Monday, May 31, 2010

South Sudan: Circumventing the curse of petro-wealth (Part 2) - The Norwegian Experience

By John A. Akec

In the first installment of this article (The Citizen, Tuesday May 25, 2010, Vol. 5, Issue 144), the author contended that wealth generated through the extraction and export of petroleum resources is a double edged sword. On the one hand, it provides those countries with guaranteed income to use to fund vital infrastructural projects and other services such as provision of health and education services, and development of sources of clean drinking water. One the other hand, it has the potential of harming the long-term economic sustainability of the country that depends on oil revenues entirely to fund everything. It does so by killing innovation, creating a nation of wealth consumers as opposed to a nation of wealth and technology producers.

And because of usual rise in government expenditure that comes about as a result of unrealistic expectations, the government of an oil exporting country will be tempted to borrow heavily using its oil reserves as collateral. When things don’t work out as predicted, as they usually do when oil prices fall and the interest rates rise at the same time, the leadership (or rather the government) of the heavily indebted country finds itself unable to service the debt and hence falls prey to the whims of the powerful global lending institutions of the last resort such the IMF and the World Bank, and eventually looses control of its economic decision-making as they are forced by the lending institutions to cut back on public spending in order to service their debt as a condition for debt relief or condition for approval of further borrowing.

As a consequence of imposed conditions for borrowing, the countries concerned get impoverished and their economies begin to decline, thereby setting the scene for social and political upheavals. The list of countries that suffered this fate includes Ecuador, Indonesia, and Nigeria (where 80% of oil wealth currently benefits only 1% of the population) (refer to presentation by Kristine Kendel: Should Timor-Leste Go into Debt? Lessons from Oil-Export Dependent Countries; La'o Hamutuk Public Meeting, April 2010).

Enough of grandfather's scary bed-side fairy tales; tell us more about success stories; I can hear some of my readers say…

Fair enough. Here are some good stories - the experiences of Norway and those of a number of countries in MENA region (namely, Middle East and North Africa).

June 12th, 1968 was a landmark date for Norway and the world. On that day, a promising oil well was struck by Philips in the North Sea on the shores of Norway. More discoveries followed and shortly after, Norway made it into the list of oil exporting countries, where it currently ranks as world's top seventh oil exporting nation, with production rate hovering around 2.5 million barrel per day. While oil exports make up 50 percent of Norwegian exports, the income from oil forms just a little over 30 percent of the GDP. With a total GDP of $ 280 billion, Norway exports goods worth $ 122 billion, and imports goods worth $ 64 billion. This is a healthy balance of trade. Moreover, Norway's current account surplus stands at $ 54 billion (that is the net income that remains in the country). Unemployment was at 3.2 percent in 2009 during the global economic downturn.

Beside oil, Norway exports natural gas, electricity, wheat, potatoes, pork, barley, fish, beef, milk, metals, chemicals, textiles, pulp and paper products, and ship-building equipment, among others.

This is all well, but how Norway does it? All this is exposed in a book by Farouk Al-Kasim entitled " Managing Petroleum Resources: The Norwegian Model in a Broad Perspective", Oxford Institute for Energy Studies, UK, 2006.

The writer is an oil expert of Iraqi origin who was an insider, having spent 4 decades working for companies and government institutions involved with the development and management of oil resources in Norway. From what Al-Kasim wrote, it is apparent that there was no one single solution which could be seen as a panacea for all the challenges posed by sustainable exploitation of petroleum resources. Yet, most prominent in the Norwegian government strategy was the exercise of good governance in the management of petroleum resources throughout the three main stages of oil resource development: upstream and downstream operations, and utilization of oil windfalls (revenues).

Broadly speaking, the Norwegian government had set specific goals to be achieved through the pursuit of good governance at each of the three stages. In upstream stage (exploration, drilling, and transportation of crude oil), the goals included the establishment of policies that are in line with national economic and developmental plans and devising of the optimal policies for development of oil infrastructure, protection of environment and improving the operating efficiency in oil fields.

Second, the goals of downstream or value adding stage (refining of crude oil to produce fuel and other by-products), include identification of local and international markets and adoption of best approaches to marketing of petroleum products; formation of institutions responsible for supervision and marketing of the oil and its byproducts, use of oil and gas products for local consumption, creation of local industries that use oil products as raw materials, and creation of employment opportunities for Norwegians in oil sector and associated industries.

Finally, the goals of utilization of windfall include collection of data and carrying out of detailed and most truthful analysis of all the components of oil accounts to ensure that Norway is getting its legal entitlement of the income in order to safeguard the national interests (let us be reminded of the unsettling findings of Global Witness in regards to Sudan oil accounts); putting in place development plans that encompass all the economic and social sectors and utilization of parts of revenue to create industries and innovation companies that would benefit future generations; formation of special fund for implementation of sustainable development initiatives; and formation of a bigger reserve fund whose aim is to protect national economy against fluctuations in oil prices, or for use in emergencies and serving future generations.

Four decades on, the results are there for all to see. There are no records that anyone in Norway lives below poverty line and the country runs a mixed of free market economy and social welfare capitalism where the gaps between the rich and the poor are narrow. Today, almost all the income from oil is invested in external accounts where it generates interest.

Another bright example of what good management of oil resources can do is that a number of MENA (Middle East and North African) oil-exporting countries were able to use their reserve fund to absorb the shocks of global economic crisis of 2008-2009. These countries include Saudi Arabia, Kuwait, Bahrain, United Arab Emirates, Qatar, and Oman, Libya, Algeria, Iraq, Iran, and Syria. All with exception of Dubai were able to weather the world economic downturn successfully.

Overall, good management of petroleum resources in South Sudan would demand learning all the above lessons and avoiding bad ones. In particular, South Sudan must try to live within its means while making most of what it got and avoid the temptation of borrowing against untapped reserves as a means to speeding up the wheel of economic development. The enactment of necessary legislation is also a must.

And finally, let us be reminded that good intentions or good policies alone will not see the light of day by the way of implementation unless very capable cadres are recruited and trained in order to faithfully carry out this extreme national duty on our behalf.