3.0 Chapter Three: Case Study
3.1 Introduction
This research is centrally focusing on Ethiopia and the strategies which can be adopted to enhance sustainable exploitation of resources and political stability. Ethiopia is a sovereign state in the North-Eastern part of Africa and borders countries like Eritrea to its North, Djibouti lies in the North-Eastern border, Somalia is found to its East, Kenya to the South, the recently found South Sudan to its West, and Sudan to the North West (Mehretu, Marcus & Crummey, 2019). See figure 1.1(Appendix 2). According to Tadesse (2015), the leading oil blocks which have been confirmed to be viable for exploitation include; the greater Afar Block, the Mekelle Basin, the Segen Rift Basin, Abay Basin, and the Ogaden Basin. These regions have been marked as the richest reserves for oil that can be explored by the contracted foreign companies. Furthermore, Tadesse is appealing for continued prospective studies to help in establishing new boundaries of oil downstream (2015). Another region which has been identified is the Calub Gas Field, expected to contain ten (10) productive wells. The oil field can support two main reservoirs, namely; Adigrat, which provides condensate and Calub, which produces dry gas. On the other hand, the Ogaden Basin can support small wells such as Hilala and El-Kuan, which can be relied on as the simple units for exploration of oil. Cumulatively, the oil deposits in Ethiopia can be refined to produce benzene, kerosene, diesel, jet fuel, and liquid petroleum gas (Tadesse 2015).
Other discoveries of oil blocks in Ethiopia which have been documented by Tadesse (2015) include; Generale Area block 4, New Reservoir in the Gumburo Sandstone, and New Age El-Kuran block 8. With these blocks, it is estimated that there is a total reserve of 766 billion cubic feet of oil which can be exploited to improve the economic growth of the country. In the extended regions of South West Ethiopia, North East, and Central parts such as Yayu, Sola, Mersa, Lalo-Sapo, Delbi-Moye, and Gojeb-Chida, prospective studies indicate that oil shale occurrences amount to over 1 billion tons (Tadesse 2015). With these resources, Ethiopia can engage in sustainable exploitation to sustain its commendable growth rate, which hit landmark attainment of over 10% in growth between 2004 and 2009 (World Bank 2018). Therefore, it is imperative to outline proper guidelines which can curb rapid reactions in the economic and political spheres which had already started in some regions like Kalub and Hilala (Getachew & Awel, 2018). Proper utilization of these vast resources can also rectify the declining economic growth in Ethiopia hence restoring the negative economic balances like high inflation rates and unfavourable balance of payment (World Bank 2015). Accordingly, UNICEF (2019) affirms that reasonable exploitation of large blocks of natural resources can help in correcting loose monetary policies, food prices and the GDP of Ethiopia.
Furthermore, the aims and objectives of this comparative study would be achieved by analyzing the situation in Ethiopia with respect to Nigeria and Batswana. Nigeria is a country in West Africa with the highest population in the continent, totalling to 190 million people (Rui et al., 2018). The country has vast oil deposits which were discovered in 1956 and efforts have been invested in harnessing the natural resource for economic development. In partnership with foreign sponsors, Nigeria has managed to explore its oil fields, thus producing over 1.6 million barrels per day (Rui et al., 2018). The country’s large-scale production has influenced its positive ranking in the global index, sitting in position 13 among the world’s largest producers (Rui et al., 2018).
