent of whom lived below the poverty line of $1.25 per day. But President Idris Deby Itno found these institutional arrangements irksome, they limited his discretionary authority to use the revenues to retain power and they were soon abandoned. One may draw the conclusion that grafting inclusive institutional solutions onto a political root stock that is deeply extractive offers little chance of success.
This is the dilemma for development agencies working to support poverty reduction in Africa and elsewhere. Institutions are critical but they need to be homegrown, shaped by a domestic consensus, and that takes time and the outcome is unpredictable. If political power is narrowly distributed, it is unlikely that natural resource wealth will be tapped to benefit the poor. There is a role for external actors to “nudge” the political equilibrium towards inclusive solutions and give the poor a political voice. Principles such as transparency of contracts, revenues, and public expenditure, can aid the process of domestic political debate but may themselves be resisted. Proposals to encourage governments to transfer a share of revenues directly to citizens, may also galvanize public engagement on the broader allocation of natural resource revenues. But how political elites will respond will vary. If institutional change is slow and resisted, the answer to the question on whether the poor will benefit from Africa’s natural wealth over the next decade may lean toward the negative if we continue to function with the current state of knowledge. All this argues for greater attention to the incentives of politicians and powerful elites and the design of institutions that are incentive-compatible and more inclusive, an important area for further policy research.