14 minute read
The Resource curse, the just energy transition and supreme audit institutions
by kwedamedia
Several African countries are blessed with abundant natural resources, both in quantity and diversity. But political economy configurations and poor leadership continue to hold us back.
More broadly, the world is at a critical juncture – the fall of the Berlin Wall in 1989 promised to usher in a new era of prosperity and a pervasive adoption of Western liberal democratic capitalism. But two recently published books by prominent authors Martin Wolf and Pranab Bardhan respectively demonstrate how this expectation has been shattered. Not only has autocracy grown, but the world has grown more unequal and more divided. Russia’s war on Ukraine, now nearly 18 months old, following the disruptive effects of COVID-19, has exacerbated pre-existing trends toward populism and dissatisfaction with the post-Cold War liberal order.
The climate crisis has not abated either, despite some reprieve from the economic lockdowns during COVID-19. The need for a just energy transition could not be more urgent. The Russian war has, of course, demonstrated the fragility of a global transition towards renewable energy, as many countries have resorted to fossil fuels if temporarily, to weather the impact of sudden energy supply disruptions brought on by sanctions against Russia. Clearly, energy security still shapes political and economic trajectories disproportionately.
I paint a picture, below, of what scholars have termed ‘the resource curse’ and the need for a just energy transition. Underpinning our ability to reverse the resource curse and embark on a just energy transition will be the quality of our governance institutions. Auditors, and audit institutions, play an irreplaceable role in shaping the incentives that will determine the success or failure of African countries over the next eighty years, by which time Africa alone will account for four elevenths of the world’s population.
The Resource Curse
Natural resource wealth should, intuitively, result in a development dividend. Often it fails to do so, especially in weakly institutionalised or ‘emerging market’ contexts. Why? The answer depends on many factors. To begin, the ‘resource curse’ is best defined as the paradoxical relationship between resource abundance and underdevelopment. Scholar Richard Auty first coined the term in 1993. The first empirical work on the subject was published by Jeffrey Sachs and Andrew Warner in 1995. Since then, a proliferation of academic literature has sought to make sense of the paradox.
In summary, the literature shows that natural resource wealth tends to be strongly correlated with a range of adverse development outcomes. In the economic category, we see slow growth, weak industrialisation, negative savings, and poor human development outcomes. In the political category, we tend to see a growth towards autocracy in the presence of natural resource wealthy countries, or the proliferation of armed conflict (though there is limited evidence suggesting that natural resource wealth necessarily causes such conflict).
These outcomes are well documented, and a range of causal mechanisms have been proffered as explanations for how the resource curse operates. I focus on three of these:
First, there is the rentier effect. Natural resource wealth generates rents that accrue to the ruling elite in any given country. Some scholars have referred to this as the peril of unearned income.
The late Douglass North and his collaborators theorised a ‘double balance’ between political and economic institutions. How rents are generated and distributed determines the nature of the elite bargain that underpins the balance of these institutional arrangements. Typically, natural resource wealth flows into the hands of the select few who run a country. These elites then build economic institutions that cement their power rather than generate broad-based development. Rents are distributed to the ruling elites’ patronage circles instead of being invested in innovation, infrastructure and the provision of public goods.
Elites ensure that a sufficient mass of citizens support the existing elite bargain. There is no incentive to build the productive sectors of the economy. To do so would, ironically, constitute a political risk to the stability of the elite bargain. Typically, productive sector growth produces a middle class, which starts to demand political representation and a return on taxes in the form of ubiquitously distributed public goods. In the end, the presence of natural resource wealth leads to a calculus among ruling elites that renders the costs of reform higher than the costs of repression. Those outside the patronage circles can expect rough treatment and zero service delivery.
The exact anatomy of how this effect plays out in any given country is determined by historical factors, the type of resource available, and – as is the case with all ‘resource curse’ cases – the quality of governing institutions at the time of discovering the resource.
For instance, oil has a different effect on the elite bargain to diamonds. Also, the geographic type and location of the resource play a role. Offshore oil, for instance, is less prone to theft than onshore oil. Some research has shown that onshore oil is correlated with higher coup frequency, possibly because the government increases military expenditure to protect oil fields. Resultantly stronger armies formed a risk to the ruling elite. Alluvial diamonds, on the contrary, can easily land in the hands of rebel groups. This sustains those groups but also creates internal problems, as rebel leaders often cannot easily discern which members are real believers in the cause, and which are simply resource-hunters. By and large, though, the rentier effect tends to consolidate elite bargains that favour autocracy over democracy.
