Oil and Africa’s resource curse

Knowledge@Wharton, a publication of the Wharton School at the University of Pennsylvania, spoke to John Ghazvinian, author of Untapped: The Scramble for Africa's Oil, who is a visiting scholar at the university.

Here are a few highlights of the story.

Since 2000, one-third of the world’s oil new oil discoveries have been in Africa. Oil companies have already invested $20 billion in Africa in oil exploration and production, and they plan to spend another $50 billion before the end of the decade, Africans see little benefit from this interest in their continent. It’s called the Resource Curse, Ghazvinian says. "Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil," he said. By inflating the value of a country’s currency, oil makes other exports uncompetitive. Workers begin flocking to high paying petroleum businesses, weakening other sectors of the economy, forcing countries to depend on imports. "That decimates a country's agriculture and traditional industries."

However, locals lacking degrees in engineering find themselves with little chance for promotion. The oil industry is capital intensive, not labor intensive, Ghazvinian says, so oil companies really only hire local to be guards.

Politicians become drawn into oil’s web, also. Governments with high oil revenues rarely charge income taxes, breaking the compact between citizens and their government. When politicians are not responsible to their citizens, it’s difficult to force them to invest in education or health infrastructure. Corruption is another problem altogether, he admits, but one that works both ways. Western bankers often look the other way when African leaders make large deposits. Western governments rarely question the leadership of African nations if the oil continues flowing.

Contrasts come in many shades
It all adds up to a world of contrasts. Oil money is rarely invested in oil producing regions, allowing people in Nigerian delta to live in the “Stone Age” not far from multibillion dollar oil facilities. In Luanda, Angola – where “The disparity between rich and poor there is like nowhere else in the world – oil companies pay as much as $15,000 per month to rent employee housing.

Which begs the big question: How responsible are oil companies for development of oil-rich nations?

[Oil firms] often argue that their role in Africa is simply getting oil out of the ground, maximizing profits and paying taxes. Politicians, they contend, are responsible for investing the tax revenues in education and infrastructure.

"The oil companies will often say that they would like to invest in infrastructure or schools, but they don't have the expertise," Ghazvinian notes. "That's glib. Exxon Mobil is making billions and can hire consultants. They could do more. They don't have to usurp the role of government to do something useful in the countries where they are operating."