Building the New State: The Challenge of the “Resource Curse” in South Sudan
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Transcript of Building the New State: The Challenge of the “Resource Curse” in South Sudan
Building the New State: The Challenge of the “Resource Curse” in South Sudan
Luka Biong DengKush Inc, Juba, South Sudan
Visiting Fellow, IDS, University of Sussex, UKBrighton, 1st October 2012
Outline of the Presentation1. Introduction
2. Review of the “Resource Curse” Approaches
3. Diagnostic Typology of the “Resource Curse”
4. The Challenge of the “Resource Curse” in South Sudan
5. Options for averting the “Resource Curse”
6. Conclusion
1. Introduction: Optimism about the New State
• Unanimous acceptance by all 192 member states of UN.
• Long struggle of the people of South Sudan
• Political commitment of the international community to the Comprehensive Peace Agreement.
• Viability of the new state and promotion of peace and stability in the region
• The strong will of people of South Sudan and international community.
1. Introduction: Pessimism about the New State • Failed state before its birth• New State entering into a world that is stratified into the top
billion people, middle four billion of people and bottom billion of people.
• The bottom billion faced with four traps: conflict (73%), natural resource trap (23%), land-locked and bad neighbours trap (30%) and bad governance trap (76%).
• South Sudan faces these four traps: prolonged conflict, natural resource, land-locked with bad neighbours and emerging from a country with bad governance.
• With no much effort the new state falls not only in the bottom billion category but also at the bottom of the bottom billion.
1. Introduction: South Sudan and the Bottom Billion
Other Developing Countries Bottom Billion Countries South Sudan0
10
20
30
40
50
60
70
80
Life expectancy (years)Infant Mortality (%)Child Malnutrition (%)
1. Introduction: Focus of My Presentation
Is South Sudan vulnerable to the “resource curse” and what options available for the new state to address it?
2. Review of the “Resource Curse” Approaches • There is a growing empirical knowledge that
consistently shows the negative effect of natural resources on growth with countries well-endowed with large natural resources performing poorly than the resource-scarce countries.
• The concept of “resource curse” refers to the link that is observed between large natural resource revenues and bad economic performance.
2. Review of the “Resource Curse” Approaches
2.1. The Dutch Disease Approach
2.2. The Rent-seeking Approach
2.3 The Volatility Approach
2.4 The Specialization Approach
2.5 The Political Economy Approach
2.1 The “Dutch Disease” Approach
• “Dutch Disease” refers to the negative effect caused by natural resources export boom on traditional export sector.
• “Dutch Disease” process has two effects: the resource movement effect (movement of labour from tradable to non-tradable) and spending effect (spending extra income from export revenue on non-tradable goods pushes their prices up relative to prices of tradable goods resulting in appreciation of exchange rate)
• Cross-country experience does not fully support the negative effect of “Dutch Disease” on growth with some performing well while others did not.
2.1 Questioning Evidence of “Dutch Disease”?
• Increased growth in good years (1960-80) and slow growth in bad years (1980-1998) (Hausmann and Rigobon, 2002)
1960-1998 1960-1980 1980-1998
-3
-2
-1
0
1
2
3
4
5
6GDP Per Capita Annual Growth (%)
All DevelopingOil ExportersOther Countrie
%
2.2. Rent-Seeking Approach
• The natural resource wealth causes “rentier states” to do a poorer job of promoting economic development than other states.
• Symptoms of Rent-seeking Behaviour: “Overgrazing of the commons, common-pool problem”: Fighting over natural resource wealth at the disposal of the government, overspending, distorted allocation of spending, low non-resources taxes, savings and weak political compact.
• However, the rent-seeking behaviour is not only unique to the resource rich countries alone.
2.2. Questioning the “Rent-Seeking”?
• Increased savings in good years (1960-80) and low savings in bad years (1980-1998) (Hausmann and Rigobon, 2002)
1960-1998 1960-1980 1980-19980
5
10
15
20
25
30
35
40
Average Domestic Saving Rate (%)
All DevelopingOil ExportersOther Countrie
%
2.3. The Volatility Approach
• Volatility of natural resource export prices (twice as volatile as those of other commodities but are also unpredictable) acts as tax on investment and subsequently impedes growth.
• Volatility of government spending rather than resource revenues as a factor impending growth.
• Voracity Effect: Overspending in good years, and under-adjusting in bad years may explain the high volatility experienced by oil-rich countries.
• Questioning volatility argument: Volatility caused by resource revenues may not be described as a curse when compared to the revenue it generates.
2.4. The Specialization Approach
• A country that is diversified, in terms of having a significant non-oil tradable sector, will be much less affected by volatility in government domestic spending than an economy that is fully specialized in non-tradables.
