11 July 2018

Ethiopia: How Ethiopia Can Avoid the Curse of Oil

Photo: Daily Monitor
Oil rig (file photo).

Ethiopia has recently started crude oil production in the Ethio-Somali state, with the prospect of commercial quantities. Inevitably, when a country starts to produce oil in commercial quantities, economic phenomenon like the resource curse ('the paradox of plenty'), or more specifically, the oil curse, or the 'Dutch disease', becomes a topic of discussion.

So, is oil a blessing or a curse, and how can Ethiopia escape the 'oil curse' pitfall some countries fell into?

Dr. Berhanu Denu, Economist and Assitant Professor at Addis Ababa University, says what makes a resource a blessing or a curse is how the country manages to use it.

While mentioning the fact that the discovery and production of oil has triggered conflict in some countries, and also citing how resource-poor countries had experience better economic growth and stability than their resource-abundant counterparts, he argues that the paradox of plenty is not the effect of natural resources, as for every Nigeria, Venezuela or Democratic Republic of Congo (DRC) there is a Norway or Botswana that are able to create a stable and steady economy.

There are things Ethiopia can do to avoid the 'oil curse' pitfall according to him. First is creating a peaceful environment by reaching a consensus with the local community of where the oil is discovered, and with the general public on how to use the resource.

Moreover, Dr. Berhanu points out that it is not possible to grow the economy by focusing on a single economic sub-sector, which led some countries into a trap after discovering oil. Focusing in one sector of the economy while forgetting to invest, bring in new technologies and introduce modern processes into other sectors like the agriculture, industry, service, education and health sectors causes problems to the country's economy, he notes.

"The way the economy can grow from the revenue that is generated from oil is if it is used on the other sectors of the economy. Some countries thought that economic development will come as a result of oil revenue while forgetting the other sectors, which brought lopsided development."

Thus, in order for the huge revenue generated from the oil not to undermine

other sectors, Dr. Berhanu recommends thoroughly incorporating the oil sector into the country's current national plan, GTP II, and in future plans as well. "And legislative body should oversee if it is implemented accordingly."

This undermining of other sectors describes a more specific economic concept called 'Dutch Disease', which denotes a situation where growth in national income from extracting oil damages other sectors of the country's economy as increased revenues from natural resource exports tend to increase the real value of the exporting country's currency.

In this regard, Jimma University Economics Associate Professor Dr. Wondaferahu Mulugeta believes that there is a possibility that the feared 'Dutch disease' phenomenon can happen as the country's money supply will increase with revenue from oil, which can spike inflation and bring real exchange rate appreciation. However, he believes that there is a low chance of it occurring in Ethiopia's case, and also steps that the country can take to avoid it.

One step the country should take, he argues, is to spend the revenue generated from oil production on important infrastructures and human capital development that help the economy in the long run rather than in recurrent expenditure like wages. This helps gold rush usage of the revenue.

Given the importance the manufacturing sector on the country's national plan, GTP II, the Associate Professor stresses on the need for spending the revenue on important input sector that feed the manufacturing sector, like leather and tannery, and on important import goods like medicine.

Further, Dr. Wondaferahu recommends policymakers to look into ways to tame the inflation that comes along with generating huge revenue from oil as a way to avoid the 'Dutch disease' phenomenon. He suggests professional training policy, flexible labor policy and merit-based incentive that enhance productivity and output to be undertaken side by side in order to address inflation.

Also, regarding on the need for making available the right human resource that would be able to manage, oversee, license and tax the new oil sector, the Associate Professor expressed his belief that the government has already put something given that the country may have some gap in that regard. And if we are not ready in this matter, I believe it's not late to do something about it, he adds.

For Dr. Constantinos Bruhtesfa, a Public Policy Expert, it all depends on having democratic responsibility and accountability. Countries like Norway managed their oil resource so well to the benefits of their people and their development, unlike countries like Nigeria, Angola and Venezuela where the resource has become a curse, he notes.

The Expert indicates that when a country finds oil, and once the revenue generated by the oil comes into the coffers of the government, the money should be kept in the books of National Banak of Ethiopia and commercial banks, and there must be serious plans for the money.

Furthermore, he stresses the people living in the specific area where the oil is extracted should benefit in terms of human development, schools, health clinics, and general livelihood. "We should have committed Ethiopians who can manage the resource properly and utilize it to the benefits of the Ethiopian people, and specifically the region, which has a lot of agricultural potential, but is always under food stress."

This has two advantages, according to Dr. Costantinos. It will intensify the direct support the population get from this, which means they will have better livelihoods, and further build upon the development works that is being undertaken in the region.

Secondly, he says, it will also help marginalize groups supported by some foreign governments and terrorist organizations that want to destroy the oil production process. "Ethiopia has such experience where Chinese citizens and Ethiopians were killed by groups that feel that the Ogaden oil should not be pumped out unless their political agenda is agreed upon."

The other key element, Dr. Costantinos say is corruption. He proposes creating a very clear rules and regulations to avert oil companies bribing government officials, government abusing the money and misusing the resource to the point of damaging the environment.

According to him, these steps would help Ethiopia from repeating the mistakes some countries made when managing their resource.

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