In a bid to stimulate the debate on Uganda's newly discovered oil and the sharing of the oil wealth, Business Vision runs a series of articles by Professor Kasozi, the director of the National Council for Higher Education. This week's article focuses on how Uganda can avoid depending on oil as a sole major export

THE last thing the discovery of oil in Uganda should bring here is making this country a petro state. The difference between a banana republic and a petro state (not to be confused with petrol) is minor. Small underdeveloped countries with a single agricultural or commodity export item such as bananas and pineapples, ruled or defended by a military clique, or a strong family and under servile relationship with a foreign large-scale planter or mining company, were called banana republics. Many of them were in central and south America. The term banana republic was pejorative, but its features are not different from what petro states are, except in one aspect, oil money.

A petro state is a country whose economy is dominated and dependant on the export of crude oil and, or gas resources and whose pre-existing political and social institutions are not democratic enough to enforce transparency in the management of oil revenues.

While petro states earn a lot of money from oil, they exhibit the same characteristics as banana republics, which earn far much less cash. Both have 10 nasty characteristics, which include slower rates of economic growth, skewed social systems, regime longevity, excessive spending on defense, slow rates of poverty eradication, lack democratic culture, are rentier states, have resource-rich but suffering enclaves and are prone to conflict and war. It is a pity that African states that have had oil before Uganda exhibit the characteristics of petro states. It is everyone's hope that as Uganda develops its oil resources, it does not become a petro state, entirely dependent on this resource. It should keep developing the non-oil sectors of the economy as it improves its oil-processing sub-sector.

On the other hand, if oil were to "crowd out" or kill other economic activities, such a development would be unfortunate as Uganda was never a banana republic. In its economic hey-days of the early 1950s and 1960s, Uganda depended on the three Cs and three Ts. These were coffee, cotton, copper, tobacco, tea and tourism. On the economic front, therefore, Uganda had leverage and could not easily be ransomed by a single foreigner dealer. On the political front, Uganda, as Gardner has written, could only be properly ruled by consensus as it is hard to concentrate absolute power in a country with so many social and economic groups and interests. Uganda became unmanageable whenever rulers tried to force complete uniformity or unity of the state. If Uganda became a petro state, it might be controlled by corporate interests and lose the factors that make authoritarian rule difficult, except with the use of brutal force as the Obote and Amin regimes tried to do. The way oil is managed will certainly influence future political culture in this country.

Oil states normally have strong rulers, who often use primordial structures to make political and economic decisions. The state and the ruler are all in one. As Louis XIV said, "the state is the ruler" and vice versa.

In a petro state, the level of oil dependence influences political behaviour. The percentage of contribution of oil exports to the gross domestic product (GDP) measures this level. In a number of petro states, the dependence ranges between 20 to 80%.

A petro state lives on revenues (or rents) from oil export rather than extraction of surplus from human labour. Like a banana republic, a petro state has a "mono" source of revenue as other sectors have either been crowded out or killed by oil such as Nigeria, or have not been developed because of the easy cash from oil like Congo-Brazzaville, Angola and Gabon. Petro states face numerous problems. Due to price volatility of oil and other raw materials, petro states suffer booms and busts that create economic and eventually political problems. As oil is a finite resource, its long-term contribution to development of the state is unpredictable and fragile. Petro states exhibit uneven regional development due to the enclave nature of this resource which breeds conflict.

There are 10 characteristics of petro states that Uganda should guard against as it implements its oil policy.

The first characteristic, not observed by many planners, is that oil states experience slower overall economic development than countries dependant on multi-sector sources of revenue. This is because in a petro state the minds of most planners and government officials are focused on oil to the exclusion of other economic activities. In the period between 1965 and 1998, OPEC member countries' economies GDP growth decreased annually by 1.3%, while non-OPEC middle-income countries registered annual growths of 2.2%.

The reasons for this slow growth have been fully discussed by Terry L.Karl in her book "The Paradox of Plenty" and in my earlier discussion in these series. Briefly, they are, first, the oil curse. This is the inverse relationship between high levels of natural resource dependence and growth rates.

