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

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

Luka Biong DengKush Inc, Juba, South Sudan

Visiting Fellow, IDS, University of Sussex, UKBrighton, 1st October 2012

Outline of the Presentation1. Introduction

2. Review of the “Resource Curse” Approaches

3. Diagnostic Typology of the “Resource Curse”

4. The Challenge of the “Resource Curse” in South Sudan

5. Options for averting the “Resource Curse”

6. Conclusion

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.

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.

1. Introduction: South Sudan and the Bottom Billion

Other Developing Countries Bottom Billion Countries South Sudan0

10

20

30

40

50

60

70

80

Life expectancy (years)Infant Mortality (%)Child Malnutrition (%)

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?

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.

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

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.

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)

1960-1998 1960-1980 1980-1998

-3

-2

-1

0

1

2

3

4

5

6GDP Per Capita Annual Growth (%)

All DevelopingOil ExportersOther Countrie

%

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.

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)

1960-1998 1960-1980 1980-19980

5

10

15

20

25

30

35

40

Average Domestic Saving Rate (%)

All DevelopingOil ExportersOther Countrie

%

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.

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.

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 .

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.

3. Diagnostic Typology of the Resource Curse • Political-Economic Typology: Towards a Policy Mix

Political-Economic Typology of Resource Rich Countries

CategoriesPolitical Categories

Economic Categories

Autocracies Factional Democracies

Mature Democracies

Naturally Specialized

Saudi Arabia State of Alaska

Inefficiently Specialized

Iran VenezuelaNigeria

Botswana

Diversified SingaporeChina

Mexico Norway

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:

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 reserves are likely to be exhausted in about 12 years

Muglad Basin Melut Basin Total0

500

1,000

1,500

2,000

2,500

Initial Oil Reserve (mmbbl)

Remaining Oil Reserve (mmbbl)

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

20012002

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

20192020

20212022

20232024

20252026

20272028

20292030

0

50

100

150

200

250

300

350

400 South Sudan Oil Production Forecast

Melut Basin OilGreater Nile Oil Block 5A

Oil

Prod

uctio

n 00

0s b

/d

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

Muglad Basin Melut Basin Total0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Producing Oilfields (mmbbl)Non-Producing Oilfields (mmbbl)

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

4.3 Economic Analysis of the Resource Curse

• Oil Dependence

2008 2009 20100%

20%

40%

60%

80%

100%

120%South Sudan Indicators of Oil Dependence

Oil Exports (% of total exports)Oil GDP (% of GDP)Oil Revenue (% of total revenue)


• 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


• Macroeconomic Impact: Living ConditionsKenya Ethiopia Ugand

aSudan 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


• Symptoms of Dutch Disease: Economic Growth Performance


• Symptoms of Dutch Disease: Resource Movement Effect

Oil GDP

Non-oil G

DP

Government

Non-oil n

on-government

0%

10%

20%

30%

40%

50%

60%

70%

South Sudan GDP Composition by Economic Sectors

200820092010

2008 2009 20100%

10%

20%

30%

40%

50%

60%

70%

80%

Foreign Trade and the Economy of South Sudan

Imports as % of GDPExports as % of GDPOil Exports as % of GDP


• Symptoms of Dutch Disease: Spending Effect (Traditional vs. Non-Tradable Sector)

2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

30%Traditional vs. Non-Tradable Sector Public Spending

Non-Tradable SectorTraditional SectorTraditional as % of Non-Tradable


• Symptoms of Dutch Disease: Spending Effect (Exchange Rate Policy)

Jan.11 Feb.11 Mar.11 Apr.11 May.11 Jun.11 Jul.11 Aug.11 Sep.11 Oct.11 Nov.110.00

0.50

1.00

1.50

2.00

2.50

3.00

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Inflation, Real Exchange Rate and Premium

Real Exchange Rate (SSP per US$)

Premium between Official and Market Rate ( %)

Annual Inflation (%)

Real

Exc

hang

e Ra

te (S

SP P

er U

S$)


• Rent-Seeking Symptoms: Composition of Revenue and Expenditure

2005 2006 2007 2008 2009 2010 2011

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

Revenues, Expenditure and Reserve

Total RevenueOil RevenueNon-Oil RevenueReserve/DeficitTotal Expenditure

Mill

ions

SDP

2005 2006 2007 2008 2009 2010 2011

-50%

0%

50%

100%

150%

200%

Allocation and Composition of Oil Revenues and Expenditure

Capital as % Total ExpenditureExpeniture as % RevenueCurrent Expenditure as % Total ExpenditureNon-oil Revenue as % of Total ExpenditureReserve/Deficit as % of Total revenue