3.2 Resource Curse
Nigeria has not achieved significant economic growth and economic stability despite the abundance of natural resources in the region. Reports by World Bank (2018) show that up to 33.1% of Nigeria’s population is surviving below the poverty line, while political democracy has not attained full equilibrium. Furthermore, Nigeria’s government is in constant conflicts with outlawed groups such as Boko Haram who want to take control of the country. Some of the reasons why Nigeria suffer the consequences of resource curse are as follows. First, Nigeria dismantled its federal fiscal system of derivation practice upon the discovery of oil resources and introduced a new system of collecting and distributing revenue. This new model created vast political turmoil through skewed resource distribution, creating regional and national development plan distortions and imbalances. The new changes in policy privileged the majority in terms of revenue benefits and therefore received more social and economic benefits alienating the minority regions characterized by a considerably small number of people. These marginalized communities, therefore, felt neglected, and they were deprived of enough resources leading to their underdevelopment (Gatachew & Awel 2018). The country’s natural resource wealth has gravely undermined the checks and balanced provided by institutions and resulting in the emergence of a weak and unresponsive state where only the executive arm of government is responsible for policymaking. Under this arrangement, the executive holds exclusive state power preceding over the country’s wealth policies of collection and distribution of revenue. The other arms of government, the judiciary and legislature are left to perform superficial duties. The result of such a strategy leaves the executive immensely powerful and therefore, the tremendous growth of rent oil in the country. (Rui et al. 2018). For instance, the draft constitution of Nigeria inaugurated after 1970, grants almost all state power to the executive branch of government. It is therefore responsible for the budget-making process; the constitution also provides the president of the country the right to withdraw money from consolidated of the federation. These provisions of the law render the other arms of the government almost helpless before the executive and therefore, cannot provide checks and balances to the executive arm of the Government (Crawford & Botchway 2017). These inappropriate governance policies make Nigeria suffer the consequences of the resource curse.
Botswana demonstrated the possibility of escaping the resource curse. It is considered, one of the richest countries in the world as far as diamond is concerned. The country was able to survive the effect of the economic phenomenon through the use a three-pronged strategy to avoid the resource curse; first, the country indulged in economic diversification because an overreliance on the mineral sector for most of Botswana’s revenue renders the country susceptible to the key sector price shocks. The country also recognized that diamond wealth was limited; it was existent if diamonds were in the ground. However, if the country created wealth from the resources obtained from diamonds, it could achieve the long-term sustainable development programs of the country for posterity. Because the mineral sector liked narrowly with the other sectors of the economy in Botswana. It was paramount for the state to initiate the growth of other non-mineral economy sectors with specific focus to the creation of employment, (the mineral sector holds 2% of the country’s labour force) (Meijia and Castel 2012). Besides diversification, Botswana created a sustainable fiscal policy which ensured the government separated the linkage between revenue and expenditure. According to (Meijia and Castel 2012), this strategy saw the country avoid pro-cyclical expenditure and thereby eliminating excessive investment in projects with low return, transparency and institutions weakening, accumulation of debt, the entrenchment of expenditure and the loss of manufacturing competitiveness. The decision of delinking these two financial aspects is no small feat given the then, political pressure to spend to the last penny funds in treasury coffers. Nevertheless, Botswana adhered to the guidelines provided by both the informal and formal fiscal policies and to the National Development Plan to ensuring moderated spending during booms increased spending during busts. The government was able to save, invest and use any excess revenue prudently and therefore avoided the resource curse (Frankel 2012). The national development plan consists of a 6-year planning cycle with the provision for updates prompted by economic changes through mid-term reviews. The development plan has been crucial in the management of foreign aid and mineral rent (Frankel 2010).
3.3 Dutch Disease
The Dutch disease comes as a result of over-dependence on a single source of the economy for income by a country. Under the current regime, the country has seen the reduction in income from the other formerly lucrative sectors of the economy like palm oil, timber and cocoa to an export total of 4% of the country’s income. Such a reduction is as a result of the skewed investment that privileges the oil sector at the expense of the other sectors like manufacturing, human capital among other traditional exports of the county (Gatachew & Awel 2018). As a result, the economy of Nigeria has become totally reliant on the oil export sector for economic development; therefore, any interference on the oil sector would drastically harm the country and control over the oil resource translates into the control of the cautery’s collection and distribution of resources. Through the analysis of the Nigerian case, the discovery of oil resources translates into increased national income characterized by inequitable distribution of resources, inequitable scion-economic growth, income inequality, poverty and ethnic violence. Hence, rather than the natural resource, oil contributing to the economic growth, the oil resource has caused the weakening of the institutions of the state, caused ethnic group, undemocratic governance and undermined equitable resource distribution (Uhunmwuangho 2011).