Secondly, as argued in an earlier article, oil hurts other sectors of the economy by pushing up the real exchange rates of a country's currency and therefore rendering most other exports uncompetitive (the Dutch disease). The reduced competitiveness then crowds out other sectors such as agriculture. This is what happened in Nigeria. Some academics believe that if Nigeria did not start pumping out oil in the late 1950s, it might have developed faster and might have been on the same levels as the Asian giants, which have no oil or major minerals. But this may be mere speculation. What is certain is that the weakening of the non-oil sectors reinforces a country's dependence on oil, throwing the country squarely in the camp of petro states.

Thirdly, price volatility at the international level, which dependence on oil brings, can reduce a country's budgetary discipline as well as good public planning. Since the non-oil economy has been weakened, reduction of oil revenue can devastate the petro state and cause political chaos that could choke democratic development, hence the many coups and authoritarian regimes ruling petro states.

Fourthly, the enclave nature of oil mining means oil-rich regions are exposed to booms and busts. These can cause chaos in the enclaves, for example, the Niger Delta where people are surviving in an almost Hobbesian state of nature. Fifthly, petro states do not often have professionally-diversified social systems. Oil being one of the most capital-intensive industries creates few jobs per unit invested. As a result, foreigners often take most of the decent jobs created. Moreover, as there are few productive linkages between the oil sector and the general economy, vertical and horizontal integration of the economy does not take place. All these factors contribute to the slow growth of petro states.

However, building of a refinery can partly alleviate the problem as some downstream industries can fill the gaps.

The second characteristic of petro states, which is connected with the first, is the slower levels of poverty eradication. Oil revenues undermine pre-existing distributive mechanisms as power to allocate is usurped by the state, which cannot sustain this role in bust periods or be fair to all social groups needing assistance. In bust periods, revenues coming to states is reduced and the state is unable to fulfill social obligations.

For example, in the Middle East in the 1970s, GDP rose from around $250 to about $2,000. But the level dropped to $400 in 1992. These drops, which led to increases in poverty levels, also affected populations in Gabon, Congo, Ecuador, Iran and Trinidad and Tobago. In Nigeria, the number of people below the poverty line grew from 27% in 1980 to 66% in 1996.

Due to the undemocratic power structures in petro states, the oil induced distributive structures are unequal. In Nigeria, the richest 10% of the population controls 40% of the country's wealth and the poorest 20% control only 4.4%. Nigeria spends only $2 per person per year on health instead of the $34 recommended by World Health Organisation. Oil states are also not the best performers in education. The secondary school gross enrolment ratio for OPEC countries is 57% compared to the world average of 64%. OPEC countries spend 4% of GDP on education compared to the world average of 5%.

The third major characteristic of petro states is the skewing of social structures as oil induced social formations begins to emerge. The growth of a local indigenous property owning class, a sector of society necessary to stand up to dictatorships, is choked. As oil money comes directly into the hands of rulers of the state and foreign interests, local entrepreneurs are starved. Privileged linkages to the state, not entrepreneurship, determine whom, among the local population, accesses wealth. Foreign companies dominate the middle and upper sectors of a petro state social structure.

Likewise, the development of a local working class, conscious of its rights, is slowed by the sociology of the petro state. As wealth distribution is managed by the state and is not dependant on the amount of entrepreneurship or labour but on ethnic or primordial loyalties, negative attitudes towards labour develop. Semi-skilled or menial labour jobs are shunned and slave labouring like foreigners are often invited to the petro state to do this type of work. In Gulf States, for example, foreigners do 60-90% of menial, domestic, construction, industrial and professional work. The major impact of this division of labour is a reduction in local professional diversification, class consciousness and, ultimately, lack of interest in political participation.

Changes of governments in these states are often palace revolutions or military coups that do not lead to the political empowerment of the population.

The fourth characteristic of petro states and banana republics is regime endurance or longevity in power. Individual rulers of petro states govern for decades due to the concentration of economic and political power in the hands of the state and the slow growth of political transition structures.

In both types of states, rent from oil or other commodities accrue to the state. Concentration of both economic and political power strengthens the ruling elites to levels where no alternative social power can become strong enough to challenge incumbents. Oil money permits regimes to consolidate and monopolise power, for example, Gomez in Venezuela, Saddam Hussein in Iraq, Surhato in Indonesia, life presidents of the Gulf of Guinea and the sheikhs, kings and presidents of the Middle East illustrate this point.

Petro states spend a lot of money on defence, buying instruments of coercion and maintaining a large army, police and paramilitary. Regimes in many petro states and banana republics are dependant on the bullets, not ballots for survival.

