South Sudan Oil: A Curse or a Blessing.
By Dr. Isaac Yak R. Tutdel, Ph.D.
27th December 2016(Nyamilepedia) —– The Petroleum Industry in South Sudan (PISS) was inherited from the continuing Sudan and sustains long historical records. South Sudan is endowed with significant non-renewable natural resources that would have an enormous positive transformational impact on the South Sudanese communities if polices to exploit them were for the benefits of such communities. These non-renewable natural resources comprise oil as the leading resource, uranium, copper, diamonds, gold, iron ore, mica, silver, zinc, and others.
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Although a sizeable reserve of these minerals has been proven to exist, a comprehensive exploration has not been conceded to and undertaken throughout the country due to protracted political conflicts between the North and the South that predate Sudan’s independence in 1956. The Addis Ababa Peace Agreement of 1972, which ended the first Sudanese civil war between the Southern Sudan and the Khartoum government, made it possible for oil companies to explore oil in the South of the country. The American oil company Chevron made the first discovery of oil the in the late 1970s and 1980s in greater Upper Nile Region. However, Chevron could not continue with the exploration and production because of the outbreak out of Sudan second civil war in 1983.
The Guiding Principles for Prudence use of Oil Revenues
Suffice to the explicit explanation of the symptoms of resources curse; let’s explore the judicious aspect of exploiting oil for a blessing. Various experience around the globe suggest the basic principles that should guide the use of oil revenues, and how well such principles been put into practice. There are three fundamental queries about the use of rents from the extraction of non-renewable resources:
- Would the use of Oil resources be dedicated to present consumption or on investment to generate sustains revenues?
- If for the investment aspect, what economic, physical capital and human capital assets should be developed?
- Would the rents be handled by the government unswervingly or handed to populations?
1- Regarding the query of whether proceeds from non-renewable resources should be spent on present consumption or on investment, one ethical point is that of custodianship: the present generation should pass assets on intact to future generations. In contrast, a utilitarian would argue for spreading the benefits across present and future generations. Economists’ usual characterization of this approach is the permanent income hypothesis which implies that, following a discovery of an exhaustible natural resource, consumption should increase by the expected annuity value of the discovery, with revenues in excess of this being invested to build a stock of assets sufficient to finance the consumption increment in perpetuity. However, this rule needs modification in a developing economy that is capital-scarce and accumulating capital as it converges to a higher income path.
The consumption increment should then be somewhat front-loaded; less should go to future generations (who will have higher incomes in the future anyway) and more to current poverty reduction. In effect, this change brings forward (and therefore flattens) the path of consumption growth in the economy. But even with this modification, the theory suggests a high savings rate from resource revenues. Chapter IV, Article 4.1.10. of the Compromise Agreement on the Resolution of the conflict in the Republic of South Sudan did mention the prudent management of oil revenues through the ‘Oil Stabilization Account’ (OSA) as well as the Future Generations’ Fund (FGF).
2- Regarding the question of what assets should be acquired with resource revenues that are saved, at the aggregate level this is a choice between domestic and foreign assets. For a capital-abundant country, the usual answer is to accumulate foreign assets in a sovereign wealth fund, such as Norway’s Pension Fund. For a capital-scarce country, the priority is to build a domestic assets including human as well as physical capital. Scarcity not just of capital as a whole, but of public funds, in particular, suggests that government investment in infrastructure and in public health and education systems should offer high social returns. However, scarcity of funds does not automatically imply that high-return projects are immediately available.
An efficient path of investment needs to take into account domestic opportunities and the absorptive capacity of the economy. While the priority is domestic investment, there are several reasons for supporting this with some accumulation of foreign assets. One is that the efficient path of domestic investment will, quite generally, be different from the actual path of revenue, often building up more slowly and being less volatile. This suggests the need for a “parking fund” that is, a way of placing revenues offshore until they can be used efficiently in the domestic economy. Another reason is the need to self-insure against price uncertainty by building a “stabilization fund”. Some insurance against price fluctuations can be provided by financial instruments. Much oil is sold forward, that is, a price is agreed upon in the present at which the oil will be sold in the future, typically at durations up to six months. Depositing revenues in a stabilization fund when resource prices are high is a way of building such a protective buffer.
3- Regarding the issue of who makes these consumption and investment decisions, the broad distinction is between the government and the private sector. The government, while distributing some revenues through current spending, can retain ownership of assets that are acquired. These may be public investments, or assets associated with lending to the private sector, perhaps through a development bank or simply by having lower government (domestic) debt than would otherwise have been the case. The alternative is that funds are given to the private sector by tax reductions or a program of citizen dividends. The case for government control is derived from the scarcity of public funds in developing countries and the need to increase public investment in human and infrastructure capital. Resource revenues can fund such investments without imposing taxes that will be distortionary and can be hard to administer in low-income countries. Further, the government can smooth spending, both across generations and also in response to short-run business cycle fluctuations, mitigating the risk of resource-induced macroeconomic instability.
The potential benefits of distribution to the private sector are based largely on the poor track record of governments. Direct distribution to citizens may reduce the risk of corruption and improve the quality of investments undertaken, although the link from citizen dividends to efficient investment is questionable in a country with poorly developed financial institutions. Citizen dividend schemes also create their own political risks, as they may become highly politicized and subject to electoral bidding wars by populist politicians
The symptoms of the Resource Curse Theories.
Voluminous works extensively discussed what could be term as the symptoms of the resource curse. It is worthwhile noticing that, each writing on resource curse is influenced by a particular situation at the time of writing that paper. Different situations at different times at different places possess unique circumstances that require special attention and different findings. Henceforth, the below resource curse symptoms command a unify support among the various writers of resource curse literature.
