Syndicate content

Will oil be a blessing or a curse for Kenya? – Lessons from Indonesia and the rest of the world

Wolfgang Fengler's picture

This piece was co-authored with Günther Schulze1.

Kenya may have found oil in Turkana that could change the development trajectory for the country. In 2011, Kenya spent US$ 4.1 billion on oil imports, equivalent to approximately 100,000 barrels per day. For Kenya to become a net oil exporter, the resources in Turkana would need to be substantial and similar to those of Sudan or Chad. 

If indeed Kenya has substantial oil reserves, will they benefit the country in the long-term?

Some observers are predicting similar problems as in Nigeria, Equatorial Guinea and many other resource-rich African countries where corruption has been amplified.

Others argue that this need not be the case. Countries as diverse as Botswana, Chile and Norway have shown that natural resources can be a blessing. If managed well, they can even support the fight against poverty by providing the resources needed to scale up the delivery of public services. In the last ten years, many of the world’s fastest growing economies, including in Africa, have benefitted from exporting natural resources.

So who should we believe?

 Let’s zoom in on the symptoms of the “resource curse” and how they can be mitigated. A resource boom increases exports which typically leads to a stronger currency. This hurts the (non-oil) export and import-competing sectors. The government has more resources, but the ‘stronger’ shilling further accentuates Kenya’s economic imbalance. Starting the “second engine” – exports in manufacturing –becomes even more difficult.  In the extreme, this leads to de-industrialization. This is the “Dutch Disease” scenario, a term that was coined by The Economist to describe the incapacity of the Netherlands to benefit (initially) from its natural gas finds in the North Sea. But this ‘disease’ is not fatal and it can be prevented. This requires a mix of industrial, labor market, trade and exchange rate policies that enhance the country competitiveness in the non-commodity sector, for example in lowering taxes on labor.

More worryingly, the sudden wealth that comes from natural resources can erode the quality of institutions. Politicians may be less pressured to undertake needed reforms and the windfall revenue may be spent on “white elephants” (non-productive prestige projects) or large transfer schemes that end up benefitting the political elite. Many talented individuals will be tempted to seek rents rather than productive activities and corruption can increase. In Sao Tome and Principe (STP), corruption went up significantly after oil discoveries were announced in 1997-99. By contrast, Cape Verde which was very similar to STP managed to tame corruption in the absence of oil. Again, ills of oil can be avoided as they are largely man-made. Since oil is a long-term resource, it should be matched with long-term investments in education, health, and infrastructure, as well as savings that will benefit future generations.

Indonesia is a rarely discussed case and its track-record has been mixed. It is a member of OPEC, but it has been a net-importer of oil since 2003 (it remains a big exporter of natural gas). In terms of managing its revenues from natural resources it is neither a great success nor a spectacular failure. The country also implemented massive decentralization, which implied re-working how natural resources revenues would be shared.

Here are two main lessons for Kenya from Indonesia: 

First, no matter how high oil prices go and how strong the temptation for politicians, establishing price ceilings or introducing energy subsidies are losing strategies with dramatic effects. Over the last decade, Indonesia has spent an average of 11 percent of its budget (US$ 10 billion) per year on wasteful fuel subsidies. They are wasteful because they mainly benefit the rich– who own cars. They are also detrimental to the environment because pollution is being subsidized. 

Second, a new revenue sharing mechanism with the regions will be needed. In Indonesia, most of the oil and gas are extracted in remote regions of the country. The most prominent is Papua which – just like Turkana – has a huge land mass but very few people. Thanks to a special autonomy arrangement, Papua has been receiving 70 percent of revenues from oil and gas produced on its soil. Since 2000 its revenues increased fivefold as a result. This poor province is now flush with cash. Now Papua’s key challenge is not to generate additional revenues but to use the existing resources wisely (see also next story).

The biggest -but most important- challenge is to build and maintain good institutions. “Sunlight is the best anti-septic”, in other words transparency will be the most powerful lever for accountability. If Kenyans know exactly how much oil is being produced, how much royalties oil companies pay this would already be a major step in the right direction. Next, a transparent sharing formula would help manage expectation on how much each unit/level of government can expect to receive. Kenya’s strong civil society and creative industries, especially in ICT, can play a strong role in monitoring the oil revenue flows and proposing solutions on how to spend the money well. Then the resource curse can be turned into a blessing. 

1. Günther Schulze is a Professor of Economics at the University of Freiburg, Germany

Comments

Submitted by Edgar on
Why would the discovery of oil spell gloom to Kenya and why echo such sentiments anyway. Being a student of New Age Thinking and an ardent believer of like attracts like at a thought level, it is my submission that instead of mirroring what is mundane elsewhere - policy influencers such as thyselves should pick up the gauntlet in offering positive prosperous outlook going forward despite it not being the purview of economics. Lets not have safe policy or cautious trajectory propositions,lets go all out like Napoleon did without any option of failure. The brief should focus on three things 1.Success 2.Success and lastly 3.Success nothing else - Lessons from Indonesia are misplaced here, how about: Oil a Blessing to Kenya - Lessons from USA/Brazil/UAE/England/Kuwait/Abu Dhabi and the Likes.

