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Kenya’s Resource Challenge

OXFORD – Kenya has been exporting energy for years – in the form of some of the world’s fastest long-distance runners. But Kenya will soon be exporting another, far more profitable kind of energy, as it taps into a string of recently discovered oil fields in its 450-mile-long section of the Great Rift Valley, a fissure in the earth’s crust that runs from Lebanon to Mozambique.

African countries have plenty of experience with the downsides of major resource endowments. Kenya must learn from these cases, in order to prevent its new oil riches from tripping up East Africa in its headlong dash toward monetary union.

The riches are indeed vast. In the last two years, more than 1.7 billion barrels of oil have been discovered in the Lokichar basin. Estimates vary widely, but there could be up to 20 billion barrels – a volume that would make Kenya one of Africa’s most resource-rich countries, second only to Nigeria, which has 37 billion barrels of proven reserves. Nearby, Uganda has discovered 3.5 billion barrels, and Tanzania has found vast reserves of natural gas.

These countries now must determine how to avoid the “resource curse” – an all-too-common affliction whereby rising resource revenues lead to volatility, rent seeking, and corruption, while spurring real exchange-rate appreciation and wage increases, thereby undermining other economic sectors’ competitiveness. The key will be to capture the oil revenues and invest them wisely, thereby converting below-ground assets into above-ground assets that yield an adequate rate of return and stimulate economic development.