Mismanagement of Rent.
Resource extractive industries, particularly petroleum and mineral resources, are characterized as boom/bust industries due to the volatility of global markets for those commodities. Various literature about the resource curse argued that complications be ascribable to the apathy that comes of sudden treasure from resource extraction. Governments may perceive a lesser need for sound economic management and institutional quality. Sudden increases in wealth can also lead to consumption rather than an investment of resource rents at individual and institutional levels. Specifically, there is a strong correlation between economic ‘booms’ or sudden increases in wealth and the following: (1) Increased public spending (2) Inefficient allocation of resources (3) Bad economic decision-making (4) Rent-seeking behavior.
Entrenchment of undemocratic regimes.
Attached to the argument concerning the centralisation of natural wealth is that, resource boom retards political charge and entrenches regimes. The members of the government-industry group are collectively termed ‘rentier elites’, who ‘capture’ natural-resource rents and use them to create patronage networks that consolidate their power. It is argued that these elites have strong vested interests in maintaining the status quo and thus act to suppress criticism and potential political challengers.
Other studies make the distinction between the ‘developmental’ and ‘predatory’ state: both may be authoritarian, but the former has a bureaucratic structure and an elite that will develop the country while the latter has an elite that is organized around sucking out the state’s wealth and resources and thus makes little attempt at development.
Resource rents are flowing out of the community and region.
Leakages of resource rent are a widespread practice in the countries endowed with natural resource and constitute a major symptom of the resource curse. Essentially economic growth is slow because revenues leave the region/country rather than are reinvested in economic diversification or social goods. In addition to the above assertion is the aspect of social and economic sustainability. Other studies rather focused on the effect of absentee ownership on well-being in the rural communities where extraction is taking place which is severely restricted and deprived to freely access their ancestral lands and are not benefiting from the new development of resources in form of human and physical infrastructures and lack of economic development opportunities.
Crowding out of other sectors/weakening of human capital.
The best example of crowding out was coined the Dutch disease; a boom in Holland’s domestic revenue following the discovery of offshore oil led to un-competitiveness in other sectors of the economy particularly manufacturing. Inflation caused by large foreign exchange generated by exports was a key problem that went unaddressed by the Dutch government. Absolute failures to create a productive and efficient economy promoted rentier society and enhanced unnecessary dependency on the government.
An associated problem in Holland and other economies experiencing the resource curse is brain/skill drain. High wages offered by resource sector industries can serve to draw away scarce labor from other sectors of the economy, making it difficult for them to compete. The same high wages can create disincentives for education, entrepreneurship, and innovation in other sectors effectively degrading the pool of human capital that may be necessary to develop other sectors of the economy. Weak governance and institutional infrastructure may have a direct negative effect on growth by lowering productivity. It is often argued that natural-resource production impedes development by creating a market or institutional failures. Experts also suggest that high revenue from oil bonanza have negative impacts for economic performances. Some studies within the so-called ‘resource curse’literature argue that high public revenue derived from natural resources has perverse effects on economic efficiency.
Increased conflict in society.
Civil wars and social unrest especially in the developing countries endowed with natural resources are associated with the discovery of natural resources. Large resource revenues create a pot that is worth fighting for since whoever is in power is better to plunder that pot. Revenues accruing from oil/other minerals can be used to finance the Defence unit to protect the governing elites. No matter how the conflict can be deadly with enormous humanitarian disaster, the ruling group’s interest is often driven by maintaining the status quo and thus employed a brute forces to suppress any critics, and potential political challengers and the result is the breed of bad governance in its strongest meaning. The ongoing conflict in the Republic of South Sudan is also associated with the control over the resources particularly oil. When the war broke out on 15th December 2013, two major oil producing blocks were captured and shot down by the rebels’ forces within the first week of the war. This was done for two primary reasons, first to deny the government from generating the revenues from oil to finance the war and, second to boost the negotiating power of the rebels since they post a significant threat to the national oilfields. The annual oil production in South Sudan was brought below 50 percent during the war.
Degradation of the environment and human rights.
Extraction of natural resources beings petroleum or other minerals temper with environmental and human rights issues. The destruction of livelihoods of the local community and degradation of their surrounding environment is another symptom of the resource curse. Issues related to the loss of land through uncompensated displacement, destruction of subsistence sources of living, destruction of wildlife habitats and the unprofessional disposal of heavy substances, results in long-term impacts of social nightmare and immense pollution. If an extractive project is controversial or takes place in a conflict-ridden area, security for the industry and its labour force provided or supported by the central government may lack accountability and may ultimately be responsible for abuses of human rights.
The factors stipulated above are more or less self-explanatory in nature. Policy makers are furthermore advice to establish good governance that involves optimum contractual terms, revenue transparency, institution-building, use of stabilization funds and local capacity-building to service, and benefit from the sector. Revenues accruing from the oil must be re-invested in other sectors for the diversification of the economy to avoid the phenomenon of the resource curse.
It is worthwhile mentioning that some countries have escaped the resource curse phenomenon in which Malaysia and Norway are on records. The symptom for Malaysia to escape the curse includes the impressive growth record prior to the Asian financial crises, and its achievements on poverty alleviation and economic diversification. Malaysia clearly cannot be readily identified as having a classic case of the resource curse, particularly when compared to often cited examples of debilitating rent seeking behaviour and patronage. Nor does it suffer from the Dutch disease.
South Sudan still maintain the chance to translate its natural resources into lasting values to avoid the Dutch disease and uses these values in improving the lives of its impoverished people. Political leaders should avoid rent seeking tendency which leads to patronage character.