Introduction
Chad is one of the poorest countries in the world with income per capita in 1985 only $120 per year (Day-Viaud & Joffe 1995, p. xvii). A consortium of oil companies discovered oil field with the reserves of 917 million barrels to be last until 2032. Considering the high risk investment in the country, the consortium will not sponsor this project unless the World Bank involved providing political risk protection (Esty 2006, pp. 1-5). This indicates that both the Chad government and the consortium are highly dependent on the Bank. This is a great opportunity for the Bank to control the loan contract negotiation by enforcing conditionality to ensure the oil windfall will bring welfare to Chadians.
Key issue
The key issue is how to create and maintain economic growth during and after the oil windfall. While oil mining will increase government revenues dramatically, many evidences suggest resources-abundance countries have stagnated in economic growth and underperform the resource-poor countries. This phenomenon called ‘resource curse’ (Auty 1993, p. 1; Sachs & Warner 1995, p. 2).
Chad has serious growth impediments both in economic and institution aspects. Chad has low capital investment and improvement, low productivity labours and lack of skill improvement opportunities, low technological input, lack of physical and human capital development, inconsistent economic policies, and ‘anti-development fiscal policy’ (Azevedo 1988, pp. 68-73).
Chad's political institution is not conducive for investment. The president has excessive power with ability to control the legislative and judicative (Kneib 2007, p. 32). This is a highly concentrated decision-making power which create uncertain and potentially volatile policy environment that bad for the welfare of citizens and investors (MacIntyre 2003, p. 29). Natural resources economy without good quality institution will create negative effect on growth (Sala-i-Martin & Subramanian 2003, p. 12).
Solution options
Option-1: Non-mining industries development
The Bank must direct its loan conditionality to support the non-mining sector. The sustainable development of natural resources economies lies in successful diversification into non-mining sector (Auty 1993, p. 258).
The oil revenue allocation and economic policy should be strictly designed to stimulate the non-mining sector. The revenue management plan (RMP) must give specific details regarding permissible expenditures to prioritize improvements on growth drivers; they are: saving and investment, physical and human capital, and technological improvement (Helpman 2004, pp. 10-12). For example, Chad government must develop transportation infrastructures, free basic and vocational education and job training to be linked and matched with the need of non-mining industries. Valuable incentives must be given to private sectors to improve their productivity through technological change such as free import tax for machineries. Incentives to start-up the non-mining firms such as temporary energy subsidy, efficient entry licence, and employee trainings support would attract domestic entrepreneurs and foreign direct investments.
The non-mining industries development should focus on areas where Chad has (potential) comparative advantages—for example from the availability of raw materials, labour's characteristic and geographical position—and relatively simple to begin.
While this option could create some results in a relatively short-term period, its success rely on the commitment of Chad leaders to implement the RMP and the economic policy. However, as economic improvement will increase the president's popularity, the president would have intrinsic motivation to support.
Option-2: Change the institutional architecture
The Bank must maximize the use of its strong power during the negotiation phase by forcing the Chad leaders to democratize its state's institution and promote good governance. The combination of democracy and good governance is a significant determinant of total factor productivity (Rivera-Batiz 1999, p. 32).
The conditionality must force the Chad leaders, particularly the president, to change their constitution to balance the power structure by creating constraint on executive government and improve the bureaucracy efficiency. This will improve the credibility of the government on ensuring the quality and certainty of its policies. This can be done, for example by, (a) strengthening the power of the National Assembly to be able to monitor the president and to have more power on legislation making, (b) making the Supreme Court independent from the president, (c) preventing the involvement of military forces in civil war and politics, and (d) promoting transparency and some initial measures on bureaucracy reform. However, the idea is not to swing from the severely concentrated to the severely dispersed, rather to make it in the middle of the range. For example, the president should still have a space to respond to policy challenges which require an immediate action. Country with political power structure located in the centre of the decision-making power ranges is unlikely to suffer from significant governance problems (MacIntyre 2003, p. 36).
Although this option has potential to improve Chad's government credibility, there is no significant constraint for the president to revoke the agreement. The president will still able to maintain his strong power after the agreement and bring back the old constitution. The political leaders renege on promises once the aid is delivered and their problems are resolved (Smith 2005, p. 566).
Proposal
By considering the following criteria, (a) time to see impact, and (b) resources availability, option-1 is the most plausible solution
Time to see impact is crucial to maintain the motivation and spirit of the Chadian on supporting the solutions. Option-1 would provide tangible and visible improvements faster than option-2 because option-1 will directly increase the quality of life through better livelihood by creating more jobs and other opportunities. If the improvement takes so long, or not really tangible and visible, people will get frustrated with the reform which lead to the increase of social and political problems, and end up with lower growth.
Resource availability is a precondition to make the solution work. Chad has resources to support option-1, at least for the start-up phase. For example, Chad's productivity on cotton production has been increasing from time to time (Azevedo 1998, p. 30). This is an excellent resource to start the textile industry serving the African region. By contrast, option-2 requires relatively strong human freedom—that is the individual freedom to effectively shape his/her own destiny (Sen 1999, p. 11)—which Chad is lack of. Chad's human development index in 1995 was only 0.324 which give the country a rank of 175 out of 182 countries (UNDP 2009). It is difficult to have strong institution without human freedom because most of individual tend to rely his/her life on other person rather than on the rule of law. Human freedom development takes more times because it is not just about skills to work in a factory. Therefore, option-2 is more potential to create and maintain economic growth during and after the oil windfall.
References
Auty, RM 1993, Sustaining development in mineral economies: the resource curse thesis, Routledge, London.
Azevedo, MJ 1998, Chad: a nation in search of its future, Westview Press, Boulder, Colo.
Day-Viaud, V & Joffe, G 1995, Chad, Clio Press, Oxford.
Esty, B 2006, The Chad-Cameroon petroleum development and pipeline project, Harvard Business School, MA.
Helpman, E 2004, The mystery of economic growth, Belknap Press of Harvard University Press, Cambridge, Mass.
Kneib, M 2006, Cultures of the world: Chad, Marshall Gavendish Benchmar, New York.
MacIntyre, AJ 1003, The power of institutions: political architecture and governance, Cornell University Press, Ithaca.
Rivera-Batiz, F 1999, 'Democracy, governance and economic growth: theory and evidence', paper presented at the conference: Democracy, Participation and Development, New York City, sponsored by the Program in Economic Policy Management at Columbia University, April 1999, viewed 29 October 2010,
Sachs, JD & Warner, AM 1995, Natural resource abundance and economic growth, National Bureau of Economic Research, Cambridge, MA.
Sala-i-Martin, X & Subramanian, A 2003, Addressing the natural resource curse: an illustration from Nigeria, National Bureau of Economic Research, Cambridge, MA.
Sen, A 1999, Development as freedom, Knopf, New York.
Smith, A 2005, 'Why international organizations will continue to fail their development goals', Perspectives on Politics, vol. 3, no. 3, pp. 565-567.
UNDP 2009, 'Human development index trends', Human Development Reports, viewed 30 October 2010,
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