• Categorization of oil rich countries into (1) naturally specialized countries such as some Gulf states, (2) inefficiently specialized countries such as Venezuela and Nigeria and (3) diversified countries such as Ecuador, Mexico and Indonesia.
• However, specialization approach is not robust enough to explain the “resource curse” phenomena.
2.5. The Political Economy Approach
• The lack of democracy in terms of policies and institutions as prime cause of the observed “resource curse”.
• The negative relationship between resource abundance and growth is conditional to policy failure and bad institutions.
• There is a cumulative and unambiguous empirical evidence that authoritatively supports the centrality of policies and institutions in explaining the “resource curse”.
• Typology of political states (matured democracies, factional democracies and autocracies) as a basis for analyzing the political economy of natural resources management .
2.5. Questioning “governance approach”?
• Democracies outperform autocracies with absence of natural resource rents and the reverse is true with the presence of large natural resource surpluses (Collier).
• Bad investment in the resource-rich democracies lead to poor growth as a result of short horizon with elections .
• Ethnic diversity may impede growth of resource-rich democracies because of politics of patronage.
• Political Dutch Disease suggests that natural resources wealth impedes democracy.
• Specific aspects of democracy such as checks and balances rather than mere elections and democratic institutions are more important
• It is questionable whether democracy per se would be answer to the resource curse.
3. Diagnostic Typology of the Resource Curse • Political-Economic Typology: Towards a Policy Mix
Political-Economic Typology of Resource Rich Countries
CategoriesPolitical Categories
Economic Categories
Autocracies Factional Democracies
Mature Democracies
Naturally Specialized
Saudi Arabia State of Alaska
Inefficiently Specialized
Iran VenezuelaNigeria
Botswana
Diversified SingaporeChina
Mexico Norway
4. Is South Sudan Vulnerable to the Resource Curse?
Level of oil abundance
Economic analysis of the Resource Curse
Political analysis of the Resource Curse:
4.1 Level of Oil Abundance: Existing Oil Fields
4.1 Level of Oil Abundance: Existing Oil Fields
• With daily production of 320,000 bpd, the remaining oil reserves are likely to be exhausted in about 12 years
Muglad Basin Melut Basin Total0
500
1,000
1,500
2,000
2,500
Initial Oil Reserve (mmbbl)
Remaining Oil Reserve (mmbbl)
4.1 Oil Production Forecast from Existing Oilfields
• With existing level of oil production, level of production peaked in 2010 and may decline to 50% by 2019
20012002
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
20192020
20212022
20232024
20252026
20272028
20292030
0
50
100
150
200
250
300
350
400 South Sudan Oil Production Forecast
Melut Basin OilGreater Nile Oil Block 5A
Oil
Prod
uctio
n 00
0s b
/d
4.1 Oil Production Forecast from All Oilfields
• With daily production of 320,000 bpd, the remaining oil reserves are likely to be exhausted in about 70 years
Muglad Basin Melut Basin Total0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Producing Oilfields (mmbbl)Non-Producing Oilfields (mmbbl)
4.2 Risks of Oil Sector in South Sudan
• Existing Oil Infrastructure
• Sudan and South Sudan Border and relations
• Existing Oil Contracts
• Alternative Pipelines and Refineries
• East vs. West future investment
4.3 Economic Analysis of the Resource Curse
• Oil Dependence
2008 2009 20100%
20%
40%
60%
80%
100%
120%South Sudan Indicators of Oil Dependence
Oil Exports (% of total exports)Oil GDP (% of GDP)Oil Revenue (% of total revenue)
4.3 Economic Analysis of the Resource Curse
• Macroeconomic Impact: Income Per Capita in USD
Countries GDP Per Capita
GNI Per Capita
South Sudan 1,650 1,094
Kenya 788 783
Uganda 500 490
Ethiopia 319 319
Sudan 1,700 1,662
4.3 Economic Analysis of the Resource Curse
• Macroeconomic Impact: Living ConditionsKenya Ethiopia Ugand
aSudan South
Sudan* Population below
