Kenya should avoid oil curse

Discovery of oil in Turkana has been met with high exuberance and great expectation.

However, the celebratory mood that has engulfed our country should be informed by oil producing African countries’ tragic experiences.

Strong evidence supports the resource curse hypothesis, or what economists call the paradox of plenty.

It explains why countries rich in a particular natural resource are among the most economically troubled, authoritarian and conflict-ridden.

They suffer declining per capita incomes, great budget deficits, and weak and undemocratic institutions, and eventually conflicts.

As Kenya celebrates its new find, the greatest challenge is how to avoid the paradox.

A crucial factor that determines the nature of the resource curse is the location of oil wells.

In-land oil deposits elicit scramble for other scarce land resources like pasture, parks, water, and farmlands.

A good illustration is the Ogoni region in Nigeria. Already, community pressure groups are emerging in Turkana area.

The political system in place is yet another factor. Even though Kenya has a modern Constitution, the tension between institutional, rule-based forms of governance, and old patronage networks continue to stay alive.

The continuous rewarding of supporters and appeasing of political opponents through allocation of resources within the framework of a modern state structure may have devolved to the County level.

When countries shift focus to single resources, they catch the Dutch Disease.

Dutch disease

The “disease” occurs when a country becomes dependent on one resource at the expense of traditional ones.

Oil discovery may slow growth of the country’s competitive horticulture, tea and coffee exports if not well managed.

The discovery may impede possible policy initiatives to improve livestock production in Turkana.

Agriculture still represents a realistic source of mass rural employment for the majority of unemployed youth, which oil cannot replace overnight.

By becoming highly dependent on oil, small-country economies such as Kenya may open up risky price fluctuations when prices dip.

Price volatility and low revenues make economic planning difficult, leading to excessive borrowing in times of low prices, while political expediency results in expansionary policies.

Unfortunately with oil, countries get access to more credit pegged on future oil earnings as collateral, leading to more future debt problems.

The presence of oil reserves should be good news to the country, but efforts should be put in place to address the Dutch Disease syndrome.

With the steady implementation of the Constitution, the role of institutions in determining effects of natural resources and wider development performance is critical.

Weak or under funded institutions will push the country towards the oil curse. Every effort should be geared towards reforming key institutions and the legal system.

A good starting point would be an Oil Resources Bill. This will prevent any visionary diversions by the new discovery and by new governments.

Source: www.businessdailyafrica.com

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