On average, non-oil developing and middle income countries spend 12.5% of annual budgets on defence. But oil-dependant countries in the same category spend about 20-35% on defence. From 1984 to 1994, OPEC member countries' average expenditure on defence was three times that of developed countries and two to 10 times that of non-oil developing countries. Actually, the beneficiaries of this expenditure are the developed countries who, on one side sell the equipment to these undemocratic regimes, but on the other want to be seen as promoters of democracy in developing countries!

The sixth characteristic of petro states is rampart corruption. There is a relationship between the concentration of power, money, absence of democratic structures and corruption in petro states. Each feeds and enhances the arena of the other. Because oil cash flows directly into the hands of the state, a state whose power is not moderated by checks and balances or regulatory agencies, the temptation for corruption is enormous. The ruling elites are often dictators using personal methods of managing state affairs and making no difference between personal and state wealth. This habit increases the arena of corruption as it gives corruption official sanction. Oil companies are known to collude with state officials in putting money to corrupt items. The mercenary coup plot to overthrow the government of Equatorial Guinea is a glaring example of adverse external influence that had the potential to lead to corruption.

The seventh characteristic of petro states is the lack of, and the choking of the development of democracy. The concentration of economic power in both the petro and banana republic leads to the concentration of political and therefore, coercive power in the hands of the state. There is a relationship between oil revenue concentration and authoritarianism in a petro state. Virtually all Middle Eastern and African oil exporting countries are authoritarian regimes, or have a limping democracy like Nigeria. There are four causes of this political malady. First, where there is no taxation as happens in many petro states, rulers have no obligation to be accountable to citizens. Secondly, oil revenue increases patronage that weakens pressures for representation by the population on government bodies or demand accountability from the government. Thirdly, petro state leaders can buy or suppress political consensus by using the massive oil money. They also use the funds to finance repressive organs of the state like the army, the police and vigilantes for their own interests.

The eighth characteristic of both petro states and banana republics is rentier status. Rentier states depend on funds remitted from external sources instead of proceeds from a domestically diversified economy. As enormous cash flows in, authorities focus on resource distribution instead of resource creation. Budgets begin to resemble shopping and distribution lists instead of emphasing strategic goals and steps for overall development. Agencies of restraint like the auditor general's, ombudsman, Parliament; the Judiciary and civil society are weakened or compromised.

State priorities of activities shift from the maintenance of law and order to the reception and distribution of oil money. Money is used to reward supporters or to suppress opposition. At the government level, the state loses fiscal control and often embarks on reckless spending, which often leads to massive debts. This happened to Nigeria. The aim of political participation becomes the capture of the state or to be part of it to share in the oil loot.

The ninth characteristic of petro states is the marginalisation or destruction of oil producing enclaves. At first, oil producing enclaves achieve a bust of activities, especially in the oil processing phase. This is a time when the wells are being dug, land cleared, roads made and equipment brought in. The enclave tends to attract the rich, the famous, the poor, the prostitutes and other wretched of the earth. But as oil extraction continues, especially if it is exported in a crude form, a number of ugly scenarios unfold that make life difficult.

Firstly, the jobs and opportunities are not enough to go round. Second, due to the relatively high salaries paid to those who are lucky to get jobs, inflation sets in. Food and other items become inaccessible to many and then crime including prostitution sets in. This has happened in Nigeria (the Delta) Angola (Cabinda and Quito). Secondly, the expropriation of arable land for oil extraction, occasional oil spillage or gas flarings, toxic dumping and other mistakes lead to environment disasters. Cultivation of food and cash crops in the area becomes difficult and food has to be brought into the enclave at great cost, further making life more difficult for those living on the edge. In Ecuador, the Cofan Indians complained of oil seepage in their drinking water systems. The Exxon Valdez disaster led to environmental damage of air, soil and water. In the Niger Delta, gas flarings have scorched the earth, destroyed crops and wasted what were previously arable lands.

The tenth characteristic of petro states discussed in this article is the occurrence of war and conflict in these states. As rules for the peaceful transfer of power in petro states are either weak or absent, in the majority of cases, governments change violently. Because the control of the state is, in effect, the control of revenue, incumbents and aspirants ferociously guard or seek to control the state by any means possible. Hence the military expenditure and the bloody wars of succession in the petro African states of Congo-Brazzaville, Nigeria, Chad and the mercenary attempt to overthrow the government of Equatorial Guinea.