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.

Regime change in Chad?

Is it time for regime change in Chad? Admittedly, it’s a tarnished phrase, part of the modern lexicon (like “ethnic cleansing”) that seems to provide an aura of innocence and order to an undoubtedly messy and sordid event.

We write this as three different rebel groups have coalesced into one fighting machine and are presently awaiting the evacuation of N’Djamena, Chad’s capital, to resume its assault and bring down the regime of Idriss Déby. The African Union has claimed its body will refuse to accept the rebel government. Mr. Déby, after all, is an elected leader of a sovereign state. The United Nations has also pledged its support. The Security Council is working out a a way to prop up the Déby regime.

Even with the backing of these political bodies, the question of regime change is still pertinent. One, the rebels are literally waiting outside the capital to begin a final assault. Secondly, we have to ask ourselves whether Chad would be better without President Déby?

As much as we love uttering the word “freedom” and throwing around expressions like “democracy,” is a country like Chad part of a world where those two terms exist in mutually exclusive environments? There are grey areas for each, especially in the case of Chad, a fractured, poor country.

Déby’s 17 years in power have not been pretty. Transparency International ranks Chad as the eighth most corrupt country in the world, which is admittedly a step up from just a few years back. The U.S. State Dept. heavily criticized Déby’s most recent “seriously flawed” election (where he changed the constitution to be able to run) and chronicles the concentration of power in the president’s ethnic group, the Zaghawa. The Council on Foreign Relations examined how Déby circumvented the once-acclaimed Petroleum Revenue Management Law that was to guarantee a portion of oil royalties distributed directly to public works, the sectors of health, education, rural development and environmental projects.

Chicken crosses the road
As predicted, the agreement over oil revenues worked until Déby needed weapons. Déby, like today’s rebels, originally came to power through a military insurrection launched from Sudan’s Darfur region. Yet he has brought a semblance of stability to Chad, which had suffered nearly three decades of civil war since its independence from France in 1960.

After more than a decade of relative peace, hostilities began again in 2004 when Janjaweed militias from Darfur began attacking villages in neighboring eastern Chad, and Déby immediately accused Sudanese President Hassan Ahmad al-Bashir of trying to destabilize his country. In August 2005, a group of militants formed an army in an attempt to overthrow the Déby government and soon began attacking Chad’s military.

As rebel activity increased, Déby did admittedly what any other leader would do: Use any money at his disposal to protect himself and, the way he saw it, his country. It is not the first time national security trumped other needs. (One could also make the argument that many of the recorded human rights violations in Chad were conducted in the name of national security.)

Now we come to the chicken and egg portion of our program. What came first? Déby’s iron-fisted, cynical rule, and the power he wholesale doled out to his Zaghawa tribe. Or, the rebellion. (Some cynics may point out that Déby, like Niger’s President Mamadou Tandja, needs a “rebellion” to make the case for staying in power. With rebels attacking the capital city twice in a two-year span, I’d say that’s doubtful in the case of Déby. The Jury remains out on Tandja.)

The question at hand
Let’s get back to Déby’s rule. There is the question of whether the people of Chad want to be ruled by someone else than Déby. It’s their decision, of course. In our eyes he may have done wrong by attempting to change the constitutional number of term limits, but a majority of voters supported his plan. He may have overseen questionable elections, and his party may dominate politics, but it the country, on paper at least, is a semi-functioning democracy. He didn’t force the opposition to boycott the previous election.

In these matters, there’s an important question to ask: How corrupt or dominating does a government have to be before it’s considered corruptly dominating. Where does one draw the line of leading ruling party and one-party state?

In this instance, we can pose a less pie-in-the-sky question: What happens if a majority of Chadians want a one-party state? I’d say in some cases political liberties – the right of multi-party elections, the right of a representative opposition – may fall in different categories than traditional human rights – the right of assembly, the right to a free and fair trial, freedom of thought, etc. Perhaps this is the difference between freedom – universal rights – and democracy, which is just a system of government.

This may seem obvious in a post-Saddam Hussein world, but if a majority of Chadians support the Déby regime, no matter how harsh it is, the international community should respect that. Continuing with Saddam in mind, what happens when a majority of Chadians want Déby out but because he’s got such a stranglehold on power, they’ll never get him to budge?

There is no such thing as a good coup d’etat, of course. Of the more than 100 coups taking place in Africa since the mid-1960s, members of the International Crisis Group estimate that only two could actually termed “good coups”: Mali in 1991, which is better seen through the lens of the anti-Soviet revolutions that swept through Eastern Europe a few years before; and maybe Mauritania in 2005.

There’s a lot of reasons for this. International law for one. Secondly, the instability that often arrives with a coup. Idriss Déby may not be a particularly good president, but he provides for the world a known quality. This devil we know is often better than the devil we don’t know.

To serve and protect
Let’s say either the UN Security Council through France, with its 1,500 soldiers stationed in Chad, decides to protect the Déby regime. With rebels barking at the gates, perhaps this may be a good time for the Sarkozy government to bleed some reforms out of Déby. If the French would guarantee his protection, Déby may be very amenable to a compromise. (Of course, any security guarantees may lead France down a slippery slope of protecting tyrants in need – a bad habit they promised to reconsider.)

