Oil in Africa: Blessing or Curse?

Oil discoveries have been a mixed blessing for many African countries, providing great wealth but often bringing the curse of corruption. The inflow of dollars and other hard currencies can also drive up the value of local currencies, creating added challenges for export oriented industry and agriculture. The history of oil management on the continent has been fraught with problems, and Wilson Center on the Hill joined by the Wilson Center's Africa Program hosted a discussion on how developing, resource-rich countries can avoid the obstacles the oil curse can pose to sustainable growth. Steve McDonald, consulting director of the of the Africa Program and the Project on Leadership and Building State Capacity moderated the discussion, which also covered the role the United States can play in maintaining fair practices in African extractive industries.

Nicolas Cook, a specialist in African affairs at the Congressional Research Service, opened the discussion. Cook stressed that his comments were his own and did represent the views of the CRS. He quickly established Africa's great strategic importance to the United States. Roughly 25 percent of the United States' oil imports come from Africa, almost all of which is the desirable, sweet and light crude. The African import market is expanding rapidly with other nations tripling exports in the last few years. Since sub-Saharan Africa has been able to expand its capacity through discoveries and investment from abroad, and because it presents fewer political risks than OPEC nations, Cook argued that Africa will play "a dominant role in maintaining U.S. energy security."

African oil exporters do present some problems for the United States, however, and Cook pointed to the political elites' control over oil revenue as one of the main stumbling blocks to sustainable growth. Several governments have suffered from the "national resources curse" phenomenon, where corruption and rebellion follow the discovery of valuable natural goods. While President Obama has supported the Extractive Industries Transparency Initiative (EITI), aimed at reducing the pitfalls of natural resource curses, the administration has "given limited aid to countries looking to put EITI into place." EITI only tracks revenue, not expenditure, and Cook recommended a broader "EITI plus" mechanism that would keep track of countries' spending as well as their earnings. Cook further suggested that the U.S. can help reform the oil industry through bilateral commissions, and referenced Nigeria and Angola specifically as countries that need help on issues of energy supply and reform. USAID's global development alliance could present another avenue for change, Cook argued, by creating public-private partnerships in African countries to enhance international corporations' social responsibility.

Ian Gary, a senior policy manager for Extractive Industries with Oxfam America, agreed that the United States should take an increased interest in the fate of sub-Saharan Africa's burgeoning oil economies. Since the United States imports such a large portion of its oil from the continent, Gary warned that political unrest could cause increased prices for American consumers. Development programs that encourage "stability and social justice" of its trading partners, therefore, can help provide at least partial energy security. Countries like Ghana, which will have $1 billion next year to add to its $4 to $5 billion annual government revenues, often aren't prepared to allocate such a large amount of money fairly and without saddling the country with future debt. Gary pointed to misallocation and ensuing human rights issues as a major challenge for governments suddenly rich with oil revenues.

The United States has an incentive to help African countries avoid such missteps, and Gary suggested that several government agencies have the capacity to partner with countries' developing extractive industries. The State Department's Energy Governance and Capacity Initiative could leverage American expertise to assist countries that show the requisite political will, and he echoed Cook's suggestion that the USAID Global Development Alliance play an integral role in combating corruption. Gary noted that the Treasury Department's unit for technical assistance could lend their expertise to support nascent oversight committees in countries like Chad. The United States could even be represented on a higher level internationally on the EITI, by providing more support to the initiative and implementing it locally. One section of the Dodd-Frank bill adds another check on possible corruption by demanding the disclosure of payments made to governments by U.S. extractive companies. Gary noted that the U.K., France, and Germany were all hoping to implement similar legislation on a wider European basis. Given the numerous U.S. efforts to stem resource-related corruption and the history of the last few decades, Gary argued that "any country that 'doesn't know what the right thing to do is in extraction' is willfully doing the wrong thing."

To clarify the challenges of developing a transparent extractive infrastructure, Mohammed Amin Adam offered the example of Ghana where he serves on the Civil Society Platform on Oil and Gas and as National Oil Coordinator of Publish What You Pay. The early stages of investment in a find like the Ghanaian Jubilee oil field are incredibly important, and Adam used Nigeria as an example of a country that has not shown any tangible progress after two decades of high oil revenue. He pointed to heavy borrowing against high revenues, unwise spending, and nationalist leaders as three major traps other countries with natural resources have fallen into. A government committee's study on Ghana's early stages of oil development found that the country was not entirely ready for extraction and the resulting pollution dangers; Adam warned that the government structure and income distribution models must be updated to meet the challenges posed by a lucrative oil industry.

Despite its history, Adam argued that the prospects are good for West Africa due to its light, sweet crude, its enviable position outside OPEC, and the lack of "oil nationalism" in the region's leaders. Another window of opportunity is opened for Africa, he said, but qualified that hope by maintaining the need for vigilance and support from the international community. Ghana has taken the lead in promoting good governance, implementing requirements that the government report both receipts and revenues—above and beyond the restrictions of EITI. The country established a people's committee to aid government oversight, and has implemented several laws to bolster its legal framework and promote transparency. Adam also noted that Ghana has avoided ad hoc government spending by requiring that any oil revenue used be approved as part of the budget, and as part of a long-term development plan.

Ghana has implemented many effective supports for its extractive industry, but Adam warned that many challenges still remain. He cited the lack of transparency along the value chain in the oil industry, absence of competitive bidding, and a budget process that has its own corruption as impediments to a truly healthy extractive industry. As the government deals with an increased debt profile and calls from its regional neighbors to share in the profits, Adam stressed that Ghana is taking the right steps toward sustainable growth, but must avoid the mistakes that have caused resource curses to plague other African countries in the past.

By: John Coit
Kent Hughes, Director, Wilson Center on the Hill