Even though there is evidence that Botswana suffers from many of the symptoms of Dutch disease for reasons not caused by the Dutch disease theory. Indeed, the reason for lack of a diversified economy and dependence od the Diamond economy is not related to revenue from diamond is not it related to the Dutch debases. The country has, however, managed the wealth of its resources effectively, but more efforts should be put in place for the country to achieve its dream of a fully diversified economy away from diamond economy (Pegg 2012). In 2005, Botswana created the body, BEAC (Business and Economic Advisory Council) to help in the promotion of economic diversification through the identification of investment projects, outlining constraints that would hinder the implementation of the identified projects and formulation strategies to overcome the constraints through an action plan. This strategy focused on the following; First, by creating an environment for business to thrive. Second, the government ensured the creation of projects to aid economy diversification through the support of agriculture and tourism among other sectors. Third, the government of Botswana addresses the issues of policy as well as institutional matters to create a stable financial sector. Fourth, through creating structures and offering the necessary incentives to such as training and business development to improve the business capacity of Botswana. Nevertheless, economic diversification has more room for improvement especially in the agricultural and manufacturing sectors to further strengthen the country’s private sector which shows some weakness due to high labour cost and the thin domestic market and insufficient skill-mix required by the market. The government additionally created institutions and infrastructure to facilitate the competitiveness of the private sector to help attain sustainable economic diversification (Pegg 2012). The structure, oversight and the recurrent nature of the National Development plan plays a critical role in the successful track record of wealth planning in Botswana. Botswana is currently experiencing a steady decline in the diamond era as a result of the high cost of production and the depletion of the diamond resource. Since diamond income forms 60% of government income and 80% export earnings, the depletion of diamond resource will be disastrous to the country’s economy. The depletion is estimated to be between 2025 and 2027, which will cause the decline of GDP to 47% below the non-depletion path necessitating the adjustment of the consumption patterns to the new levels of GDP. This scenario is proof if the failure of Botswana to deal with economic diversification.
3.4 Rent-Seeking
Oil sector dominates Nigeria’s Economy; the government derives nearly nine-tenth of its national income from oil. This scenario means that the oil sector receives most of the fixed investments. According to (Crespo & Zambrano 2018), the abundance of oil as a natural resource in Nigeria coupled with poor government policy creates overreliance in the oil sector. The effect of such is the instigation of rent-seeking violence between the regional and ethnic factions in Nigeria. Anecdotal evidence from Nigeria attests to the fact that resource wealth can lead to rent-seeking tendencies in the by political elites. Between 1970 to early 2000 oil price run-up where the income share controlled by the 55% of the country poorest was the same as the amount of income controlled by the richest 2% of the country’s population. The same period witnessed the rise in the number of people who survive under 1 dollar a day from 26% to 70%. A proof that the political institution of a country can be altered, for instance, democracy, property rights, political stability as well as the amenability of rent-seeking tendencies.
