Can Uganda Escape the Natural Resource Curse?

05.11.15

Can Uganda Escape the Natural Resource Curse?

05.11.15
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By Havard Bergo for Global Risk Insights

Uganda’s oil age was initiated in 2006 when President Yoweri Museveni announced the discovery of significant oil reserves in the Albertine region, on the border with the Democratic Republic of the Congo (DRC).

In a country where 64% of people live on less than $2 a day, this finding caused enormous optimism, but also concern over how the government would manage future oil revenues, as well as the foreign investments necessary to begin drilling. Since then, estimates of the size of the deposits have been revised from 300,000 barrels of oil to 6.5 billion barrels (of which 1.4 billion are recoverable). This also includes sizable natural gas reserves, with much of the country yet to be explored.

With production by China’s CNOOC due to start in 2017/2018, the question is whether Uganda will join the ranks of the many African countries that saw natural resources become a curse – or if they will beat expectations.

Impressive economic and human development

Uganda has made enormous progress on many fronts since President Museveni came to power in 1986. He ended the decades of bloody turmoil that marked the presidencies of Idi Amin and Milton Obote, and later oversaw a final conclusion of the civil war when the Lord’s Resistance Army fled to the DRC a decade ago.

Market liberalization and reforms also significantly improved the under-performing economy, with real GDP growth averaging 7% annually through the 1990s and 2000s. Uganda has seen enormous population growth – from 10 million in 1970 to 37 million in 2014 – but strong economic performance still managed to reduce poverty levels from 56% in 1992 to 20% in 2012.

It is also one of the few success stories in the fight to halt HIV/AIDS in Sub-Saharan Africa. This impressive progress have been more unstable in recent years, with volatile growth rates and increasing HIV prevalence levels, yet economic and development outlook are largely optimistic for the years to come.

Oil often bad for development

The “resource-curse” theory states that significant natural resources rarely lead to substantial economic or social progress for the overall population. Uneven distribution of revenues is often the least of the problems. According to Larry Diamond of Stanford University: “[The] surge of money from oil often has insidious effects on the greater economy: the influx of oil money fuels inflation, distorts exchange rates, undermines the competitiveness of traditional export sectors such as agriculture, and preempts the growth of manufacturing.”

Oil often has a negative impact on the rule of law and democracy, as well. It promotes or exaggerates the already existing corruption cultures and encourages a political system based on cronyism and patronage, rather than accountability, good governance, and public trust.

Transparency a key concern in Uganda

Uganda was named the most corrupt country in the region in Transparency International’s East African Bribery Index, and ranks as number 142 worldwide. Nearly half of citizens report that bribes are commonplace in everyday interactions with government agencies, and corruption permeates every level of governance.

Uganda is amongst the world’s largest aid recipients, which accounts for over 20% of government budgets. In 2012, the Office of the General Auditor in Uganda revealed that roughly $13 million in donor money had been embezzled by government officials, leading several countries to withhold money.

The case exemplifies the wider issue of state accountability. Under President Museveni’s 29-year long rule, Uganda’s political system has improved on many levels, including the introduction of multi-party elections in 2005, and enjoys a relatively free press.

Yet Museveni’s democratic credentials have suffered heavily in recent years: for instance, by introducing anti-gay legislation that received widespread condemnation in western countries, or over prosecuting members of the opposition.

Musevani’s regime has been increasingly characterized as a “vast network of corruption and patronage” with an executive branch that goes “well beyond constitutional limits,” leaving well-funded concerns over how they will manage the substantial petroleum revenues that are expected to start arriving in a few years.

Case of Botswana

Professor Pamela K. Mbabazi of Mbarara University argues that Uganda should try to emulate Botswana, the only country in Sub-Saharan Africa that have managed to turn its mineral wealth into sustainable development.The government aggressively managed revenues centrally, created a strong legal framework, and built a series of empowered state institutions that led to accountability and transparency, turning the resource curse into a blessing.

Much of this success is credited to the clever decisions of Botswana’s first president, Seretse Khama. Yet, his key legacy was that he left behind accountable state institutions that limit the power of the elites, making the system less dependent on strong personal rule.

Ugandan-Norwegian oil cooperation

Uganda has for many years undertaken a bilateral project with Norway: the Oil for Development program. This program seeks to develop and strengthen the regulatory framework for the petroleum sector.

The cooperation has produced notable achievements so far. Uganda recently passed legislation in parliament to regulate the new industry, creating a Petroleum Authority, a National Oil Company and a Minister of Energy and Mineral Development to oversee the new industry.

Moreover, the government has outlined an “Oil Revenue Management Policy” and has developed and implemented environmental monitoring plans for the exploration in the Albertine region. Yet, Jack Mosbacher of Stanford argues that the current framework “is full of glaring holes that invite long-term corruption and abuse” and that, in particular, the Minister of Energy’s discretionary ability to issue or revoke exploration, production, and export contracts should be amended.

Uganda at a crossroads

What Uganda does with their oil will have a huge impact on it’s future. The current level of corruption in the country makes it unlikely that the new petroleum sector will remain clean, but it may still be possible to avoid the fate of other African countries.

Professor Mbabazi argues that, after all, there is reason to “adopt the strategy of cautious optimism“ for the road ahead. Uganda has taken significant steps to draft legislation and create a regulatory framework prior to exploitation.

The government, the public, and international partners are also acutely aware of the potential failures, and of the need to learn from the many negative African examples.

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