Building the New State:The Challenge of the “Resource Curse” in South Sudan                  Luka Biong Deng            Ku...
Outline of the Presentation1. Introduction2. Review of the “Resource Curse” Approaches3. Diagnostic Typology of the “Resou...
1. Introduction: Optimism about the New State• Unanimous acceptance by all 192 member states of  UN.• Long struggle of the...
1. Introduction: Pessimism about the New State• Failed state before its birth• New State entering into a world that is str...
1. Introduction: South Sudan and the Bottom Billion80                                     Life expectancy (years)70       ...
1. Introduction: Focus of My Presentation      Is South Sudan vulnerable to the     “resource curse” and what options     ...
2. Review of the “Resource Curse” Approaches  • There is a growing empirical knowledge that    consistently shows the nega...
2. Review of the “Resource Curse” Approaches  2.1. The Dutch Disease Approach  2.2. The Rent-seeking Approach  2.3 The Vol...
2.1 The “Dutch Disease” Approach  • “Dutch Disease” refers to the negative effect caused by    natural resources export bo...
2.1 Questioning Evidence of “Dutch Disease”?          • Increased growth in good years (1960-80) and slow growth          ...
2.2. Rent-Seeking Approach   • The natural resource wealth causes “rentier states”     to do a poorer job of promoting eco...
2.2. Questioning the “Rent-Seeking”?         • Increased savings in good years (1960-80) and low savings in           bad ...
2.3. The Volatility Approach  • Volatility of natural resource export prices (twice as    volatile as those of other commo...
2.4. The Specialization Approach   • A country that is diversified, in terms of having a     significant non-oil tradable ...
2.5. The Political Economy Approach  • The lack of democracy in terms of policies and institutions    as prime cause of th...
2.5. Questioning “governance approach”?  •   Democracies outperform autocracies with absence of natural      resource rent...
3. Diagnostic Typology of the Resource Curse  • Political-Economic Typology: Towards a Policy Mix     Political-Economic T...
4. Is South Sudan Vulnerable to the Resource Curse?     Level of oil abundance     Economic analysis of the Resource Cur...
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         ...
4.1 Oil Production Forecast from Existing Oilfields                             • With existing level of oil production, l...
4.1 Oil Production Forecast from All Oilfields         • With daily production of 320,000 bpd, the remaining oil          ...
4.2 Risks of Oil Sector in South Sudan   • Existing Oil Infrastructure   • Sudan and South Sudan Border and relations   • ...
4.3 Economic Analysis of the Resource Curse       • Oil Dependence                    South Sudan Indicators of Oil Depend...
4.3 Economic Analysis of the Resource Curse   • Macroeconomic Impact: Income Per Capita in USD           Countries      GD...
4.3 Economic Analysis of the Resource Curse   • Macroeconomic Impact: Living Conditions                          Kenya   E...
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      South Sudan ...
4.3 Economic Analysis of the Resource Curse       •   Symptoms of Dutch Disease: Spending Effect (Traditional vs. Non-Trad...
4.3 Economic Analysis of the Resource Curse                                          •      Symptoms of Dutch Disease: Spe...
4.3 Economic Analysis of the Resource Curse                   •      Rent-Seeking Symptoms: Composition of Revenue and Exp...
4.3 Economic Analysis of the Resource Curse        • Rent-Seeking Symptoms: Fiscal Compact      Domestic Revenue Mobilizat...
4.3 Economic Analysis of the Resource Curse       • Rent-Seeking Symptoms: Fiscal Allocation and Discipline          Funct...
4.3 Economic Analysis of the Resource Curse        • Rent-Seeking Symptoms: Size of the Government         Current Fiscal ...
4.3 Economic Analysis of the Resource Curse     • Volatility Symptoms: Oil Prices, Revenues, Expenditures 900.00          ...
4.3 Economic Analysis of the Resource Curse  • Volatility Symptoms: Sources of Volatility                                 ...
4.3 Economic Analysis of the Resource Curse      • Specialization Symptoms: GDP and Exports Composition          Sources o...
4.4 Political Economy Analysis of the Resource Curse      • Quality of Policies and Institutions: CPIA                    ...
4.4 Political Economy Analysis of the Resource Curse  • Corruption Perception Index (CPI):                              CP...
4.4 Political Economy Analysis of the Resource Curse  • Political Rights (PR) and Civil Liberties (CL):                   ...
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 Sud...
5. Options for Averting the Resources Curse                         (a) Governance Measures     •   SPLM as a dominant pol...
6. Conclusions:   Shutting down of oil production is a blessing in disguise    and provides opportunities.   Current aus...
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Building the New State: The Challenge of the “Resource Curse” in South Sudan

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Seminar by Luka Biong Deng, given at the Institute of Development Studies on 1 Oct 2012

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Building the New State: The Challenge of the “Resource Curse” in South Sudan

  1. 1. Building the New State:The Challenge of the “Resource Curse” in South Sudan Luka Biong Deng Kush Inc, Juba, South Sudan Visiting Fellow, IDS, University of Sussex, UK Brighton, 1st October 2012
  2. 2. Outline of the Presentation1. Introduction2. Review of the “Resource Curse” Approaches3. Diagnostic Typology of the “Resource Curse”4. The Challenge of the “Resource Curse” in South Sudan5. Options for averting the “Resource Curse”6. Conclusion
  3. 3. 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.