The stable pollical institution in Botswana was responsible for effective discouragement seeking rent- tendencies leading to a more favourable outcome. The involvement of the government officials, parliament and the civil society in the process planning through transparent consolations improves accountability of all mineral resource management. The country adheres strictly to the development plans preventing illegal project inception and implementations (Pegg 2012). The sustainable fiscal policy, on the other hand, provided guidelines and rules focused on limiting debt, increasing revenue productivity and limiting expenditure. With the acknowledgement of the limited nature of the mineral wealth, the government ensured the policy consisted of both informal and formal rules to guarantee fiscal sustainability (Frankel 2010). For instance, the principle of sustainable budgeting introduced in 1994, which directs on the productive investment or saving of mineral revenues rather than consuming them. And the National Development Plan of the 2006 mid-term review which directs on the requirement for consistency between the projected midterm government revenue and the and the set government expenditure limit (at 40% of GDP) (Meijia and Castel 2012). Lastly, the Pula Fund as a strategy for investing and saving mineral revenue is effective for Botswana. The Pula Fund was established in 1993. The fund is critical in providing the required greater flexibility in the international reserves management and to create certainty in the forecasting of the government annual dividend payments by the Bank of Botswana. The Botswana case, therefore, reveals that the resource curse can be avoided, a country should ensure good governance, promote economic diversification and promote efficient investment policies.
3.5 Dependency Theory
Dependency theory focuses on the explanation of the dependency of third world countries on the developed world. The assumptions of the dependency theory are based on the activities of the multinational within the third world countries. The companies co-opt local elites in order to cause a shift in the bargaining power in the directions of the multinationals. In Nigeria, the dependency is attributed to the poor politics that causes underdevelopment and poverty. The country leadership is corrupt and concentrates in amassing wealth. Poor governance policies are responsible for the underdeveloped manufacturing and the agricultural sector.
Botswana is also stuck in the wrong end of the global value chain, and therefore, the country has been piling pressure on its extracting company, the De Beers to make a consideration of the start of a local processing system of the locally mined diamond. The country has also pushed for the company to allow the transfer of rights to sell to the government of Botswana some rough diamonds. This plea is vital because, the extracting company has been transporting the rough diamond to country’s like Israel, China, the USA and Belgium for sorting, cutting, design of jewellery due to the low costs of diamond transportation. Second, the company is responsible for the selling of the diamond. The instances of corruption have also been proven within the country as a result of collusion between the Tswana leaders and the who had the responsibility of appointing economic and political elite who in turn shifted the government policy in favour of the interest of the company. The government has, however, implemented stringent measures to curb corruption in the recent past. Botswana has also allowed stakeholder engagement in the process to increase accountability and transparency of the process.
3.6 Conclusion
Ethiopia stands at a development crossroads in the advent of oil discovery. The current regime can take the opportunity for reform by putting into practice the good lesson obtained from Botswana’s management strategy of resource wealth. In so doing, the country will be able to turn around Ethiopia from the resource curse, Dutch disease, Overdependency Syndrome but most importantly create a vibrant, diverse, inclusive economy which is people-centred. Through equitable resource distribution, the standard of living of the Ethiopians would improve, and the decades of food shortages would end, the country can also achieve sustainable agriculture through strategic investment in the sector. Ethiopia can also achieve sustainable development goals through investment in human capital and other key sectors of the economy like health, education, industry and manufacturing. Therefore, rather than letting the abundant oil wealth to become a burden to the country, Ethiopia can leverage the revenue from the resource and the retunes on investment for the promotion of inclusive and equitable economic growth.
3.7 Recommendations for Ethiopia
Ethiopia has the potential of ending the over-dependency on European funding by putting more investment in skill formation as well as multinationals. However, this strategy would only work in the long run as the country is still in a disadvantaged position in the European production chain and is faced with long term dependency. As such, there is a need for a change in wide-interaction capacities. However, this strategy should be rolled out without creating ani-European alliances. Through constructive engagement with the international partners, the structural problems that Ethiopia faces can be permanently eradicated. Additionally, Ethiopian sits in a unique period in history; it is, therefore, time to reorient its values and adopt and inward focus on its priorities and development needs. Essential to carry out is to choose a strategy for reducing the intensity of aid and, therefore, dependencies and, therefore, by improving the aid delivery institutional mechanisms grounded on democratization, good governance, transparency, and effective civil service. The strategy will steer the country away from future losses that the economy might face.
