The globalization resulting in the growing interdependence of countries from increasing integration of trade has had an enormous impact on developing countries’ growth process. This intertwined relationship between the globalization phenomenon and growth become even more apparent as developing nations rely extensively on commodity exports as sources of income. The effect of increasing wealth of exports from natural resources, which results in the decline of the tradable good sector of an open economy was termed “Dutch Disease” by the Economist magazine to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large gas field in 1959. Several studies have expressed their weariness on how often countries with oil or well-endowed with other natural resources have failed to deliver growth more rapidly than those without. This concern remains even more relevant today as the world experiences a bust in the oil industry that is manifested through the sharp decrease of the oil prices in the international market. While many Sub-Saharan African countries have been praised for their extraordinary growth during the past two decades, it is now crucial, more than ever, to reassess growth in the region within the midst of this commodity market turmoil as Africa is still the most dependent continent on commodity exports. The way Sub-Saharan African countries weather this storm will determine the effectiveness of new regulatory frameworks on fiscal policies recently introduced by many governments, and show whether lessons have been learnt from other commodity crises.
Before diving into the negative spillovers of the plunge in oil prices in Sub-Saharan African economies, it is important to revisit with a brushstroke the economic mechanism leading to a “Resource Curse” or “Dutch Disease”. In fact, the question of what drives economic growth has been one of the most venerable topics of discussion in economics that simply refuses to fade away. It has been noticed for several decades that oil or other natural resource dependent countries have failed to deliver growth. To illustrate this, Jeffrey Frankel, Economics Professor from Harvard University makes an interesting observation that many African countries such as Angola, Nigeria, Sudan, and the Congo, which are rich in oil, diamonds, or minerals, continue to experience low per capita income, and low quality of life. Meanwhile, by contrast, as he puts it, the East Asian economies Japan, Korea, Taiwan, Singapore, and Hong Kong have achieved western-level standards of living despite being rocky islands with virtually no exportable natural resources. What is it that impedes growth for many African countries well-endowed with natural resources and makes them so vulnerable to external shocks?
In fact, the answer to this question resides in a rather simple theoretical explanation of commodity boom-bust cycles. A sharp decrease in the price of exports commodities (i.e. oil price) drives down the price of non-traded goods in the domestic economy and thereby the real exchange rate, which is defined as the relative price of a basket of traded and non-traded goods between the domestic and the foreign economy. We see this trend in Nigeria, which relies on oil for 70% of its budget and over 90% of its exports. The country has been bashed by a constant decline in Brent crude oil prices, which has been swinging widely on either side of $50 per barrel in the past couple of weeks. The downfall in the price of oil has led to the devaluation of the Nigerian currency. To combat this, the Nigerian central bank raised interest rate to a record of 13% and devalued its target exchange rate for the naira to 5%, and other measures related to budget cuts are expected according to Bloomberg news. On a macro level, the inevitable consequences of relying too much on commodity exports in countries like Nigeria will be noticed in lower profits in tradable activities such as manufactured goods, which inarguably tend to create higher growth rates. And of course one can imagine that the decline in tradable goods will have severe consequences on any potential growth prospects.
Another example of this wistful reality is Angola, Sub-Saharan Africa second-largest oil producer behind Nigeria. The country’s economy is largely dependent on oil production. According to the International Monetary Fund (IMF), Oil export revenue accounted for close to 97% of total export revenue in 2012. The country’s excessive dependence on oil export has certainly a direct impact on the macroeconomic indicators. According to BloombergBusiness news, Angola’s President Jose dos Santos projected that the oil revenue will decline to cover 37 percent of spending needs, down from 70 percent last year. Consequently, as it has been sadly observed, the national currency, the Kwanza has plunged 7% against the dollar in the past six months as foreign exchanges has become limited due to restrictions from the government. Moreover, when we look at East Africa; significant oil discoveries have been made notably in Uganda and Kenya in recent years, which raised the countries’ economic prospects. However, with the recent oil collapse, exploration in the region will most likely slow-down.
In the fight against the resource curse, it is important to note that many sub-Saharan African countries have made significant economic and political developments that have ignited growth in the region during the past two decades. In addition to these changes, other western-style institutional mechanisms namely—commodity funds or sovereign wealth funds—have been adopted in countries like Angola and Nigeria to prevent the resource curse. Whether these institutions for saving during booms would allow them to continue the financing of major infrastructure projects remains to be seen. To avoid the negative impact of a commodity crisis, commodity exports countries in Sub-Saharan Africa need first and foremost to diversify their economies and progressively decrease their dependence on the commodity export. In addition to that, these countries ought to emulate Chile’s countercyclical fiscal policy initiated in 2000 under President Michele Bachelet’s first term. This rule simply consists of limiting government spending induced by receipts from copper exports during commodity booms, and increase spending when there is a bust or when the export commodity prices start falling. Therefore, the government at that time insisted on saving most of the proceeds for rainy days, and was able to maintain a sustainable growth when copper prices started tumbling.
While it has been widely observed that many resource-rich countries perform poorly, it is crucial to note that countries with natural resources are not primarily set for failure. The most important factor to consider for many sub-Saharan commodity-export countries is the implementation of various institutional mechanisms as cited above, which would help navigate through any potential commodity crisis.
Harold Agblonon
References
McClelland, Colin. "Angola Plans 25% Cut in Budget as Oil Revenue Set to Plunge." BloombergBusiness(2015): n. pag. Web.
“Country Analysis Brief: Angila.” Country Analysis Brief (2015):n.pag. U.S Energy Information Administration. 19 Mar.2015. Web.30. 2015.
Frankel, Jeffrey, “The Natural Resource Curse: A Survey,” The Natural Resource Curse: A Survey Faculty Research Working Paper Series (2010):n. pag. Print.
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Contending that tenure insecurity under informal customary institutions dampens incentives for investment and contributes to low agricultural productivity in much of Sub-Saharan Africa, policy makers have tried to formalize customary land use through the provision of de jure rights to users.