Natural Resources and African Development

(with a focus on non-renewable resources)

ECON 3510 ,

Archibald RitterJune 3, 2010

Note: The source for this is African Development Bank, African Development Report 2007, Oxford and New York: Oxford University Press, 2007, Chapters 1, 4, 5, and 6. (Skim chapters 2 and 3)

To access this source on the Web, please “Google” the following title, and follow the link to an “Adobe” pdf. file:

“African Development Bank, African Development Report 2007, Oxford and New York: Oxford University Press, 2007”

OutlineI. Some Historical ObservationsII. Current Role of Resources in African Development– Petroleum, coal, natural gas– Minerals– Forestry products

III. The Main Mineral Sector Development IssuesIV. “The Paradox of Plenty”– The “Resource Curse”– Conflict States and Resource Wealth– The New “Scramble” for Africa’s Resource Wealth

V. Managing Resources Effectively for Equitable Development

VI. VI. The New Scramble for Africa’s Resources

I. Some Historical Observations Pre-Colonial metal-working; since time immemorial Scramble for Africa, motivated in part by desire for

mineral wealth Cecil Rhodes and the British in South Africa”Gold Coast” (which became Ghana)

A Mineral Resource Treasure House? The Mineral Sector at Independence Non-Petroleum Mineral Activity decline from 1970s to

1990s; Petroleum continues strong 1995-2010 (+/-): Resumption of Mineral Exploration and

Development Artisanal/Informal Sector Mining and Large scale Modern

Mining

II. Current Role of Resources in African DevelopmentMineral Export Concentration, Selected Countries. 2005

(Percentage of Total Exports)

Country Main Export Other ExportsBotswana Diamonds 88.2% Nickel 8.1Chad Oil 99.9%Ghana Cocoa 46 Manganese 7.2Kenya Tea 16.8 Flowers 14.2Nigeria Oil 92.2S. Africa Platinum. 12.5 Coal 8; Gold 7.9Tanzania Gold 10.9 Fish 9.7; Copper 8.6Zambia Copper 55.8 Cobalt 7Sub-Saharan Africa Oil 49.2 Diamonds 12.6; Nickel 7.8

Oil in the Niger Delta, Nigeria: +/- 89% of Gov’t revenue +/- 25% of GDP about 95% of export earnings; 13% of oil revenues to oil-producing states Impoverishment and environmental problems for local peoples (the Ogoni

and other groups) Major Conflict in the Delta

New Petroleum Play in Two African Regions

A New Country? 2011: South

Sudan

Benefits and Costs of Mineral and Petroleum Extraction:

III. The Main Oil and Mineral Sector Development Issues

III. The Main Oil and Mineral Sector Development Issues

1. Price volatility generates macroeconomic instability (explanation in class)

2. Long-run downward price trends?3. Short-term Character of some mining due to finite sixe

of ore bodies or petroleum deposits4. Enclave Character: limited linkages to economy5. Further processing migrates abroad6. Environmental Impacts7. Impacts on Local Communities8. Insufficient Returns to Governments

Conclusion: Don’t Do Petroleum or Mining?Manage Petroleum and Mining Sectors

Intelligently?

1. Mineral Price Instability

Source: OECD Development Centre, based on World Bank, 2009

Recent Mineral Commodity Prices, 2000-2009

Example of Mineral Price Instability: Gold

2. Terms of Trade and Mineral Prices

Current Concern: Is China’s demand for minerals softening?

4. Enclave Character: limited linkages to domestic economies

Explain:– “Backward Linkages” (ability to provide the inputs

needed for mining or oil)

– “Forward Linkages” (ability to undertake further processing of the ores or petroleum)

– “Consumption Linkages” Payments to people promoting increases in final demand)

Depends on employment and income patterns and volumes

6. Environmental Impacts

Varieties of Impacts:

Water and Air QualityTailingsNoxious WastesLand use and degradation

7. Impacts on Local Communities

Local community receives the • environmental degradation and • often the loss of artisanal mine jobs• Social dislocations

without the macroeconomic benefits

Note case of gold mining in Tanzania, African Development Report, 2007, p. 150

8. Returns to Government: Taxation

Tax Regimes and Revenues are ImportantVarieties of Taxes:

Royalties (on metal content of ores extracted)Income from Production Sharing or State OwnershipCorporate Income TaxesPersonal Income Taxes on People in the sectorSales Taxes on sales to people in the sectorImport Taxes on Imported Inputs Export Taxes

Are revenues to Governments sufficient?

