Thursday, March 29, 2012

Can Kenya avoid the Resource Curse?

This week, the big announcement was that Kenya has found oil - but is that good news?

From the Archives - March 2006 I am hoping that we don’t find oil fields/reserves in Kenya and not just because we are unlikely to escape the much-written about oil curse that has plagued so many countries. We simply don’t have the governance systems in place to manage oil revenues which the Economist referred to as oil money flows from big oil to the big man and Kenya will become the latest example to confirm that resource rich countries grow more slowly than resource poor ones.

Kenya's oil is likely to be found in remote parts of Coast, North Eastern, Eastern or Rift Valley provinces and these are areas that have not received much development in 43 years of independence. Discovery of oil is likely to be met by hostility from these residents (who are often armed to defend themselves from bandits and raiders) and who will have the view that “you" (other Kenyans/central government/Nairobians) don’t consider us to be Kenyans, you have never cared about us and now you’re only taking an interest in us because we have oil – so F__ you, we want our own country and we’ll cut our own oil deals, maybe even with Sudan, Ethiopia or Somalia.”

Also the discovery of oil will not help other vibrant & diverse industries, especially agriculture-based, which will be hurt by the distorted foreign currency positions that oil will create. Also, oil & mineral industries never create as many jobs for locals as they promise - and agriculture, which supports a majority of Kenyan households & families will suffer leading to increased poverty.

There Hope: So how can Kenya escape the resource curse? At an African Leadership Network (ALN) Forum in Addis Ababa in October 2011, Oxford Economist Prof. Paul Collier, outlined steps for countries to escape the resource curse (which should begin even before oil/minerals are found)

5 Steps for Handling Resources
1. In terms of discovery of natural assets, geological information has to be made public before government's call in the private companies (..Kenyan insiders are dealing away oil drilling leases.)
2. Have a good taxation system to benefit the society – (Africa's resource history is one of missed revenue, and misaligned contracts so it is important to get the right contracts)
3. Involve & manage the local community (avoid a Niger delta problem)
4. A substantial portion of income should be saved rather than consumed
5. Save in what? Africa needs sovereign development funds, not sovereign wealth funds. However Africa does not have much of this capability, and there is a need to build capacity, i.e. invest in investing to manage the resource depletion and erratic commodity prices.

At the same ALN forum, Dr. Donald Kaberuka, President of the African Development Bank (ADB) spoke about helping countries avoid the oil curse saying ..Diamond-rich Botswana has shown that it is possible to do this. Oil exporting countries have made mistakes but recently when an African country (he did not name) discovered oil, the ADB went to see the President and offered their advice as the ADB is helping countries negotiate good contracts through a legal support facility, and avoid signing bad deals which are difficult to wiggle out of without damaging investor confidence.

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