Submitted by Noor on
indeed i want to suppliment the fact that most of the African economiesa re finding new resources that have been the main bound of control pressured by the rich developed cuntries. this is a blessing because it is this very line that the west is dying to control. who curses the other is the selfish interest that the west puts when it coems to achievement of the poor countries. it suprises me most when they speak of eradicating poverty and providing aid to Afirca and in the event that wealth i sdiscovered it turns into a curse. take uganda for instance oil has not yet been extracted but are already in court attles with the oil companies. now te president is claimig the oil campanies waht to tople him.(accordingt to one media house. my submission is that whatever the consequence that may coem out of the discoveries these are blessings and we aughtv to reat them to the benefit of the people where the oil is found and beyond to include the entire country.

Kenya needs to start on the right trajectory on oil matters in Turkana. Turkana has been in existence with all sorts of problems all along. Institutions like The World Bank needs to openly advice concerned stakeholders in Turkana. The Government of Kenya in particular needs advice on managing the political, social and economic effects of oil find in Turkana; with clear objectives and a plan for equitable development of Turkana People. Some critical issues need to be sorted out first: security of the Turkana People, education, livelihood improvement and health sector support.

As a Ugandan, we are facing similar dilemmas with regards to the petrochemical resources now discovered in Lake Albert. I agree that uneven development which does not benefit all sections of the community would be counter-productive. Nevertheless, on balance, I am optimistic that this does represent an authentic opportunity for a step change in investment in social and economic progress for East Africa.

Submitted by Kimathi on
As a young Kenyan, i would prefer that the newly found resource be carefully managed, with an eye on those who come after us. Being a natural resource, the benefits ought to not only be enjoyed by we who live now, but also preserved for posterity. That is why the Norwegian model, tinkered to suit local circumstances, would, in my opinion, be ideal.

Submitted by Philip Munyua on
We have top researchers at the World Bank, IMF and leading universities that have conducted studies on this field of the 'natural resource curse'. I guess it is time 'someone' at those institutions sat down and synthesized those studies/models with a view of coming up with the best model for Kenya before the actual extraction! I would shy away from prescribing a model of particular country to Kenya at this stage since the fiscal, monetary, political and moreso geo-political factors might be totally different.

Submitted by Future Kenya on
I trust the foreign Institutions can play a vital role to keep Kenya in the right track by introducing them to proper way of public funds management and spending. Every day we hear stories about our politicians and misuse of their posts but we don’t put them in courts or rather cases don’t get to final verdict. As we Sun rising from East and set towards West we also come to hear misuse of funds day in day out. Consultancy from foreign institutions would play a vital role to have hopeful country to change to the expectations the world is expecting.

Submitted by Anonymous on
I think oil is a blessing to Kenya no matter what analyst may say, it occurs that Kenya has a new constitution and a new crop of intellect that will make oil discovery in Turkana much of a blessing than a curse. recently we are doing so well in curbing corruption which could be the main stumping block.

Submitted by Kilimo KAPCHAROI on

Turkana oil will be a blessing if Kenya gets it right the first time by developing inclusive policies and a legal frame work that responds to the interests and aspirations of the local community so that they do not take up arms if they feel excluded from their oil. Remember it is hosted in their grazing lands. It will be a curse if the "oil sharks" -government officials and MNCs share out the oil blocks and revenue accruing from it by themselves, leaving little for poor Turkana and Kenya. A "Turkana or Kenya Sovereign Fund" should be set up to save for future generations and this sovereign fund should be open to public and NGOs scrutiny to make sure the "sharks" don't help themselves with it like the golden berg, Triatton and Anglo-leasing.....does this ring a bell?. The government should also publish the contents of contracts they sign with the oil companies for transparency and subscribe to Publish What You Pay"

Submitted by Kilimo KAPCHAROI on

The Turkana oil will only be a blessing if the Turkana community are fully involved in decisions affecting the extraction and development of the oil. Decisions that would assure the Turkana that their fragile environment will be protected during and after extraction of the oil. A blessing if the Turkana people see tangible development in schools, hospitals, clean water, new planned urban areas as opposed to emergence of shanties, 50% of revenue from oil going to them, security provision etc. A curse if the same old story of oil sharks(MNCs and government officials) lining their pockets with people's money. A curse if the people feel excluded from partaking of the oil goodies. A Sovereign Fund for the Turkana and Kenyan people should be established to save part of the oil money for future generations. All oil revenue earned by the govt should be published periodically and all transactions involving oil be made public and be open to public scrutiny. The Policy of "Publish What You Pay" in terms of what MNCs pay to govt. Should be a norm in govt. affairs.

Add new comment