in this article, we discussed developing economics, the characteristics, the examples, the role of oil and gas in developing economics, the challenges and risk.
Definition
A Developing economy refers to a nation with a low Gross National Income (GNI) per capita, a Human Development Index (HDI), and a less industrialized base compared to more developed nations. Key characteristics often include a low standard of living, high poverty rates, underdeveloped infrastructure, high unemployment, a large agricultural sector, reliance on foreign aid, and significant income inequality. These economies are typically in the process of industrialization and are focused on improving their fiscal, economic, and social conditions.
Characteristics of Developing Economies:
Low income and GNI:
The per capita GNI is low, meaning the average annual income for an individual is significantly below that of a developed country.
Low Human Development Index (HDI):
The HDI, which measures life expectancy and education, is typically low in these economies.
Industrialization level:
They have a relatively underdeveloped industrial base and are often more reliant on agriculture.
Poverty and living standards:
A large portion of the population lives below the poverty line, leading to a low standard of living.
Infrastructure:
There is poor and inadequate infrastructure, including essential facilities and services.
Unemployment:
High rates of unemployment are common, particularly in rural areas.
Economic structure:
Economies may rely on a few primary export resources or tourism and often need foreign aid to address socio-economic problems.
Income inequality:
There are drastic differences in wealth and income distribution among the population.
Development Context
Relativity of development:
The concept of “developing” is relative; a country that was considered developed in the past might be viewed as developing by today’s standards.
Focus on improvement:
Development economics focuses on improving the economic, social, and fiscal conditions within these nations.
Historical shift in terminology:
The term “developing country” was once widely used but is now often phased out by organizations favoring other categories and metrics.
The Role of Oil & Gas in Developing Economies:
Economic Benefits
Government Revenue:
The most significant benefit is the fiscal role of the oil and gas sector, generating tax and other revenues that fund public services and infrastructure.
Economic Growth and Investment:
Revenue from oil and gas exports can attract foreign investment and boost economic activity, although this can sometimes lead to underdevelopment in other sectors.
Employment:
The sector creates jobs directly and indirectly, including large numbers of induced jobs in related industries and services that support oil and gas operations.
Energy for Development:
Oil and gas provide essential energy for transportation, industry, and consumption, powering economic development and transformation.
Foreign Exchange Earnings:
Oil and gas exports contribute to a country’s foreign exchange reserves, which are vital for international trade and financial stability.
“The Resource Curse”:
Many oil-rich developing countries have underperformed economically, failing to use resource wealth to build productive economies or strong financial buffers like sovereign wealth funds.
Market Volatility:
Fluctuations in oil prices and demand can make revenue streams unstable and impact economic planning.
The Just Transition:
The global push to achieve net-zero emissions by midcentury threatens long-term revenue for oil-producing nations, requiring careful management of the transition away from fossil fuels to mitigate negative impacts on public services and employment.
Concentrated Workforce:
Although not always a major direct employer, the sector’s workforce is often geographically concentrated, with unique characteristics like varying unionization rates and a high proportion of contract workers, which need to be considered for a just transition.
The Challenges of the Role of Oil & Gas in Developing Economies:
Economic & Market Challenges
Over-reliance & Volatility:
Overdependence on oil and gas makes economies vulnerable to volatile global prices and market fluctuations.
Lack of Diversification:
Countries often neglect or under develop other sectors, such as agriculture, which were once economic mainstays, leaving the economy too reliant on a single resource.
Limited Value-Added:
Foreign companies often dominate the industry, resulting in low local value-added and limited technological capacity within the country.
High Fuel Costs:
High import duties, taxes, and the cost of fuel and maintenance can make energy and mobility unaffordable for many people in developing countries.
Governance & Security Challenges
Weak Governance & Corruption:
Poor legislative frameworks, corruption, lack of political will, unclear roles between regulatory bodies, and weak compliance systems hinder development and accountability.
Security Risks:
Oil theft, pipeline vandalism, and related security issues increase operating costs and disrupt production.
Community Conflict:
Resource extraction can lead to conflicts with local communities, potentially causing project delays or abandonment.
Environmental & Sustainability Challenges
Environmental Degradation:
Oil and gas operations can lead to toxic contamination of soil and water sources, posing significant health risks.
Transition to Renewables:
The global shift toward renewables and the declining cost of alternative energy sources present a challenge for continued reliance on fossil fuels for development.
Sustainability Issues:
Profitability pressures often conflict with environmental protection, and a lack of long-term strategic planning hinders the industry’s ability to adapt to new environmental and market challenges.
Social & Trust Challenges
Low Bargaining Power:
Developing nations often have lower bargaining power with foreign companies, leading to a suboptimal capture of resource rents and benefits.
Lack of Information:
A lack of accurate, timely, and accessible data on demand, supply, trade, and investment can weaken a country’s position in contract negotiations.
The Opportunity for the Role of Oil & Gas in Developing Economies
Economic Opportunities
- Revenue and Growth:
Oil and gas production generates significant government revenues, driving GDP growth and supporting national fiscus.
- Job Creation:
The sector creates both direct jobs and numerous indirect/induced jobs in related industries, often concentrated in specific regions.
- Industrialization:
Oil and gas development can kickstart industrialization by providing raw materials (feedstock) for plastics, chemicals, and pharmaceuticals.
- Investment Attraction:
The presence of these resources can attract foreign investment, boost economic activity and potentially improve the current account in the balance of payments.
Conclusion
The role of oil and gas in developing economies is characterized by significant contributions to government revenue, job creation, and export earnings, but this is often accompanied by challenges like dependency on volatile prices, limited direct employment, and potential negative environmental impacts.