IV. The Paradox of Plenty aka “Resource Curse”

The “curse”Resource wealth generates great revenues for governments

but also may tend to lead to relative economic stagnation and political problems – waste, corruption, political patronage systems, civil conflict & war

i.e. an inverse relationship between resource wealth and genuine development

Why? Economic factors: exchange rate, prices, econ. managementPolitical factors via

windfall revenues to Governments without need for accountability to tax-payers, and also

windfall revenues “up for grabs” among competing elites.

Empirical Validity of the “Resource Curse”

Countries that might have the “Resource Curse”– High mineral export dependence on one or a few

minerals– especially petroleum exporters (“Oil

Economy Syndrome” )– High Foreign Exchange and Fiscal dependence on

the resource export– High levels of Direct Foreign Investment in the

resource sector

Evidence re Performance:– Economic Growth (GDPpc)• Resource-rich countries are richer than resource

poor (GDPpc; tax revenues; foreign exchange earnings)• Resource rich grew more slowly than resource

poor (2.4% pa vs. 3.8% pa, 1981.2006• Resource rich coastal states best off;• Resource scarce land-locked, worst off

The Phenomenon in Brief:Export “boom” caused by a sudden increase in oil export prices or in resource export volumes, leads to an appreciation of the exchange rate with negative consequences, such as

• a major reduction of traditional (pre-boom) exports;• unemployment of the factors of production in

the traditional export sector;• an increased concentration on the resource

export and reduced diversity of export structures;• damage to import-competing exports;

Explanation: “Dutch Disease” or “Oil Economy Syndrome”

Plus• an inflationary impact as the demand for

non-tradable products increases, which further affects the real exchange rate;• irresponsible use or misuse of foreign

exchange windfall receipts

Examples:• Spain during its glory days with silver and gold inflows from

pillage and later the rich mines of Mexico and South America from perhaps 1530 to 1700

• Countries undergoing a resource boom (e.g. Canada in a minor way in the 1950s, again in 2006-2008 with tar sands and oil prices)

• Major oil exporting countries such as Nigeria (with 92% of its exports as petroleum in 2004); Chad (99%) etc.

• The Netherlands after its North Sea natural gas boom and before the “Euro”

Explanation, with diagram on the blackboard• The diagram represents the foreign exchange (in US dollars)

market from the perspective of an oil exporter, in this example, Nigeria.

Explanation 2: Other Economic Factors

• Volatility of Foreign Exchange Earnings and Tax Revenues affects economic management and performance

• Economic Policy Failures: – Waste the funds extravagantly when available;– Expand consumption – Reduce other non-mineral taxes– Undertake costly but unwise strategic investments

2. Socio-Political Origins:“Dutch Disease” becomes “Resource Curse”

• Increased potential for corruption• Rent-seeking and winning is more profitable than

productive economic actions;• Bad decision making: government does not have to

respond to tax payers because rents come resources;• Resource revenues feed patronage systems,

permitting authoritarian or predator regimes to remain in power;

• Conflict among elites, regions, ethnic groups may be intensified.

Civil Conflict, Fragile States and Resource Wealth

Evidence that resource wealth increases incidence of civil war and conflict (see chart)

- Oil & diamonds dominate; - Diamonds are easily “lootable”

- But resource mis-management is also a key factor explaining poor economic performance and resource wealth

Civil Strife linked to Resource Wealth, 1990-2002

CountryCountry YearsYears ResourcesAngola 1975-2002 Oil, Diamonds

Chad 2008- Oil

Congo, Republic 1997 Oil

Congo Dem. Rep. 1996-97; 1998-2007

Oil, Diamonds, Copper, Gold, Cobalt

Liberia 1989-1996 Diamonds

Nigeria 1975- 2009 Oil

Sierra Leone 1983-2005 (+/-) Diamonds

But note Rwanda, Somalia, Uganda, Kenya: were resources involved in these cases?

Resource Wealth Management and Fragile States

Predatory rule is enhanced by resource wealth:State power gives direct access to income from

resourcesResource income can finance patronage or clientele

systems where rulers pay off support network; Support networks may be regional, ethnic, religious, or

economic in character.Access to resource wealth by various channels: access to

tax revenues, pay-offs from foreign companies; kick-backs;

International spill-overs of civil conflict: diamonds escaping by neighbouring countries

V. Managing Resources Effectively for Equitable Development

Key Question: How can resource wealth be harnessed and utilized effectively to promote equitable and sustained development?

