Sudan’s Referendum: Understanding the Economics of Peace

On January 9, the people of Southern Sudan started voting to become the world’s newest country and the first new African nation in decades. The voting stems from the 2005 Comprehensive Peace Agreement (CPA); and the expected outcome, assumed to result in the south’s independence, will have an enormous impact on the economies of both new nations. Particularly with looming matters of oil, border and conflict control, cooperation between North and South Sudan will be of utmost importance for their development and economic success.

As a whole, Sudan has seen GDP growth of over 10 percent in recent years, mainly due to its increasing oil production. Sudan is Africa’s third largest producer of oil, with 75 percent of this production coming from the south. The 2005 CPA determined that the country’s oil income, which amounted to around $4.5 billion from January through September of 2010, should be divided evenly between the north and south. Although this oil income makes up around half of the north’s government revenue, it is a whopping 98 percent of the souths. Despite most of the oil-producing regions being in the south, the south’s lack of infrastructure to export the oil, and its inability to quickly address this issue, necessitates cooperation with the north. Controversy over this income—how much it is and how it would be divided after a successful referendum—has been circling the media for weeks.

Oil, however, is not the only problem that these two potentially separate countries will have to face. Border conflict is an issue of utmost concern, as demonstrated in the last two days of elections. News sources indicate that since voting began Sunday, an estimated 60 people have been killed near the Abyei border due to clashes with Arab pastoralist nomadic populations. This oil-rich area is supposed to have its own referendum to determine to which nation it will belong, but in the meantime Abyei, described as the border’s “powder keg,” is so far living up to its name.

Apart from oil and conflict over oil-rich border areas, there are even more details that will need to be carefully managed going forward, specifically when considering the development and economies of the north and south. The north could potentially suffer from a huge decrease in government revenue, and the new south will definitely feel the effects of its lack of institutions, infrastructure and skilled human capital. Over half the population of the south lives on less than $1 a day; an estimated 85 percent of the southern population is illiterate; paved roads within the south are scarce—sources state there are only 60km of asphalt roads; and the government in Juba will face an uphill battle with subpar institutions available.

However, progress is being made toward succeeding as separate states. Khartoum has reportedly begun making changes to try and offset the upcoming financial setbacks—the parliament approved austerity measures that will include cuts in government spending, sales of state-owned companies and shares, and reductions of senior state employee salaries by around 25 percent. The south, despite the aforementioned ominous statistics, has actually moved forward since 2005 thanks in part to donors that helped the region build basic roads, increase school attendance and set up 29 ministries. And its outlook is bright: U.S. sanctions on the country should lift soon, allowing for more investment from abroad if the referendum goes smoothly; the nation plans to double its oil output in the next three years from 450 thousand barrels a day to 1 million barrels a day; and a research note from DaMina Advisors LLP mentioned that the south is thought to have “abundant” mineral deposits including marble, gypsum and chromite.

These positive notes should indicate that both North and South Sudan have the potential for economic success, separately, as long as they continue to support one another. Their shared oil interests and forthcoming border agreements mean that their need for cooperation with one another will be essential. Transparency in the oil industry is intensely important. Unarguably, for the time being, a new South Sudan must cooperate with the north to ensure that oil continues to be exported and produced, but reporting a 26 percent production calculation discrepancy will not be sustainable for two such intertwined economies. The contentious border and security issues must, of course, be addressed ever so delicately in the months to come, especially when considering a return to war is estimated to cost Sudan more than $100 billion. The north and south must work together if they want to grow as independent nations. As ballots continue to be cast, let both sides remember what they can gain from cooperation.