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Can Uganda beat the proverbial curse of oil?

By Henry Zakumumpa

A growing body of evidence suggests that oil, far from being a blessing to African countries is a curse. Without exception, every developing country where oil has been discovered has seen its standard of living decline and its people suffer, while its less endowed neighbours have gone on to relative prosperity’ writes John Ghazvinian author of Untapped: The Scramble for Africa’s Oil.

The example of Nigeria is instructive on its own here. Nigeria, the world’s seventh largest oil producer is ranked among the twenty poorest countries of the world, with 57 percent of the population living on less than a dollar a day according to the World Bank.

Many African countries have recently discovered oil among them, Equatorial Guinea, Angola, Sudan and until recently, Ghana and our very own Uganda.

The American charity, Catholic Relief Services projects that$ 200 billion in oil revenue will flow into the coffers of African governments over the next decade. This can only be good news, right?

Paul Collier in the 2007 bestseller, The Bottom Billion: Why the World’s Poorest Countries are Failing and What Can Be Done About it goes one better and provides economic evidence that shows that oil or broadly natural resources discoveries in poor countries actually retard economic growth or create distortions in fragile economies. And this is no arm-chair treatise. He illustrates with hard-nosed evidence how natural resources are a “˜trap’ for developing countries citing examples such as Nigeria, Gabon and Angola. Economists refer to this sudden inflow of petroleum dollars in economies as the “˜Dutch disease’ or “˜the paradox of plenty’.

According to John Ghazvinian , only about 5 percent of the billions of dollars invested in African petroleum projects every year are actually spent in Africa.

Because most oil production is capital intensive and relies heavily on ultra modern extraction technology, only limited highly skilled openings are available and these often go to foreign nationals The paradox is that oil exploration in Africa creates far more jobs for western nationals who have the requisite skills than it does for locals.

In Untapped: The Scramble for Africa’s Oil it is shown that the oil boom in Nigeria had a negative effect on agricultural production. “From 1970 to 1982, production of cocoa fell 43 percent, that of rubber 29 percent and ground nuts 64 percent. The percentage of Nigerians living in poverty went from 28 percent in 1980 to 66 percent in 1996. Average annual income, which in 1980 was$ 800 per person, today stands at a mere $300.”

Several studies suggest that oil booms in developing economies result in a decline in national tax revenues. That because of the sudden inflow of foreign exchange accruing from oil revenues, the incentive to generate national tax revenue diminishes. “Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil.”

Let us lose the economic theory and bring this a little closer to home. Put this in perspective. Uganda has started exporting oil to the international market. The proceeds from the oil will not come in Ugandan shillings but in US dollars or Euros. Suddenly, the country is awash with foreign exchange. The result is that the value of the Uganda shilling artificially inflates. The effect is that imported products become cheaper and consequently, a huge national appetite for imported goods like Hummers and Plasma screens grows. Meanwhile, Ugandan coffee or iron sheets from Roofings become expensive for Rwanda and Congo because of the appreciating Ugandan shilling. The local agricultural and manufacturing sectors take a hit. But the government is not too bothered about the decline in tax revenue after all there are petrodollars. It doesn’t stop there. Local food production is no longer commercially viable due to reduced export demand. Agricultural farm lands are abandoned as everyone rushes to the cities to get a piece of the oil boom. As a result there is less domestic food production and urban dwellers such as those in Kampala take to imported food stuffs. This is not an imaginary story. This is the story of Gabon, a veteran oil exporter in Africa which now imports 80 percent of its food from Cameroon.

Celebrated economist Jeffrey Sachs’ Oil Revenue Management Plan’ for the management of Sao Tome’s future oil wealth that includes the establishment of a permanent fund dedicated to development projects and poverty reduction and a Norwegian-style fund for future generations should be endearing.

So, next time you hear that Uganda’s discovery of oil in Hoima and Amuru districts can only be a good thing. Think again.


The writer is a development specialist based at Makerere University.

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