  4. 4. 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.
  5. 5. 1. Introduction: South Sudan and the Bottom Billion80 Life expectancy (years)70 Infant Mortality (%)60 Child Malnutrition (%)50403020100 Other Developing Countries Bottom Billion Countries South Sudan
  6. 6. 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?
  7. 7. 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.
  8. 8. 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
  9. 9. 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.
  10. 10. 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) GDP Per Capita Annual Growth (%) 6 All Developing 5 Oil Exporters 4 Other Countrie 3 2 % 1 0 -1 1960-1998 1960-1980 1980-1998 -2 -3
  11. 11. 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.
  12. 12. 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) Average Domestic Saving Rate (%) 40 35 30 25 All Developing 20 Oil Exporters% Other Countrie 15 10 5 0 1960-1998 1960-1980 1980-1998
  13. 13. 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.
  14. 14. 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.
  15. 15. 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 .
  16. 16. 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.
  17. 17. 3. Diagnostic Typology of the Resource Curse • Political-Economic Typology: Towards a Policy Mix Political-Economic Typology of Resource Rich Countries Political Categories Categories Economic Categories Autocracies Factional Mature Democracies Democracies Naturally Saudi Arabia State of Alaska Specialized Inefficiently Iran Venezuela Botswana Specialized Nigeria Diversified Singapore Mexico Norway China
  18. 18. 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:
  19. 19. 4.1 Level of Oil Abundance: Existing Oil Fields
  20. 20. 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 2,500 Initial Oil Reserve 2,000 (mmbbl) Remaining Oil 1,500 Reserve (mmbbl) 1,000 500 0 Muglad Basin Melut Basin Total
  21. 21. 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 South Sudan Oil Production Forecast 400 Melut Basin Oil 350 Greater Nile Oil 300 Block 5A Oil Production 000s b/d 250 200 150 100 50 0
  22. 22. 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 8,000 7,000 Producing Oilfields (mmbbl) 6,000 Non-Producing Oilfields (mmbbl) 5,000 4,000 3,000 2,000 1,000 0 Muglad Basin Melut Basin Total
  23. 23. 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
  24. 24. 4.3 Economic Analysis of the Resource Curse • Oil Dependence South Sudan Indicators of Oil Dependence120% Oil Exports (% of total exports) Oil GDP (% of GDP) Oil Revenue (% of total revenue)100% 80% 60% 40% 20% 0% 2008 2009 2010
  25. 25. 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
  26. 26. 4.3 Economic Analysis of the Resource Curse • Macroeconomic Impact: Living Conditions Kenya Ethiopia Uganda Sudan 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
  27. 27. 4.3 Economic Analysis of the Resource Curse • Symptoms of Dutch Disease: Economic Growth Performance
  28. 28. 4.3 Economic Analysis of the Resource Curse • Symptoms of Dutch Disease: Resource Movement Effect South Sudan GDP Composition by Economic Sectors Foreign Trade and the Economy of South Sudan70% 80%60% 70%50% 60%40% 50%30% Imports as % of GDP 2008 40%20% Exports as % of GDP 2009 30% Oil Exports as % of GDP10% 20100% 20% 10% 0% 2008 2009 2010
  29. 29. 4.3 Economic Analysis of the Resource Curse • Symptoms of Dutch Disease: Spending Effect (Traditional vs. Non-Tradable Sector) Traditional vs. Non-Tradable Sector Public Spending 30% Non-Tradable Sector Traditional Sector 25% Traditional as % of Non-Tradable 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011
  30. 30. 4.3 Economic Analysis of the Resource Curse • Symptoms of Dutch Disease: Spending Effect (Exchange Rate Policy) Inflation, Real Exchange Rate and Premium 3.00 90% 80% 2.50 70% Real Exchange Rate (SSP per US$)Real Exchange Rate (SSP Per US$) 2.00 60% Premium between Official and Market Rate ( %) 50% 1.50 Annual Inflation (%) 40% 1.00 30% 20% 0.50 10% 0.00 0% Jan.11 Feb.11 Mar.11 Apr.11 May.11 Jun.11 Jul.11 Aug.11 Sep.11 Oct.11 Nov.11
