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2015-11-30 | News

Debunking Africa’s ‘resource curse’

Not all economists buy into the notion of the ‘resource curse’ - namely, that resource-rich countries end up with slower growth and stalled development, in spite of having bankable natural assets. Newly appointed associate professor Mare Sarr argues that principles of transparency, accountability and institutions are more important factors leading to whether countries use or abuse their natural wealth.

Something strange is afoot in Nigeria and some other oil-rich African countries. For the past 15 or so years, foreign direct investment (FDI) as been streaming into the country, but at the same time, money and assets are pouring out on a grand scale.

‘Usually, these two are antithetical,’ says the Senegalese economist from his corner office beneath the magnificent side view of Table Mountain, at the University of Cape Town’s School of Economics.

In theory, EPRU research fellow Mare Sarr says, you shouldn’t have both.

‘Capital flight usually means that investors don’t trust a country, and start pulling their money out. But a growth in FDI means outside investors have confidence in a place and are happy to move their money into a country.’

Countries like Nigeria and Angola have seen a huge jump in illicit capital flight as well as FDI in recent years.

One of Sarr’s new projects is to ask whether this could be linked with the boom in oil prices in recent years.

‘In Nigeria, with the commodity boom, capital flight and FDI took off. So, as oil prices go sky high, foreign investors come into the country, but at the same time money leaves the country through tax evasion, and so forth,’ he says.

‘Capital flight’ - the term used by economists to indicate when money or assets leave a country en masse - could happen in three distinct ways in this context.

Firstly, through bribes: as FDI comes in, multinational firms might pay a bribe to state officials to get oil rights or secure a contract. These bribes will be hidden away offshore to avoid detection.

Another way could be through embezzlement, where oil companies pay the state its due, and corrupt officials then steal it. Finally, firms could siphon money out of a country through ‘transfer pricing’ where firms use trade and other legal loopholes to get around paying taxes within a country.

New estimates by Sarr and Burundian economist Prof Léonce Ndikumana, who is based at the University of Massachusetts, suggest that Nigeria has lost roughly US$520 billion to capital flight over the past 40 years. This adds up to the equivalent of that country’s current annual gross domestic product (according to World Bank figures for 2013).

‘This is a huge amount of money,’ Sarr says, ‘and it is money that should stay at home and contribute to fund public good and uplifting of the country, but it ends in the pockets of a few corrupt politicians, and the pockets of private firms.’

Sarr hopes to have a paper ready for publication by the middle of next year, which will support this argument.

‘Africa is a net creditor, not a net debtor to the world, as Ndikumana has showed in the past. If you look at all the FDI, all the aid, the capital flight, Africa has more money going out, than coming in. This is scary when you think of the continent’s needs to finance infrastructure development, electricity, health and education.’

The economist, who grew up in France and studied in France and the UK, joined the University of Cape Town’s (UCT’s) School of Economics seven years ago as a lecturer and has recently had his contribution to research and teaching recognised in the awarding of this associate professorship.

 

The ‘paradox of plenty debunked

The idea of the resource curse is that a country that’s wealthy in natural resources, like oil, gas or minerals often ends up experiencing civil strife and slower growth than countries that have limited resources. For economists, this ‘paradox of plenty’ has played out in many states around the world.

But Sarr says thinking in this area is becoming more nuanced.

‘There are many examples of countries whose development was based on their significant resources at the early stage of their development, and their outcomes have been good. The US, for instance, and the UK, Australia and South Africa. More recently, oil transformed Norway from one of the poorest countries in Europe 40 years ago, into one of the richest ones. Their resources were not a curse but rather a blessing.’

For him, the paradox of plenty doesn’t exist in the African context. It’s the poor management of resources in an institutionally weak environment that drives the poor development outcomes.

‘If a country doesn’t have good institutions to regulate the use or abuse of resources, there won’t be accountability. But if a country has checks and balances, and a minimum level of accountability, it will be less vulnerable to the predatory behaviour by those who have power.’

This perspective will continue to inform his research, as Sarr takes up his new position as associate professor in January 2016. He will also continue teaching undergraduate and postgraduate courses in the School of Economics.

Sarr was born in Senegal, and grew up in France, where he competed his undergraduate studies before working as a financial analyst with Kraft Foods. However he later decided to leave the private sector and pursue an academic career in economics, starting with his Masters in Economics at the University of Toulouse, before going on to do his PhD at University College London (UCL).

But he ‘wanted to come home’, which is why he started looking for a lecturing post at an African university, a decision which finally brought him to UCT.