Anyway, time is apparently running out, and a humanitarian disaster is possibly afoot. So let’s start with Déby guaranteeing a portion of the oil revenues for “future generations” as he was supposed to do with the Petroleum Revenue Management Law. We could continue with demanding the annulment of the often violent harassment of opposition politicians and journalists. We could move on to finding a counter balance to the power that lay in the hands of the president’s ethnic group. One wouldn’t have to stop there, but you get the point.

Isn’t this just another instance of big, powerful states playing the game of neo-colonialism? I’d give you a qualified “yes.” One could make the argument that the proposed reforms may take the wind out of the rebellion’s collective sails. (Claims of Sudan’s financial support notwithstanding, much of the make up of rebel troops are former members of Chad’s military tired of the regime’s corruption and ethnic-identity politics.)

A rebellion robbed of its gripes would not only lose legitimacy, but could cease being a tempest in an already instable region. It would also benefit regular Chadians by providing a respite from the chaos and fighting. Perhaps then they can go on with building a government of their choice.

None of this seems particularly revolutionary or even daring. That’s the point. The region is already unstable as it is, adding more refugees certainly won’t solve any problems. Nor will providing cover for a shadowy rebellion that nobody knows its true aims. And remember, no matter how promising it sounds, haven’t we learned that regime change often produces unintended consequences?

The Bauxite Question: No WMD, but popular with taggers

We are piggy backing on the previous post on Guinea. You can’t escape the fact that every news story on Guinea always points out that the country is the world’s leading producer of Bauxite. What does that mean? It’s as if Bauxite is an integral element in the fabrication of chemical weapons.

Well, apparently it isn’t. According to the United States Geological Survey, about 85 percent of mined Bauxite is used to make aluminum metal. Here’s the math: Four tons of dried bauxite is required to produce two tons of alumina, which produces one ton of aluminum metal.

Aluminum metal is popular, says the Arkansas Geological Survey, because it is light, has a low melting temperature and when alloyed with other metals, aluminum can become very strong. Aluminum is also easy to work with; it can be forged, rolled, cast, machined to just about anything: paint, beverage cans, baseball bats, airplanes and house siding. It carries high electrical conductivity and is very resistant to corrosion. All this adds up to make aluminum, behind iron and steel, the world’s third most popular metal.

Make that the world’s third most popular metal without significant deposits in the United States or Europe. In 2006, Australia the world’s largest producer of Bauxite, mined roughly 61,400 tons of the mineral, far ahead of Brazil (21,000 tons), China (20,000), Guinea (15,000) and Jamaica (14,000). However, Guinea is believed to posses the greatest amount Bauxite reserves – if the country can only successfully exploit them.

OM: Original Metal
As the USGS points out, it pays to go with the original when making alumina. One could use substitutes – “such as anorthosite, alunite, coal wastes, and oil shales” – but that would require building new plants and utilizing new technology. In the end, Bauxite remains the best choice for those who need their house re-sided. That’s why Guinea remains an important “partner” when its government acts like a bully state.

According to the U.S. Dept. of State, bauxite mining and alumina operations provide an estimated 80 percent of Guinea’s foreign exchange. There is a bit of mining going on. The state owns 51 percent of a joint venture with Alcoa and Alcan in the country’s most productive mine, and the government signed compacts for the construction of alumina refineries.

However, a number of obstacles stand in the way of more foreign investment, says the State Dept: a poorly developed infrastructure, rampant corruption (The 2006 Transparency International Corruption Perception Index ranks Guinea languishing near the bottom at 168 out of 177 countries), continuing political instability (see this post) and a lack of a transparent budgeting process. These red flags are not enough to scare off the Canadian mining firm Alcan from working with local NGOs (in a World Bank sponsored program) to help Guinea achieve the United Nation’s Millennium Development Goals.

General strike cancelled in Guinea

General Strikers, go to work. That’s the message heard after a group of Guinean unions met with five government ministers in Conakry and called off their planned general strike set for January 10.

The four unions initially announced their strike January 4 when President Lansana Conté fired communications minister Justin Morel Junior without explanation and replaced him with a close presidential aid.

People rioted in Conakry to protest the firing, burning tires and throwing rocks at cars. One medical student was reported killed after being hit with a rock.

From Agence France Presse:

The unions said in a statement that they "decided to suspend the strike order", laying down a series of measures that should be taken for the sharing of power between the president and prime minister to be respected with a date limit of March 31.

The unions want to "work without delay with the government on amending the decree" of December 5 which gives most powers to the government secretary general to the detriment of the prime minister, who was named by consensus early in 2007.

"We have decided to lift the call for a strike to listen to all those who approached us and all those who support us," said Yomodou Toure, secretary-general of the ONSLG union, saying the four unions calling for the strikes had obtained concessions.

Last year at this time began two months of sometimes violent protests – where upwards of 150 civilians were killed by the military – that paralyzed the country and eventually forced the long-serving president to appoint a reforming Prime Minister. However, a recent Human Rights Watch report claims that Lansana Kouyate, the Prime Minister, enjoys very little actual power.

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."