/ 19 August 2011

Namibian oil and the Dutch disease

On July 6 the Namibian minister of mines and energy, Henry Isak Katali, announced the discovery of oil reserves off the southern Namibian coast. It is estimated that the deposits are huge: 11-billion barrels, which is slightly lower than the reported Angolan reserves. This will certainly put Namibia among the top five oil-producing countries on the continent alongside Nigeria, Libya, Algeria and Angola.

Following its brutal war of liberation, Namibia has been a generally peaceful and welcoming country. It has conducted reasonable policies and has seen a steady rise in gross domestic product per capita. Despite having the unenviable record of vying with South Africa as the nation with the world’s most unfair ­distribution of income, there has as yet been no attempt to forcibly redistribute wealth.

Namibia’s economy is based on minerals, such as diamonds and uranium, but the country also has a relatively healthy agricultural sector — beef, grapes and fish — as well as tourism.

All this is probably set to change. There is a general belief that oil assures wealth, but the track record of its management does not confirm this. Oil normally puts wealth in the hands of the few who are close to the government and the industry, not necessarily the poorest sectors of society.

The reason is simple: oil produces a great amount of revenue for the government and whether the people benefit depends entirely on how effective the government is at using these resources. If funds are squandered away on giant buildings and unnecessary, inappropriate infrastructure projects instead of carefully targeted ones to help the poor, oil will actually worsen income distribution. Big infrastructure projects are easy; targeting the poor is far more difficult.

Anyone who farms knows there is nothing more dangerous to one’s crops than a herd of stampeding elephants. Namibia’s oil “elephants” bring the possibility of doing precisely the same thing to its agricultural and tourism sectors as a herd of elephants does to a maize field, if it is not managed properly.

Economists call this the Dutch disease: huge increases in foreign exchange reserves, as experienced by Holland following its gas discoveries, cause the currency to appreciate and destroy the other traded-goods sectors such as agriculture. Dutch disease is confused with, but is different from, the “resource curse”, which is a much broader problem.

Although Botswana is a good example of a country that has managed many aspects of Dutch disease through managing its diamond revenue, managing huge inflows of government revenues from oil or mineral resources is more complex than just managing exchange rates and inflation.

Namibia stands at a crossroads in its history and its children will judge the current generation of leaders by the decisions they make now. Namibia can declare that it will follow the path of Norway and take these oil resources offshore and only bring them back slowly and sustainably.

But it can also follow the path of Nigeria, which has squandered its wealth. All leaders who discover elephants in their backyard say they will follow Norway’s path. But one should believe they are serious only when they enshrine such funds in the nation’s constitution.

It is easy to be smug when one is rich. When Norway decided to take its oil and gas revenues offshore it was already one of the richest countries in the world.

But in a country like Namibia, which has extensive poverty stemming from its colonial past, policymakers will find a good reason to spend the oil money.

Namibia’s neighbours can wish the country well and hope its leaders make wise choices and learn from the many lessons of history.

Professor Roman Grynberg is employed at the Botswana Institute for Development Policy Analysis. These are his personal views