• Rent-Seeking Symptoms: Fiscal Compact

2005 2006 2007 2008 2009 2010 20110%

1%

2%

3%

4%

Domestic Revenue Mobilization

Non-Oil Revenue as % of Total Revenue

PIT Customs and VAT Others0%

10%

20%

30%

40%

50%

60%

Composition of Non-Oil Revenue, 2010


• Rent-Seeking Symptoms: Fiscal Allocation and Discipline

Accountabilty

Economic Services

Education

Health

Infrastructure

Agriculture and Rural Dev

Public Administration

Rule of Law

Security

Social and Hum. Services

Transfers to States

-100 -50 0 50 100 150 200

Under-spending Over-spending, 2010

-39.6% 3.4%

3%

10%

51.6%

-21.6%

-20.7%

-35.3%

-3.4%

-21.8%

-4.7%

Accounta

bility

Econ. S

ervice

s

Education

Health

Infrastr

ucture

Agric and Rura

l Dev

Public A

dmin

Rule of Law

Securit

y

Social a

nd Hum. S

ervice

s

Transfe

rs to

State

s0%

4%

8%

12%

16%

20%

Functional Classification of Public Expen-diture, 2005-2011 (average %)


• Rent-Seeking Symptoms: Size of the Government

South Sudan Sudan Kenya Ethiopia Uganda0

50

100

150

200

250

300

350

288

216

104

3760

Current Fiscal Spending Per Capita (US$), 2010

South Sudan Sudan Kenya Ethiopia Uganda Low-Income (Average)

0%5%

10%15%20%25%30%35%40%45% 40% 40%

12%16%

6%

18%

Civil Servants Wage Bills as % of Total Public Expen-diture, 2010

Kenya Uganda Ethiopia Sudan South Sudan

0.05.0

10.015.020.025.030.035.040.045.0

5.410.5

7.210.9

42.4

Members of Parliament Per A Million Population


• Volatility Symptoms: Oil Prices, Revenues, Expenditures

Jan. 0

5Jul.0

5

Jan. 0

6Jul.0

6

Jan. 0

7Jul.0

7Jan

.08Jul.0

8Jan

.09Jul.0

9Jan

.10Jul.1

0Jan

.11Jul.1

10

500

1000

1500

2000

2500

Total Oil RevenueTotal Expenditure

Jan-06

Aug-06

Mar-07

Oct-07

May-08

Dec-08

Jul-09

Feb-10

Sep-10

Apr-11

Nov-11

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

0

20

40

60

80

100

120

140

Oil Revenue MUSDNile Oil Price in USDDar Oil Price in USD


• Volatility Symptoms: Sources of Volatility

Table: Sources of Volatility, 2005-2011

Source Mean Standard Deviation

Coefficient of Variation

Yearly Standard 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


• Specialization Symptoms: GDP and Exports Composition

Crop Fa

rming

Animal

Husban

dry

Wag

es an

d Salar

ies

Own Business

Propert

y Inco

me

Remittan

ces

Pensio

n Aid

Others0%

10%20%30%40%50%60%70%80%90%

Sources of Livelihoods in South Sudan

South SudanUrbanRural

Oil GDP

Non-oil GDP

Government

Non-oil non-gove

rnment0%

10%20%30%40%50%60%70%

South Sudan GDP Composition by Economic Sectors

200820092010

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 Sector

4.6 5.1 5.6

4.4 Political Economy Analysis of the Resource Curse • Quality of Policies and Institutions: CPIA

2005 2006 2007 2008 20090

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Country Policy and Institutional Assessment (CPIA) Scores (1 = Low and 6 = High)

SudanUgandaKenyaEthiopia

Years

CPIA

Sco

res

4.4 Political Economy Analysis of the Resource Curse • Corruption Perception Index (CPI):

2005 2006 2007 2008 2009 20100

0.5

1

1.5

2

2.5

3

CPI Scores (1= Bad and 10= Good)


Years

CPI S

core

s

4.4 Political Economy Analysis of the Resource Curse • Political Rights (PR) and Civil Liberties (CL):

2005 2006 2007 2008 2009 20100

1

2

3

4

5

6

7

8

Political Rights (PR) and Civil Liberties (CL) (1= the most free and 7= the least free)


Years

Aver

age

PR a

nd C

L Sc

ores

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 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 women adults with schooling children)

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

• Political transformation and ethnic diversity

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

News & Politics

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