Why African Economies Need To Diversify: The Congo Example

By Andrew Friedman AFKI Original Published: August 28, 2014, 3:11 am

In 2012 the Republic of Congo raised 73 percent of its national earnings from natural resource rents and royalties. According to the World Bank, the vast majority of this revenue, 71 percent of the country’s GDP, comes from the country’s oil reserves.

Nearly three quarters of the country’s revenue stream comes from finite natural resources, nearly all from the country’s oil reserves. This makes it the most reliant on both total natural resources and oil revenue in the world by far, 18 percent above second place Kuwait in total natural resources and 17 percent above the Gulf state in oil reliance.

Classically, states that are over reliant on natural resource income have immense trouble developing.

To start such countries are reliant on a resource that is fundamentally finite. This is a particular problem in Congo, a country that 1.6 billion barrels of proven oil reserves putting it very low on the list of international proven reserves compared to international powerhouses like Saudi Arabia (267 billion barrels) or Venezuela (211.2 bb) as well as regional powerhouses such as Libya (47.1 bb) or Nigeria (37.2 bb).

Additionally, the country’s economy is subject to the rapid fluctuations of natural resource markets.

According to the WTI scale, a predominantly American oil pricing mechanism based in Oklahoma, in 2012 (the last year World Bank data on natural resource reliance is available) the price of oil per barrel peaked in late February at $109.39 and hit its low in late June at $77.72, a difference of $31.68. According to Brent, a predominantly European pricing scale, the peak in 2012 was $128.14 in mid-March and the low was $88.69 in late June, a difference of $39.45.

This means that depending on the time of year, the amount of revenue the government can expect from its export average of 250,000 barrels per day (the approximate difference between the country’s consumption and production) can vary almost $10 million on the Brent scale or nearly $8 million according to WTI.

While careful planning (that too often does not take place in natural resource reliant countries) can guard against day to day variability, it is impossible to protect an over reliant economy from year to year variation.

In one particularly extreme example, the 2008 average price per barrel (in current USD) was $102.42. This compares to a 2007 average of $77.17 and a 2009 average of $65.53.

While the 2008 boom in prices may seem like a windfall, it is important to note that the 2009 average did not even reach the 2007 price, catching a poorly planned, over reliant economy off guard with its empty coffers.

Using the 250,000 barrels per day as a baseline, this amounts to $7.04 billion in 2007, $9.35 billion in 2008 and $5.97 billion in 2009. In a woefully impoverished country, this variability is massive and can lead to tremendous budget shortfalls.

While the example may seem extreme because the Republic of Congo is the world’s most reliant economy on natural resources, the country is not alone on the continent in its over reliance on natural resource income.

In fact, six of the world’s ten most resource reliant states are in Africa. Joining Brazzaville near the top of the list are Libya, Mauritania, Equatorial Guinea, Gabon and Angola.

Additionally, Congo is only the continent’s eighth largest oil exporter. This means that in seven countries (Equatorial Guinea, Sudan, Egypt, Libya, Angola, Algeria and Nigeria) the real monetary value of the exports, and thus the real variability, is greater.

Finally, in addition to the finite nature of natural resources and the rapid fluctuation of oil prices wearing on the mind of economists in over reliant states, there is another reason to fret.

As described by Masoud Movahed in Al Jazeera, “modern mineral and oil refineries are highly technology-intensive. As a result, petrochemical and oil refineries require advanced vocational training and thus, do not serve as ample employment opportunities for the indigenous manpower.”

This means that while governments may gain revenue from the exploitation of mineral resources, too often it does not translate into jobs and skills for African populaces that would continue to grow the revenue base and improve the lives of citizens.

Countries that are over reliant on natural resource exports must diversify. If not, in the short term they must battle the rapid fluctuation of international markets for natural resources.

In the long term they must worry about the finite nature of such resources, and, in the case of oil producing states, the development of alternative technologies to compete with both oil’s limited supply and its environmental impact.

Additionally, in both the short and long term such states must use the mineral wealth windfall to ensure job training and education of citizens, something that is not often a part of highly technological and specialized mineral extraction.

Unprepared governments may feel as though a check for natural resources just keeps coming. Unfortunately for those governments, there will come a time when the checks stop. Diversification is the only way to be prepared for that day.

Andrew Friedman is a human rights attorney and freelance consultant who works and writes on legal reform and constitutional law with an emphasis on Africa. He can be reached via email at afriedm2@gmail.com or via twitter @AndrewBFriedman.

Sign up for the AFKInsider newsletter — the most compelling business news you need to know from Africa and the African diaspora, delivered straight to your inbox.

Tags: , , , , , , ,