  31. 31. 4.3 Economic Analysis of the Resource Curse • Rent-Seeking Symptoms: Composition of Revenue and Expenditure Revenues, Expenditure and Reserve Allocation and Composition of Oil 10,000 Revenues and Expenditure 200% 8,000 6,000 150% Capital as % Total Expenditure 4,000 Total Revenue Expeniture as % Revenue 100%Millions SDP Oil Revenue Current Expenditure as % 2,000 Non-Oil Revenue Total Expenditure Reserve/Deficit 50% Non-oil Revenue as % of Total Expenditure 0 Total Expenditure Reserve/Deficit as % of 2005 2006 2007 2008 2009 2010 2011 Total revenue -2,000 0% 2005 2006 2007 2008 2009 2010 2011 -4,000 -50% -6,000
  32. 32. 4.3 Economic Analysis of the Resource Curse • Rent-Seeking Symptoms: Fiscal Compact Domestic Revenue Mobilization Composition of Non-Oil Revenue, 20104% 60%3% 50%3% 40%2% Non-Oil Revenue as % 30%2% of Total Revenue1% 20%1% 10%0% 2005 2006 2007 2008 2009 2010 2011 0% PIT Customs and VAT Others
  33. 33. 4.3 Economic Analysis of the Resource Curse • Rent-Seeking Symptoms: Fiscal Allocation and Discipline Functional Classification of Public Under-spending Over-spending, 2010 Transfers to States Expenditure, 2005-2011 (average %) -39.6% 3.4% Social and Hum. Services 20% 18% 3% Security 16% 14% Rule of Law 12% -4.7% 10% 10% Public Administration 8% 6% -21.8% Agriculture and Rural Dev 4% -3.4% 2% Infrastructure 0% -35.3% Health -20.7% Education - 51.6 Economic Services Accountabilty -100 0 100 200
  34. 34. 4.3 Economic Analysis of the Resource Curse • Rent-Seeking Symptoms: Size of the Government Current Fiscal Spending Per Capita (US$), 2010 Civil Servants Wage Bills as % of Total Public 350 Expenditure, 2010 288 300 50% 40% 40% 250 216 40% 200 30% 150 16% 18% 104 20% 12% 100 60 10% 6% 37 50 0% 0 South Sudan Kenya Ethiopia Uganda Low-Income South Sudan Sudan Kenya Ethiopia Uganda Sudan (Average) Members of Parliament Per A Million Population 45.0 42.4 40.0 35.0 30.0 25.0 20.0 15.0 10.5 10.9 10.0 5.4 7.2 5.0 0.0 Kenya Uganda Ethiopia Sudan South Sudan
  35. 35. 4.3 Economic Analysis of the Resource Curse • Volatility Symptoms: Oil Prices, Revenues, Expenditures 900.00 140 2500 800.00 120 2000 700.00 100 600.00 1500 500.00 80 Oil Revenue MUSD Total Oil Revenue 400.00 1000 60 Nile Oil Price in USD Total Expenditure 300.00 Dar Oil Price in USD 40 500 200.00 20 100.00 0 Jul.05 Jul.06 Jul.07 Jul.08 Jul.09 Jul.10 Jul.11 Jan.08 Jan.09 Jan.10 Jan.11 Jan. 05 Jan. 06 Jan. 07 0.00 0 May-07 May-09 May-11 Sep-06 Sep-08 Sep-10 Jan-06 Jan-08 Jan-10
  36. 36. 4.3 Economic Analysis of the Resource Curse • Volatility Symptoms: Sources of Volatility Table: Sources of Volatility, 2005-2011 Source Mean Standard Coefficient of Yearly Standard Deviation Variation 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
  37. 37. 4.3 Economic Analysis of the Resource Curse • Specialization Symptoms: GDP and Exports Composition Sources of Livelihoods in South Sudan South Sudan GDP Composition by Economic Sectors90% 70%80% 60%70% 50%60% 40%50% 30% 20% 200840% 10%30% South Sudan 2009 0%20% Urban 201010% 0% Rural 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 4.6 5.1 5.6 Sector
  38. 38. 4.4 Political Economy Analysis of the Resource Curse • Quality of Policies and Institutions: CPIA Country Policy and Institutional Assessment (CPIA) Scores (1 = Low and 6 = High) 5 4.5 4 3.5 3 CPIA Scores 2.5 Sudan Uganda 2 Kenya 1.5 Ethiopia 1 0.5 0 2005 2006 2007 2008 2009 Years
  39. 39. 4.4 Political Economy Analysis of the Resource Curse • Corruption Perception Index (CPI): CPI Scores (1= Bad and 10= Good) 3 2.5 2 CPI Scores Sudan 1.5 Uganda 1 Kenya Ethiopia 0.5 0 2005 2006 2007 2008 2009 2010 Years
  40. 40. 4.4 Political Economy Analysis of the Resource Curse • Political Rights (PR) and Civil Liberties (CL): Political Rights (PR) and Civil Liberties (CL) (1= the most free and 7= the least free) 8 7 6 Average PR and CL Scores 5 4 Sudan Uganda 3 Kenya Ethiopia 2 1 0 2005 2006 2007 2008 2009 2010 Years
  41. 41. 4.4 Political Economy Analysis of the Resource Curse • Political Stability, Democracy and Ethnicity in South Sudan:
  42. 42. 5. Options for Averting the Resource Curse • South Sudan Oil Revenue Forecast
  43. 43. 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
  44. 44. 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
  45. 45. 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

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