Institute of Development Studies

Breaking the oil curse in the Niger Delta

Monday 2 November 2009 – Javier Arellano Yanguas

The path to overcoming the economic and governance distortions traditionally associated with oil exploitation is well worn.  But initiatives announced in recent weeks proposing direct cash transfers to inhabitants of oil producing regions are bringing the issue back to centre stage.

On 19 October, the Financial Times announced that, “Nigeria plans to transfer 10 per cent of all its oil and gas ventures to the inhabitants of the oil-producing Niger Delta, in a multi-billion-dollar bid to end the rebellion that for years hampered production in sub-Saharan Africa’s leading energy supplier”. On the same day, following the discovery of important offshore oil reserves, the Center for Global Development presented a proposal that recommended enshrining in the Ghanaian constitution a mechanism for direct cash distribution to its citizens as a way of avoiding the ‘oil curse’.

The Nigerian case has two features that make it especially relevant. First, the proposal restricts the cash-transfer to the oil-producing region. Second, Nigeria is under international scrutiny because its political stability is crucial to the well-being of the region and the health of the international oil market. Thus, the successful implementation of this scheme could influence policies in similarly troubled regions.

The extreme case of a fashionable agenda

The proposal to transfer ten per cent of annual dividends directly to the citizens in the Niger Delta is an extreme case of the fashionable ‘localist’ policy agenda for the promotion and management of extractive industries around the world. This agenda includes the mandatory redistribution of natural resource revenues to the producing regions, avoiding the centralisation of management at the national level; the participation of local citizens in deciding how to spend these devolved revenues; and, finally, the growing involvement of companies and civil society organisations in local decisions. Among other benefits, mining and oil companies hope that this agenda will help to bypass inefficient state bureaucracies and alleviate the growing incidence of conflicts around their operations. But are they right?

My own research into the Peruvian mining sector casts doubt on the effectiveness of this agenda. It shows that, in the context of a weak central state that is to a large degree captured by private bussiness, intense devolution of revenue to producing regions has gone hand in hand with the escalation of conflicts in these regions.

Some likely problems with the cash-transfer scheme in the Niger Delta

Despite the obvious contextual differences, the research points out four types of problem that in all likelihood will be associated with the implementation of the cash transfer scheme in the Niger Delta.
First, it is very unlikely that cash-transfers ease conflicts. When the population of producing regions has genuine historical grievances against the companies or the state, the increase in revenue transfers has limited capacity to stop conflicts. Moreover, such an increase is likely to trigger demand for a larger share: why ten per cent and not the more popular 25 per cent?

Second, even if residents become company shareholders, they will have little capacity to stop the activities of the criminal gangs that benefit from illegal oil trading. What is more, it is plausible that these gangs will go into the new profitable business of regulating, for example, who has the right to belong to a rich community, controlling payments in rural areas.

Third, the rationale behind the implementation of the scheme reinforces distrust of state capacity, which works as a self-fulfilling prophecy that weakens state authority even more. In turn, a weaker state cannot prevent and arbitrate conflicts, neither can control crime.

Finally, the logistics of an effective delivery of cash-transfers cannot be taken for granted. The necessity of identifying and ‘fixing’ the population of the region in order to avoid massive migration from neighbouring areas adds complexity to the operation.

In summary, policies for the improvement the lives of people in natural-resource-rich regions need to consider the puzzling political dynamics that these resources generate at local level. Frequently, seemingly ingenious proposals clash with unexpected local reactions.

Javier Arellano Yanguas is a Dphil student at IDS with the Governance Team.