Poverty Line (%) 50 38.7 35 40 50.6
Gini Coefficient (%) 48 30 44 50 45.5
Population undernourished (%)
30 44 15 20 47
Infant Mortality Rate (per 1,000) 64.7 72.5 79.2 63.8 102
Literacy Rate (%) 87.0 35.9 73.3 70.2 27.0
4.3 Economic Analysis of the Resource Curse
• Symptoms of Dutch Disease: Economic Growth Performance
4.3 Economic Analysis of the Resource Curse
• Symptoms of Dutch Disease: Resource Movement Effect
Oil GDP
Non-oil G
DP
Government
Non-oil n
on-government
0%
10%
20%
30%
40%
50%
60%
70%
South Sudan GDP Composition by Economic Sectors
200820092010
2008 2009 20100%
10%
20%
30%
40%
50%
60%
70%
80%
Foreign Trade and the Economy of South Sudan
Imports as % of GDPExports as % of GDPOil Exports as % of GDP
4.3 Economic Analysis of the Resource Curse
• Symptoms of Dutch Disease: Spending Effect (Traditional vs. Non-Tradable Sector)
2006 2007 2008 2009 2010 20110%
5%
10%
15%
20%
25%
30%Traditional vs. Non-Tradable Sector Public Spending
Non-Tradable SectorTraditional SectorTraditional as % of Non-Tradable
4.3 Economic Analysis of the Resource Curse
• Symptoms of Dutch Disease: Spending Effect (Exchange Rate Policy)
Jan.11 Feb.11 Mar.11 Apr.11 May.11 Jun.11 Jul.11 Aug.11 Sep.11 Oct.11 Nov.110.00
0.50
1.00
1.50
2.00
2.50
3.00
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%Inflation, Real Exchange Rate and Premium
Real Exchange Rate (SSP per US$)
Premium between Official and Market Rate ( %)
Annual Inflation (%)
Real
Exc
hang
e Ra
te (S
SP P
er U
S$)
4.3 Economic Analysis of the Resource Curse
• Rent-Seeking Symptoms: Composition of Revenue and Expenditure
2005 2006 2007 2008 2009 2010 2011
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
Revenues, Expenditure and Reserve
Total RevenueOil RevenueNon-Oil RevenueReserve/DeficitTotal Expenditure
Mill
ions
SDP
2005 2006 2007 2008 2009 2010 2011
-50%
0%
50%
100%
150%
200%
Allocation and Composition of Oil Revenues and Expenditure
Capital as % Total ExpenditureExpeniture as % RevenueCurrent Expenditure as % Total ExpenditureNon-oil Revenue as % of Total ExpenditureReserve/Deficit as % of Total revenue
4.3 Economic Analysis of the Resource Curse
• Rent-Seeking Symptoms: Fiscal Compact
2005 2006 2007 2008 2009 2010 20110%
1%
2%
3%
4%
Domestic Revenue Mobilization
Non-Oil Revenue as % of Total Revenue
PIT Customs and VAT Others0%
10%
20%
30%
40%
50%
60%
Composition of Non-Oil Revenue, 2010
4.3 Economic Analysis of the Resource Curse
• Rent-Seeking Symptoms: Fiscal Allocation and Discipline
Accountabilty
Economic Services
Education
Health
Infrastructure
Agriculture and Rural Dev
Public Administration
Rule of Law
Security
Social and Hum. Services
Transfers to States
-100 -50 0 50 100 150 200
Under-spending Over-spending, 2010
-39.6% 3.4%
3%
10%
51.6%
-21.6%
-20.7%
-35.3%
-3.4%
-21.8%
-4.7%
Accounta
bility
Econ. S
ervice
s
Education
Health
Infrastr
ucture
Agric and Rura
l Dev
Public A
dmin
Rule of Law
Securit
y
Social a
nd Hum. S
ervice
s
Transfe
rs to
State
s0%
4%
8%
12%
16%
20%
Functional Classification of Public Expen-diture, 2005-2011 (average %)
4.3 Economic Analysis of the Resource Curse
• Rent-Seeking Symptoms: Size of the Government
South Sudan Sudan Kenya Ethiopia Uganda0
50
100
150
200
250
300
350
288
216
104
3760
Current Fiscal Spending Per Capita (US$), 2010
South Sudan Sudan Kenya Ethiopia Uganda Low-Income (Average)
0%5%
10%15%20%25%30%35%40%45% 40% 40%
12%16%
6%
18%
Civil Servants Wage Bills as % of Total Public Expen-diture, 2010
Kenya Uganda Ethiopia Sudan South Sudan
0.05.0
10.015.020.025.030.035.040.045.0
5.410.5
7.210.9
42.4
Members of Parliament Per A Million Population
4.3 Economic Analysis of the Resource Curse
• Volatility Symptoms: Oil Prices, Revenues, Expenditures
Jan. 0
5Jul.0
5
Jan. 0
6Jul.0
6
Jan. 0
7Jul.0
7Jan
.08Jul.0
8Jan
.09Jul.0
9Jan
.10Jul.1
0Jan
.11Jul.1
10
500
1000
1500
2000
2500
Total Oil RevenueTotal Expenditure
Jan-06
Aug-06
Mar-07
Oct-07
May-08
Dec-08
Jul-09
Feb-10
Sep-10
Apr-11
Nov-11
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
0
20
40
60
80
100
120
140
Oil Revenue MUSDNile Oil Price in USDDar Oil Price in USD
