Dear Readers and Friends: August edition out , Aug 17 2018

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Seven steps to riches: How Kenya could avoid the oil curse

James Shikwati
James Shikwati is the Director of Nairobi based Inter Region Economic Network

 

 

New discoveries of oil and gas in Kenya provide a great opportunity for Kenya to reposition itself as a business and commercial hub in Africa. The country could invest in refineries, in road and rail networks, in education, health and other infrastructures and ultimately come to realize its long awaited future as the African tiger or dare we say the African lion.

But sudden riches falling like that on a country, come as a tow edged sword that can help realize long held dreams, or may escalate social and political tensions beyond the point of no return. But in Kenya, a land of great promise, oil and gas could be used to transform the country into an investment destination and a major world player in its own rights.

If Kenya stays the course and fully implements its brand new Constitution, it will likely escape the proverbial African course of poverty in riches. The United States and the European Union have provided some help. America’s Dodd-Frank Act and the Transparency Directive of the EU make it mandatory for corporations listed on stock markets to report on extractive sector payments made to governments. It is up to Kenyans to be vigilant and to take the necessary steps to ensure progress and to avoid falling into the resource curse trap. A mere seven short steps could see the country through.   

Step one: Kenya must uphold the legitimacy of the State. A country blessed with rich natural resources needs a legitimate state which means more than good governance. By voting in the new constitution in 2010, Kenya, a country of diverse ethnicity took the first step in establishing itself as a valid and viable Nation State. If the newly elected government can successfully navigate the transition from the old to the new order, this legitimacy will be confirmed. A derailed transition will create a volatile situation to which the new oil riches could only add fodder.

Step two: Kenya must understand and manage the global market. Africa has been a victim of a global market that relegated the continent to exporting raw materials and importing finished products. This blocked the capacity to develop and to grow a knowledge economy. Kenya must focus on how to effectively navigate the global market.

Step three: Kenya must take care of the environment. Oil and gas exploitation is fraught with all kinds of dangers to the environment. Leaking oil wells can mess up the entire ecosystems, endangering human, animal and plant life. Safe guarding the environment is the first rule of oil exploitation.
 
Step four: Kenya must put in place a rigorous anti corruption regime. A cozy relationship between top government officials and multinationals in the oil sector is a danger signal, a sign that corruption is ripe. There is no better way to turn the oil riches into a resource course. Where people think that access to power must translate into the tribe’s turn to eat, the presence of a high paying natural resource makes the game of politics and governance deadly. It is important to create a clear and transparent system of revenue management and disbursement to diffuse potential tension.

Step five: Kenya must establish an effective revenue collection system. In economy dominated by oil and gas, the temptation to ignore other sources of revenue is great. This would lose government much needed revenue and encourage and fuel corruption.

Step six: Kenya must continue to pursue other lines of enterprise and productivity. Oil producing Countries have a tendency to forget about other sectors of the economy in the single pursuit of easy revenues from oil and gas. Paul Collier defined this as the resource trap in which exports of natural resources increase the value of an exporting country’s currency against other currencies, rendering other productive activities uncompetitive, leading to sole emphasis on oil to the abandonment of other activities.

If oil and gas becomes Kenya's sole foreign exchange earner, traditional exports such as flowers, fresh fruits and vegetables, will suffer. Floriculture alone employs close to 60,000 workers. If Kenya fails to diversify in favor of easy oil money, it will worsen its already high unemployment rate. Increased unemployment must lead to insecurity and instability.

Step seven: Kenya must establish strong institutions. Kenya needs strong institutions that can guarantee the separation of powers between the three branches of government: the judiciary, the legislature and the executive. Strong institutions will safeguard the interests of ordinary Kenyans and bring about investor confidence and therefore development. The road to becoming a top player in international business and commerce is wide open in Kenya. Could this become the road not taken? We hope not.