Recently, Tullow Oil made two new discoveries in Northern Kenya, boosting prospects of turning this country into a potential major oil exporter by 2016. These discoveries among several other countries for instance, western Uganda, Tanzania, Ghana and Mozambique raise questions if these windfalls will be a blessing of hope or a political/ economic curse as has been always in several world nations.

The Oil rich countries on average have performed dismally compared to those without the resource registering high inequality rate contrary to people’s expectations. Conversely, if the country’s major source of revenue is natural resources, it can use them to finance critical sectors of the economy like health and education because high taxation rates will not make these infinite resources to disappear.  The question however, 'Can the benefits being experienced in the Middle East oil rich nations be replicated in Africa?'

There is huge literature in both economics and political science that explain the “resource curse,” theory with civil society trying to counter it. Three of the curse’s economic ingredients are well known that these resource-rich countries tend to have strong currencies, which impede other exports; because resource extraction often entails little job creation.

Volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in the downturns thus reflecting the time honored principle that bankers lend only to those who do not need their money.

Furthermore, resource-rich countries rarely pursue sustainable growth strategies but instead fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.

There exist known antidotes to all these problems: a low exchange rate, a stabilization fund, careful investment of resource revenues, a ban on borrowing and transparency. But there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing.”

These countries must ensure citizens get the full value of resources since there is an unavoidable conflict of interest between natural resource companies who majority are usually foreign and host countries. The former want to minimise what they pay while the latter need to maximize it. Perfect designed, competitive, transparent auctions can generate much more revenue than “sweetheart” deals. The tenders should also be transparent but ensure that if prices soar as they have repeatedly the windfall gain does not go only to the company.

Unfortunately, many countries signed bad contracts that give a disproportionate share of the resources’ value to private foreign firms. But there is still room for renegotiation and if that proves futile then windfall-profit tax can be imposed.

Countries have done that everywhere. Of course Oil firms will repulse, emphasize the sanctity of contracts with threats to leave. But the outcome is typically otherwise. A fair renegotiation can form basis of a better long-term relationship.

Recently Botswana's renegotiated such contracts laid the foundations of its remarkable growth for the last four decades. Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries like Israel and Australia have done so as well. Even the U.S has imposed a windfall-profits tax.

Equally important, the money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place to extract resources and some of the new purchasers have a similar bias.

Infrastructure has been built with one goal in mind: getting the resources out of the country with low prices possible but no agenda to process the resources in the country, leave alone to develop local industries based on them.

Real growth requires exploring all possible boulevards like training locals, small and medium-size enterprises development to provide inputs for mining operations, domestic processing, and integrating the natural resources into the country’s economic structure.

Of course, today, these states may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries’
comparative advantage is having other countries exploit their resources.

That is fallacious. But dynamic comparative advantage which can be shaped is what matters in the long run. Forty-five years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial tiger that it is today. It might be the world’s most efficient rice grower, but it would still be poor.

Companies will request Kenya to act quickly, but there is good reason to deliberately move slowly. These resources are infinite, and commodity prices have been rising. In the meantime, let us put in place reliable institutions/ policies in order to ensure wealth that is generated trickles down in order to benefit the most vulnerable members of the society and the public at large. But until that becomes a reality Africa’s black gold will remain a curse.

By Okwaro Oscar Plato

The author  is an analyst with Gravio Africa Consulting. This Op-Ed is his own views.