Second, there is the taxation effect. In essence, countries with extensive natural resource wealth place sufficient rents in the hands of elites to avoid the need for broad-based taxation. Taxation comes with a social contract that elites would rather not have to fulfil.
Resource rents help elites to avoid such a contract. My own view is that resource-poor countries tend to do better than resourcewealthy countries because elites in the former, of necessity, design institutions that protect private property and incentivise innovation.
This tends to have a positive multiplier effect that generates growth in a diverse array of productive sectors, all with a positive reinforcing effect that disincentivises political actors to move towards autocratic aspiration. A broad tax base, therefore, tends to act as a bulwark against autocracy and sustains democracy.
Of course, it is not a guarantee, and voter turnout at present is worryingly low even in countries with relatively broad tax bases. So, all these general trends have exceptions, which in our time are exacerbated by technologies such as social media that proliferate extreme views.
These are often fuelled by intentional disinformation campaigns and associated electoral manipulation. Either way, it is generally a good idea to foster a broad tax base. Any situation in which a small elite can remain in power thanks to narrow resource rents is suboptimal as it weakens the social contract that typically sustains democracies.
Finally, there is the Dutch Disease. There are two elements to this predominantly economic mechanism. In the first instance, the export of raw commodities drives up the value of the host country’s currency, which makes its manufactured products (tradable goods) less competitive on global markets. It also makes imported inputs into those products more expensive. In the second instance, the primary sector draws resources away from the manufacturing sector.
The product space is also typically quite disconnected because the skills required for the mining sector are not easily transferrable into other sectors. The combination of these effects is to render a country susceptible to commodity price shocks as there is no buffer of a sustainable, broad-based manufacturing sector.
Resource-wealthy African countries are afflicted by all the above effects to varying degrees.
The good news is that a relative consensus has emerged in the literature that the extent to which the above effects take root and proliferate is determined by the quality of a country’s governing institutions at the time of discovering resources in commercial quantities.
In Angola, for instance, when oil became a serious commercial play in the early 1970s, the country was in the middle of throwing off Portuguese colonial rule, followed shortly thereafter by a devastating civil war that lasted from 1975 to 2002. The ruling MPLA ultimately won through Soviet and Cuban support funded by oil rents, which were ironically earned through US oil companies while the CIA and South Africa were covertly supporting the rebel UNITA group. In this instance, the resource curse was exacerbated by Cold War dynamics.
Either way, there were no serious governance institutions in place at the genesis of the country’s postcolonial independence, as has too often been the case.
Institutions are best defined as the social systems – the beliefs, norms, values and culture – that motivate regular human behaviour. In other words, institutions provide the scaffolding that generates the incentives by which humans operate. Optimal institutions incentivise transparency, accountability and broad-based participation. Supreme audit institutions play a critical role in shaping and sustaining desired norms of transparency, accountability and participation (the three pillars of good governance). We must invest in strengthening these institutions so that they create credible threats against defection and rewards for good performance.
Countries, like Norway, which discovered resource wealth after these institutions were already embedded in their political economy, were able to manage that wealth in a way that has generated broadbased development. Citizens trust their government to distribute that wealth in a way that benefits all citizens. This also encourages citizens to pay their taxes, which then strengthens the social contract that protected against the resource curse in the first instance.
Just energy transition
Outside South Africa, African countries have played a negligible role in contributing to global warming (they account for only four percent of global emissions) but suffer disproportionately from the effects of climate change. Moreover, many African countries continue to be afflicted by persistent poverty, growing youth unemployment, and inequality. The combination of these factors often renders electorates susceptible to succumbing to every
aspirant dictator’s promise of a brave new world, normally some kind of Marxist utopia. Underpinning a large part of African countries’ inability to break out of these interlocking growth inhibitors is a persistent lack of access to energy, especially among rural populations.
Sub-Saharan African countries' average percentage of the population with access to electricity has grown from 28.26% in 1997 to 48.23% in 2020 (the latest figure from a recently updated World Development Index dataset from the World Bank).
Similarly, in Sub-Saharan Africa, only 8.97% of the population had access to clean fuels and technologies in 2000. Twenty years later, it had risen only to 17.64%. Fossil fuel energy consumption (as a % of total) has not been measured since 2015, but it was at 79.86% then, essentially unchanged since 2000. In SubSaharan Africa, the figure was at 39.79% by 2014, the last available measure.
Without broad-based access to energy, manufacturing on any scale remains impossible. Not only that, but the absence of electrification often leads to indoor air pollution (dirty fuels used for cooking and heating), which remains a massive contributor to unjustifiably high mortality rates (187 per 100,000 in 2015 for sub-Saharan Afric; and 114 per 100,000 for the world).
