Finding solutions to the economic challenges associated with the oil resource is not the difficult part
Recent events in parliament have propelled the oil debate to a level that we haven’t seen in the country before. The excitement around Uganda’s discovery of oil and its potential impact of economic development has suddenly turned into anxiety and ambivalence around whether we can indeed positively utilize this resource for future economic advancement or fall in the trap of the “Oil curse”.
Economists have identified essentially three key arguments that explain the oil curse. The first is that oil prices are very volatile, and this commodity price volatility exposes a country’s economy to great risks. Uganda could “fall into things” as some people might describe it, but a sudden drop in prices of the oil could easily turn the boom into a bust with dire consequences to our economy. If you have heavily invested the oil proceeds in big projects like infrastructure, industry etc- then a sudden drop in prices could potentially turn these into white elephant projects that have no benefit to the economy.
The second argument is that temporary booms normally lead to the re-allocation of resources (both capital and human) into sectors that are growing. Resources tend to move from manufacturing to the extractive industries, undermining productivity in the most productive sectors of the economy; in this case, services, manufacturing and agriculture for Uganda, and therefore inhibiting long term economic development. In addition, sudden increase in revenues from oil would make the local currency stronger than foreign currencies and this currency appreciation would affect the competitiveness of the country’s exports as they would be more expensive in foreign markets. This is what is known as the Dutch disease.
But finding solutions to these economic challenges associated with the oil resource is not the difficult part. Many countries have been successful in implementing ideas around how best to utilize resource rents and there are many useful models to draw from. Some of the successful strategies have included the creation of sovereign funds in which the oil revenues are managed and invested in strategic offshore investments for the country (Bostwana), hedging export earnings through the creation of oil option markets (as in Mexico), or putting in place a stringent and disciplined budget system that ensures counter cyclical fiscal policy (Chile).
The most complicated and significant consequence of the discovery of oil is its impact on a country’s politics and how it is governed. While the conventional economic arguments speak to the fact that the oil industry leads to the closing off of country’s chances to diversify into “growth generating industries” like manufacturing and services, it’s the impact that the oil industry has on a democracy that is most detrimental to growth.
Natural resources like oil alter how electoral competition is conducted, by encouraging patronage based politics rather than public service delivery politics. And as Paul Collier has so eloquently argued, in ethnically diverse democracies, resource rents intensify the competition for power but without the corresponding incentives to build restraints to that power. In such an environment “oiling” the patronage system through appeasing and buying off groups is more cost effective than investing in productive assets. Those that have access to power use these resources to help entrench themselves at the expense of other groups- closing off any opportunities for collaboration to solve development problems. So essentially, it creates the environment that is survival for the fittest- or fattest for that matter!
But for patronage politics to survive, it has to break the rules of how public resources are utilized. Those that are in power must be able to control and have un-fettered access to public funds in order to buy political support. And therein lays the challenge for Uganda. While the government has consistently stated that oil revenues will be invested in useful infrastructure projects; including a hydro power dam for example, the manner in which oil transactions have been handled to date-with so much secrecy and underhand dealings seems to give credence to the perception that we are well on our way to experiencing the oil curse even before the first barrel of oil is pumped out of the soil.
So putting in place systems where “access to oil rents” is controlled, would go a long away in ensuring that a country like Uganda avoids the oil curse. To this end, the current debate and haggling in Parliament has chances of being useful if only it helps create the checks and balances that would foster a transparent mechanism through which Uganda’s oil revenue would be managed so as to avoid creating the political distortions that are detrimental to development. This debate could help facilitate the building of the institutional wherewithal that is necessary to manage the oil sector successfully. So rather than stand it its way, this process should be encouraged by all stakeholders interested in how oil will impact the development of this country.
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