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March 25, 2013

The Perils of Natural Gas Extraction in Mozambique

, March 25, 2013

By Michael D. Beevers

The visit by Ruth and Peter Bechtel was interesting on a variety of levels. However, what strikes me as the most significant for both for the country, and the world as a whole, has to do with the vast deposits of commercially-viable natural gas (and coal) in Mozambique. It would not be an exaggeration to describe what is happening in the country as a “resource boom” driven by the energy needs of the world.

At first blush the resource “boom” looks promising in a country that throughout the 1980s was shaken by a brutal civil war. Even today, Mozambique measures almost at the bottom of the UN’s Human Development Index. As such the extraction of natural gas and coal provides a tremendous opportunity to foster economic development and in doing so alleviate poverty, provide jobs, deliver basic services, improve infrastructure. However, based on my experience in West Africa, and my reading of the literature on the so-called “resource curse”, substantial challenges will confront Mozambique and its people as it works to turn its natural resource endowment into genuine development that is equitable and sustainable.  Here are some traps that Mozambique needs to avoid in the years ahead.

As the Mozambican economy becomes increasingly dominated by the extractive resource sector, it is likely to have effects on the country’s economic structure.  What I mean by this is that developing countries that are heavily dependent on exports of oil or other mineral resources tend to (paradoxically) suffer from economic decline and political dysfunction.  There is a fairly robust literature that suggests resource-dependent economies growth more slowly than resource poor ones partially because developing countries with global commodities tend to suffer from poor terms of trade, which undermines the local currency (Sachs and Warner 2001; Easterly et al. 1993).  Likewise, once countries become dependent on resource revenues they become more sensitive to the inevitable “boom and bust” cycles that destabilize economies in ways that can create political problems (Ross 1999).  Finally evidence suggests that in resource dependent economies – to which Mozambique aspires — economic growth often slows to a halt because profits are gradually captured by foreign companies and political elites with little of the revenue actually accruing to the government for investment in basic services (health and education), state institutions, infrastructure and/or human capital (Ross 2003).  For this reason, it is common for developing countries with natural resource-based economies to maintain high rates of poverty and infant mortality.

While resource dependence can corrupt economic development, it can also have an impact on governments and governance, particularly in developing countries like Mozambique.  Not surprisingly perhaps, governments that get substantial revenue from natural resources are likely to be more corrupt because the sheer volume of the profits encourages “rent-seeking behavior.” Experience shows that in “boom times”, political leaders, military commanders and foreign investors in countries similar to Mozambique tend to seize revenues instead of investing in economic development (Dunning 2008; Ross 2003; Karl 1997).  This is in part because political leaders and members of the military often have the power to grant contracts and concessions to investors, wealthy landowners and other elites in exchange for kickbacks.  And finally, countries like Mozambique generally do not have the institutional capacity to manage substantial revenues in a transparent manner or put into place robust processes of government accountability.

Finally, it is worth noting for the record, that countries that receive substantial revenue from natural resources tend to tax the population less, and therefore, their leaders tend to be less accountable to the population (Fearon and Laitin 2003).  Put another way, governments that get a large share of income from natural resources become less democratic over time, and more willing to quell dissent by dispensing patronage and/or building up security forces.

This does not suggest that Mozambique is doomed.  But without a significant amount of due diligence by the international actors, Mozambican government officials, and a robust civil society there could be a bumpy road ahead. In order to turn the country’s resources into a development opportunity, several issues that need to be on the front burner

First, agreements and contracts with mining companies need to be transparent and openly disclosed to the Mozambican people and the international community. Although corrupt government officials do find ways to launder money and get rich, openness helps hold public officials accountable and ensures that laws are being upheld.  Second, civil society groups and non-government organizations need to be empowered and consulted about agreements and concessions.  This will reduce disputes and to some extent make sure that the government is there to serve the people and not the natural gas or coal companies. Third, although transparency of resource revenues is critical so too is ensuring that the revenues directly benefit the population in ways that set the course for long-term human development. What this means is that communities adjacent to mining operations must have a voice in any decisions that affect them and revenue accrued to the Mozambican treasury must be invested in the country’s future. And lastly, considerable thought needs to be given to the relations that make countries like Mozambique vulnerable to the resource curse in the first place.  For example, rather than a model that prioritizes natural gas exports in exchange for royalties and tax revenue should the government mandate that companies invest in developing local capacity for electricity generation. In other words, could Mozambique’s natural gas be used in part to power its own development? It is something worth discussing.

One final observation here is apt.  The economic and human development needs notwithstanding, the irony of all this is that Mozambique’s  future (if framed as one based on coal and natural gas extraction) revolves around the precise “dirty” energy resources that are disrupting our climate in a serious way.  Even if Mozambique can find a way to effectively harness its natural resources, it will spend increasingly dollar amounts on adapting to climate change and building resilience to the end product of the resources that lie under the country.

References

Dunning, Thad. 2008. Crude Democracy: Natural Resource Wealth and Political Regimes. Cambridge: Cambridge University Press.

Easterly, William et al. 1993. “Good Policy or Good Luck? Country Growth Performance and Temporary Shocks.”  Journal of Monetary Economics 32: 459-483.

Fearon, James D. and David D. Laitin. 2003. “Ethnicity, Insurgency and Civil War.” American Political Science Review 97(1): 75-90.

Karl, Terry Lynn. 1997. The Paradox of Plenty: Oil Booms and Petrol-States. Berkeley: University of California Press.

Ross, Michael L. 1999. “The Political Economy of the Resources Curse.” World Politics 51:297-322.

Ross, Michael L.2003. “The Natural Resource Curse: How Wealth Can Make You Poor.” In Natural Resources and Violent Conflict, edited by Ian Bannon and Paul Collier, 17-42. Washington DC: The World Bank.

Sachs, Jeffrey and Andrew Warner. 2001. “Natural Resources and Economic Development: The Curse of Natural Resources.” Economic Review 45: 827-838.

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