Oil revenues for public investment in Africa: Targeting urban or rural areas?

 
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In the study of economic development, there is a general consensus that public infrastructure investments supporting private sector-led economic activities are essential for growth. However, questions remain about how countries with newly found natural resources such as oil might best spend revenues on infrastructure and avoid the “resource curse” — the tendency of economies focused on such resources to see slower, and narrower, growth.

A 2011 study published in the Review of World Economics, “Oil Revenues for Public Investment in Africa: Targeting Urban or Rural Areas?” examines the case of Ghana. While the economy is still based significantly on agriculture, the country’s newly discovered oil resources will result in more money for the government to invest in public infrastructure in the coming years. (Other countries in this region such as Angola, Botswana, and Nigeria also face similar challenges.) The researchers, from the Kiel Institute for the World Economy and the International Food Policy Research Institute, construct six economic models — each with different levels of investment in infrastructure in rural and urban areas — to examine and predict changes in the economy over the period 2008 to 2027.

The study’s findings include:

  • In all scenarios, total household income and welfare increased in the short and long term, but gains were unevenly distributed. Rural households experienced a decline in income relative to households in urban areas. In particular, the effects of increased infrastructure investment significantly benefit the manufacturing sector and urban areas.
  • When investments benefit urban areas, the resource boom likely “increases the incidence, depth, and severity of poverty on a national scale, both in the short and medium term.” Urban areas experience a small reduction in poverty, while rural households experience higher poverty because of more expensive consumer goods.
  • In the scenarios where “oil-financed public infrastructure spending is allocated neutrally between agriculture and non-agriculture,” the results are significantly more beneficial to the poor.
  • Favoring infrastructure investments in Ghana’s northern agricultural sections has “important drawbacks.” Trying to reduce poverty “via targeted investment increases rural poverty because increased productivity leads to a worsening of the terms of trade of agricultural products. In the short run, smoothing the real appreciation (of the currency’s exchange rate) by investing part of the oil windfall into an oil fund is even superior in terms of poverty reduction in the North.”
  • The best model involves a strategy where “30% of the oil revenue is saved in an external resource fund while the rest, as well as interest income from the fund, is allocated neutrally to public infrastructure investment in agriculture and nonagriculture.”

The authors conclude: “When there is an industrial bias in public investment spending, the agricultural sectors do not share proportionately in the aggregate income gains to the economy. The economy as a whole enjoys a large medium-term supply response, but at the cost of increasing rural poverty and a sharp worsening of the distribution of income between agriculture and the rest of the economy.”

Tags: poverty, fossil fuels

    Writer: | Last updated: April 9, 2012

    Citation: Wiebelt, Manfred; Schweickert, Rainer; Breisinger, Clemens; Bohme, Marcus. "Oil Revenues for Public Investment in Africa: Targeting Urban or Rural Areas?," Review of World Economics, November 2011, Vol. 147, Issue 4, 745-770, doi: 10.1007/s10290-011-0101-2.
     

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