4.3 Economic Analysis of the Resource Curse
• Volatility Symptoms: Sources of Volatility
Table: Sources of Volatility, 2005-2011
Source Mean Standard Deviation
Coefficient of Variation
Yearly Standard Deviation
1. Oil Revenue (in MUSD) 192.84 129.22 0.67 21.54
2. Oil Revenue (in MSDP) 425.22 368.93 0.87
2. Public Expenditure (in MSDP) 331.69 276.90 0.83 39.56
3. Nile Oil Blend Price (in USD) 75.70 22.16 0.29 5.54
4. Dar Oil Blend Price (in USD) 58.44 21.88 0.37 5.47
5. Annual Inflation (in %) 16.91 20.96 1.24 6.45
6. Food Annual inflation (in %) 19.38 24.14 1.25 7.43
7. Exchange Rate (SDP per USD) 2.49 00.28 0.08 0.28
4.3 Economic Analysis of the Resource Curse
• Specialization Symptoms: GDP and Exports Composition
Crop Fa
rming
Animal
Husban
dry
Wag
es an
d Salar
ies
Own Business
Propert
y Inco
me
Remittan
ces
Pensio
n Aid
Others0%
10%20%30%40%50%60%70%80%90%
Sources of Livelihoods in South Sudan
South SudanUrbanRural
Oil GDP
Non-oil GDP
Government
Non-oil non-gove
rnment0%
10%20%30%40%50%60%70%
South Sudan GDP Composition by Economic Sectors
200820092010
Resource Movement Effect: Exports Composition (%)
2008 2009 2010
Traditional Goods 0.19 0.26 0.20
Oil 98.92 98.44 98.69
Services 0.89 1.30 1.11
Services as % of Traditional Sector
4.6 5.1 5.6
4.4 Political Economy Analysis of the Resource Curse • Quality of Policies and Institutions: CPIA
2005 2006 2007 2008 20090
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Country Policy and Institutional Assessment (CPIA) Scores (1 = Low and 6 = High)
SudanUgandaKenyaEthiopia
Years
CPIA
Sco
res
4.4 Political Economy Analysis of the Resource Curse • Corruption Perception Index (CPI):
2005 2006 2007 2008 2009 20100
0.5
1
1.5
2
2.5
3
CPI Scores (1= Bad and 10= Good)
SudanUgandaKenyaEthiopia
Years
CPI S
core
s
4.4 Political Economy Analysis of the Resource Curse • Political Rights (PR) and Civil Liberties (CL):
2005 2006 2007 2008 2009 20100
1
2
3
4
5
6
7
8
Political Rights (PR) and Civil Liberties (CL) (1= the most free and 7= the least free)
SudanUgandaKenyaEthiopia
Years
Aver
age
PR a
nd C
L Sc
ores
4.4 Political Economy Analysis of the Resource Curse • Political Stability, Democracy and Ethnicity in South Sudan:
5. Options for Averting the Resource Curse
• South Sudan Oil Revenue Forecast
5. Options for Averting the Resources Curse
(a) Economic Measures Options:• Transform South Sudan into “non-oil” economy by
distributing oil revenue directly to citizens!• Creating oil revenue fund as in Kuwait and Norway or Alaska
where income from fund is distributed to citizens! • Transfer to private sector through citizen dividends and
government to tax back part of the dividend to improve social compact and institutional building.
• Increase pro-poor public spending on human development and infrastructure
• Retain as government financial assets, but lend to the domestic private sector, by government lending for low-cost housing construction
• Retain as government financial assets and lend to foreigners, by foreign reserve accumulation for hedging against volatility.
• Targeting problem is less of a technical problem than a political will (farmers, women with children under 5, only women adults with schooling children)
5. Options for Averting the Resources Curse
(a) Governance Measures• SPLM as a dominant political party with huge political capital
(liberation struggle, peace and independence of the South)
• More than mere elections but effective checks and balance mechanisms
• Non-state actors such as churches, civil society, youth, women, farmers, veterans and other interest groups
• Media and access to public information through local FM radios
• Decentralization and lower level accountability
• Taxation as fiscal and Social Compact
• Political transformation and ethnic diversity
6. Conclusions:
Shutting down of oil production is a blessing in disguise and provides opportunities.
Current austerity measures (size of government and more focus on agriculture) and resumption of oil production.
South Sudan can easily benefit from the experiences of other countries through disruptive innovation