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Building the New State: The Challenge of the “Resource Curse” in South Sudan
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. Outline of the Presentation
1. 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
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. 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. 1. Introduction: South Sudan and the Bottom Billion
80
Life expectancy (years)
70
Infant Mortality (%)
60 Child Malnutrition (%)
50
40
30
20
10
0
Other Developing Countries Bottom Billion Countries South Sudan
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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:
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. 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. 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. 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. 4.3 Economic Analysis of the Resource Curse
• Oil Dependence
South Sudan Indicators of Oil Dependence
120%
Oil Exports (% of total exports)
Oil GDP (% of GDP)
Oil Revenue (% of total revenue)
100%
80%
60%
40%
20%
0%
2008 2009 2010
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. 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. 4.3 Economic Analysis of the Resource Curse
• Symptoms of Dutch Disease: Economic Growth Performance
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 Sudan
70% 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 GDP
10%
2010
0% 20%
10%
0%
2008 2009 2010
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. 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. 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. 4.3 Economic Analysis of the Resource Curse
• Rent-Seeking Symptoms: Fiscal Compact
Domestic Revenue Mobilization Composition of Non-Oil Revenue, 2010
4% 60%
3%
50%
3%
40%
2%
Non-Oil Revenue as % 30%
2% of Total Revenue
1% 20%
1%
10%
0%
2005 2006 2007 2008 2009 2010 2011 0%
PIT Customs and VAT Others
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. 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
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. 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 Sectors
90% 70%
80% 60%
70% 50%
60% 40%
50% 30%
20% 2008
40%
10%
30% South Sudan 2009
0%
20%
Urban 2010
10%
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. 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. 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. 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. 4.4 Political Economy Analysis of the Resource Curse
• Political Stability, Democracy and Ethnicity in South Sudan:
42. 5. Options for Averting the Resource Curse
• South Sudan Oil Revenue Forecast
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. 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. 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