The recommendations by the IMF in terms of fiscal policy should be heeded by the government and should be included as part of the Government policy. Such consolidation is appropriate to ensure sustainable growth and reduction of inflation. For instance, the institute of a transparent-oil rule in Ethiopia within the country’s supreme law to curtail spending in order to avoid the counter cyclic fiscal policy. Additionally, the country can be encouraged to ensure a reduced overdependency on oil to reduce the incentives for oil shock and rent-seeking vulnerabilities. The concept of direct distribution of oil cash to Ethiopian citizens cannot be sustained, given the current situation. It could be detrimental given the fragile institutions in Ethiopia. A less risky approach is full disclosure of the oil revenue, restricting migration to regions of oil extraction, promoting good corporate citizenship, curtail the involvement of security forces in the process, and to foster NGOs’ role in the process. Therefore, the direct cash disbursement would not be sustainable in the Ethiopian context. It would be politically unfeasible as a good amount of government revenue would be consumed. The country should, however, engage in the creation of a fund like in the case 1of Pula fund in Botswana to ensure the benefits of the oil resource id beneficial not only to the current generation but to the future members of the Ethiopian society.
4.0 Chapter Four: Role of International Community
The international community plays a role in resource wealth management. The multinationals should, therefore, comment to the highest social, environmental and human rights standards and ensure sustainable development. These private partners should also ensure to provide the necessary information to the public. First, they should abstain from corrupt practices be creating a policy against corrupt practices. They should be able to punish contractors, employees or subcontractors who engage in corrupt practices. Second, the multinationals should commit to supports the hosts country policies to attain maximum benefits from the resource wealth through lo-term commitments required to spur-local investment within the host country. The multinationals should not expect any favours from the host government except for nondiscrimination and contractual stability. Lastly, the multinational companies should ensure full disclosure of necessary information to the public; for instance, the contract between the companies and the government, clearly stating the financial terms. Any reports regarding potential impacts on the environment should be readily provided, including relevant prevention, mitigation assessment data as well as remedial plans. The company should always ensure to work together with the host government to ensure information is available and accessible, and usable manner at the right time.
5.0 Chapter Five: Conclusion
The research has obtained evidence associating natural resource wealth abundance and a series of macro-economic imbalances such as the resource curse like in the case of Nigeria. However, the study has established that such imbalances are primarily a consequence of high corruption levels, lack of accountability and transparency derived from poor governance strategies, poor fiscal and monetary policies, impropriate investment and saving strategies, overdependence on one key sector of the economy and lack of economic diversification within a country. Clearly, the study has shown the role of governance in transforming resource abundance into economic development. Good governance, which is people-centred, accountable, transparent, with checks and balances and powerful regulation against corrupt tendencies tends to associate the abundant natural resource with a high economic wealth of the country.
The study has also demonstrated that the abundance of a resource is never a sentence to poor, skewed economic growth. Because Botswana was able to avoid resource curse by applying a series of sustainable measures of fiscal policy, including the prudent and strategic investment of revenues from the natural resource for current and future generational use, and coupling such policies with good governance practices characterized by accountability, transparency and proper checks and balances. Consequently, Botswana has managed to convert its resource wealth into a blessing.
The study has obtained evidence that inflows of aid funds lead to an appreciation of real exchange rate appreciation in the Ethiopian case that will lead to a loss of competitiveness of export on the global market. The country, therefore, needs to establish an environment for the creation of good policies to elicit the prevalence of sound microeconomics. The Ethiopian policy management should also be geared towards creating policies that are in line with the sound microeconomics fundamentals such as openness to trade, good governance, spending on infrastructure, credit provisions to firms in the sectors that are tradeable, small black-market premium and other necessary policy measures. The study has also established that, if Ethiopia can ensure a sound policy environment, aid could be of more value to the country. Besides being eligible for aid, the external aid could be effectively invested in the economy of the country to sour the realization of a permanent reduction in poverty, given the good policy environment available.