Deforestation also proliferates as citizens use that biomass to cook and heat their homes. Net forest depletion in sub-Saharan Africa was at 1.55% of Gross National Income by 2020, down from 2.8% in 2003. The rest of the world’s depletion was essentially zero, making SSA an outlier.
Against this backdrop, and fuelled by apparent western hypocrisy, is a groundswell of voices in favour of Africa utilising its fossil fuel resources – “drill baby drill”. Russia’s invasion of Ukraine and the subsequent imposition of sanctions against Russian oil and gas led to a short-term reversal of many western nations’ commitments to a renewable energy transition.
But short-term reversion to coal and fossil fuels does not appear to be a good reason for African countries to become locked into a future undergirded by fossil fuel exploitation.
In light of what we know about the resource curse, a foolhardy pursuit of fossil fuel exploitation would likely produce more pain than progress. What many pundits fail to understand is that it would not only risk the rentier, taxation and Dutch Disease effects from taking root in weakly institutionalised contexts but would also risk locking countries into trajectories that crowd out opportunities for alternatives and may result in stranded assets.
In many countries in Africa, there are no functional electricity transmission grids. Thus, even if one exploited all the available fossil fuels, there is no guarantee that this would result in short-term mass electrification.
Moreover, the opportunities for unproductive rent-seeking in any mass infrastructure projects are extensive. I am therefore of the view that localised energy solutions are increasingly preferable to any mega projects.
Of course, none of the above suggests that renewable energy transitions are without flaws or even wholly achievable at present. Fossil fuels remain, on average, far more energy-dense than renewables, and renewables come with their own set of inefficiencies, negative environmental externalities, and waste problems. For instance, batteries remain expensive and inefficient, are only likely to last for about ten years, and then must be disposed of. Moreover, they require lithium, which is environmentally destructive to mine. Wind turbines are, similarly, non-renewable in that they are composite constructions that also must be discarded at some stage, though they can be recycled for other infrastructure purposes such as bridge components.
Hydropower, similarly, requires environmentally destructive damming (unless new and less invasive options can be established), which often destroys downstream livelihoods. Many economists have also raised the concern that current producers of solar panels, such as China, retain a significant first-mover advantage and will sell panels into African countries without sufficient skills and knowledge transfers. This precludes African countries from tapping into global value chains, which in turn sustains the current commodity trap – exporting raw bulk low-value material and importing finished high-value products.
The question then becomes a matter of choosing optimal energy pathways for African countries. Policymakers must choose paths that minimise the opportunities for unproductive rent-seeking and provide the most efficient energy without the environmental and social costs associated with many options. This is where supreme audit institutions will play a critical role. Ultimately, my view is that localised solutions will most likely make the most sense. For instance, micro solar grids might make the most sense in a remote Tanzanian village located far from the liquified natural gas reserves off the coast, especially in the absence of a centralised transmission grid.
In another context, small nuclear modular reactors might make the most sense, or some combination of the above. This is where the serious conversations need to turn, instead of the typically polarised views of ‘renewable’ vs ‘fossil fuel’.
Solutions
At Good Governance Africa, we are of the view that the optimal development pathway, especially for resource wealthy countries, is to try and truncate what economists have called the Environmental Kuznets Curve – an inverted U-shaped relationship between environmental degradation and per-capita income growth. Policymakers are obligated to choose energy configurations that will minimise negative externalities –the divergence between social costs and private returns. Resultant broadbased energy availability provides the necessary condition for potential manufacturing growth in selected value-chain opportunities. This is one pathway through which to start overcoming the growing challenge of youth unemployment.
Of course, the above theory is moribund without associated conditions required to build what scholars Daron Acemoglu and James Robinson have called a Narrow Corridor. Countries which succeed in the long run are those with the political and economic institutions that create an enabling environment for responsible private sector dynamism to flourish. Specifically, we require capable states that grow in sophistication alongside a citizenry that is equally skilled at holding governments accountable for their decisions. China and Russia, for instance, fall well outside this narrow corridor and are destined for a hard landing because their autocrats are susceptible to serious strategic mistakes. In China’s case, the state is capable and growing in sophistication, but the citizenry is not equipped to hold its government to account. Increasingly, the only voices that its leader listens to are his own yes-men who are too fearful to speak the truth. The same goes for Russia and countless others.
At Good Governance Africa, we are of the view that supreme audit institutions can play a critical role in strengthening both arms of governance that can create narrow corridors. Credible audits can incentivise governments to manage rents in the interest of citizens, and citizens can use audit results to punish or reward governments to serve them properly. This is the key to ensuring that Africa’s resources serve its citizens instead of cursing them.
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