Does foreign direct investment in Africa help sustain the resource curse?

“Trade, Not Aid” has been a buzzword in development circles for a long time. Allow Africans to develop their industries and they themselves will best understand how to develop their countries. As African economies grow, present rates of foreign direct investment on the continent have tilted heavily towards extractive industries like oil and the mining sector. In fact, 50 cents of every dollar invested in Africa is targeted at capturing the continent’s vast oil reserves.

It doesn’t take an economist to wonder how about the long-term economic sustainability of resource-based industries. What happens, for example, when the price of gold falls? Will these new found jobs disappear? In the same vein, you don’t have to be a Green to question the environmental effects on the continent given so many economies’ are dependent on oil, gas, timber, diamonds and minerals like bauxite and chrome. Then, there’s also the sticky question of who benefits from these riches?

Anyway, Ravinder Rena, an economics professor at the Eritera, tracked FDI in Africa and filed this report.

From Pambazuka:

European firms represent roughly two-thirds of the total FDI in Africa. More than half of European investment originates from the UK and France, going mainly to countries with which they have historic ties. French oil companies such as Total - locked out of the Middle East through France's opposition to the Iraq war - have made large investments in Francophone countries such as Cameroon, Chad, and Gabon.

The US is interested in the region as a cheap and reliable alternative to the increasingly volatile Persian Gulf. West Africa already supplies about 12 percent of US crude oil imports, and America's National Intelligence Council predicts this share will rise to 25 percent by 2015. As is often the case with oil, military involvement follows trade. In February 2007, the US set up an Africa command (Africom), which has established bases in, and signed access agreements with: Senegal, Mali, Ghana, Gabon, and Namibia. Africa is becoming strategically important to the US because of its oil production and China's increasing regional influence.

Despite its own considerable "backyard," China is generally resource-poor and Africa offers the natural resources vital to fuel its rapidly-growing economy. China looks to the Democratic Republic of Congo (DRC) and Zambia for copper and cobalt, to South Africa for iron ore and platinum, and to Gabon, Cameroon, and the Republic of the Congo (Congo-Brazzaville) for timber. For oil, it has been wooing Nigeria, Angola, Sudan, and Equatorial Guinea. China is now the second-largest consumer of crude oil after the US, and was responsible for 40 percent of the global increase in demand between 2001 and 2005. Indeed, it imports 25 percent of its crude oil from Africa.

…

But while the global demand for natural resources will bring benefits to Africa - increased FDI and, as exports grow, an improving balance of trade figures - there are concerns that such demand is simultaneously fuelling corruption, environmental degradation, and internal dissent. The windfall gains from resource extraction cause more problems in Africa. They reduce a state's incentive to impose a free and just taxation system, and encourage corruption and acquisition of weaponry, in this way, generating the internal conflicts or external wars for which Africa is known.

Like the high prevalence of oil in foreign direct investment, many countries have outfoxed the resource-curse by simply lacking the correct resources. As Ravinder Rena points out, OECD-lead foreign aid has fallen more than 5 percent since 2005, which is admittedly a skewed number because of the period of debt relief that took place before it. The good news is that perhaps better spent, more targeted aid can better help oil-poor countries. The cynics amongst you will certainly point out that it’s not like the money spent until 2005 was terribly effective.

My name is Nigeria. I am an oilholic
What are the resource-rich states to do? From a report by the US-based charity Catholic Relief Services on oil dependency and the stunning lack of development in Africa’s petro-states, international monetary and credit institutions have as much responsibility as governments in ensuring these riches trickle down to other people.

From the report:

The primary responsibility for managing Africa's oil wealth in a transparent, fair, and accountable way lies with Africa's governments. Building democratic states capable of focusing on reducing poverty is one of the key challenges facing Africa in the 21st century.

Africa's governments, though, are only one part of a web of interests and relationships in the African oil boom. Other key actors determining the outcomes of this boom are foreign oil companies, International Financial Institutions like the World Bank and the International Monetary Fund, export credit agencies, and Northern governments. The World Bank Group has played a catalytic role by supporting changes in legal frameworks and investment environments, financing projects and providing risk insurance. Export credit agencies have provided additional finance in risky environments, with few strings attached. The U.S. has identified increasing African oil imports as an issue of "national security" and has used diplomacy to court African producers regardless of their record on transparency, democracy or human rights.

Many of these actors are now making tentative steps to address the "paradox of plenty" problem generated by Africa's oil boom. They have begun to recognize that improving the distribution of benefits from oil production is not only an ethical mandate, but also an essential ingredient towards a more stable and sustainable world. The IMF and World Bank are taking steps to increase transparency in Africa's oil economies. Corporate actors are increasing their philanthropic programs and engaging in dialogue with civil society on ways to increase transparency in the sector. And Northern governments, such as the U.S. and U.K., are beginning to acknowledge the need to address the perils of oil-led development. These actions, while welcome, are not enough.

Because developing oil fields and building pipelines happens faster than the construction of efficient states and good governance, only a sustained, coordinated and coherent international effort - a "big push" to change the policy environment - by the relevant actors involved in Africa's oil boom can improve the prospects for transforming Africa's oil wealth into improvements in the lives of the poor. Only a concerted change in the incentive structure surrounding oil can help to ensure that petroleum revenues will be well managed.

Initiative alley
Because these government, international organizations and oil firms share responsibility to remove obstacles against transparency and monitoring of Africa’s oil sector, CRS advocates the Publish What You Pay initiative to hold everyone accountable for proper resource and financial management across the world.

A less lofty program, I guess, is the Extractive Industries Transparency Initiative, which combines oil and mining companies, members of civil society and international organizations.