Recall: Africa has a generous and under-utilized endowment of resources especially of non-renewable resources (oil & minerals)

1. Central Requirement: Good Governance: Good Governance:

“virtuous relationship between active citizens and a strong legitimate government dedicated to meeting peoples needs and aspirations through a representative , effective and accountable system”

Elements:Rule of law;Representative political system and accountable leadership;Effective, transparent incorruptible administration;Decentralization: Effective tax regime and regulatory framework for enterprisesEffective social programs

2. International Dimensions of Resource Wealth Management

International efforts to collaborate in improving accountability and transparency in resource income management (i.e. to reduce corruption)

A.Transparency InitiativesExtractive Industries Transparency Initiative:

B. Human Rights, Social and Environmental StandardsInternational Council on Mining and MetalsUN Global CompactTimber Certification Scheme

C. Conflict resources Governance PoliciesKimberly Process (Diamond) Certification Scheme

D.Financial Sector Governance PoliciesAnti-Money Laundering Initiative

A. Transparency InitiativesExtractive Industries Transparency Initiative:

• Aimed at gathering, reconciling, publicizing information on royalties and taxes on oil and minerals

• Objective: ensure transparency, accountability, and absence of corruption

• Most African and many other countries have joined Mauritania , Burkina Faso , Cameroon , Mozambique , Central African

Republic , Niger Côte d´Ivoire , Nigeria , Democratic Republic of Congo , Equatorial Guinea ,

Gabon Republic of the Congo , Ghana , São Tomé e Príncipe , Guinea , Sierra Leone , Tanzania , Liberia , Madagascar , Zambia, Mali

Web Site: http://eitransparency.org/

B. Conflict Resources Governance PoliciesKimberly Process (Diamond) Certification Scheme

An international government led process designed to prevent trade in conflict diamonds;

Established January 2003; Endorsed by UN General Assembly and Security CouncilSuccessful re labelling and blocking trade in “conflict

diamonds”Unfunded;

• operated by volunteers in two NGOs, Global Witness and Ottawa-based “Partnership Africa Canada”• therefore of dubious sustainability

3. Management of Natural Resource Revenues

The task: optimizing 1. revenue generation, developmental impacts, 2. benefits for future generations, while 3. maintaining the health of the enterprises involved – foreign, domestic or state

i.e. converting ephemeral resource revenues into sustained and sustainable human development for the long term

a) Ensuring Revenues plus Appropriate Incentive structure for enterprises

Requires sufficient revenues for firm to extract, re-invest, and undertake exploration for future mine development

b) Timing and Composition of Resource-financed Expenditures: How should resource revenues be used?

• Domestic investment• Domestic consumption• Savings or Investment Funds• Accumulation of foreign assets

Generally focus on “pro-poor growth” i.e. an equity oriented development strategy.

Stabilization funds or citizen dividends

c) Stabilization funds: – Fat cow / Lean cow rationale (Joseph & the Pharoah– a la Norway, Chile, or Alberta (the Heritage Fund)– Advantage– Disadvantage:

• they are “raidable”• Citizens may object to postponement of expenditures• Future economic downswings may be underestimated

Stabilization funds or citizen dividends, continued

d) Immediate Disbursement to Citizens? – Interesting idea; a type of social justice?– ”Rent” payment to citizens may be equitable

– Problems:– How then does government finance

developmental activities–Will this reinforce the Dutch Disease effect of

economic over-heating increased imports with little sustainable benefits?

4. Ensuring Fairness of Benefit Distribution to Local Communities

1. Ensure minimum disruption of local communities;2. Generate jobs for local people (note problem with

displacement of artisanal miners); 3. Revenue sharing with local communities and

states or provinces;4. Local procurement of inputs;5. Minimize environmental damage6. Decommissioning and clean-up of mine and mine-

site A caution: There is no automatic conversion of new resource wealth to broad-based, pro-poor, and sustainable development

VI. The New Scramble for Africa’s Resources

Major new participants in resource sector activity: China, India, and South Korea

Concentrated in oil, minerals and now land for agricultural exports

Major volumes of direct foreign investmentOil, minerals and agri. raw materials dominate African

exports to Asia (86% to China in 2005)

Possible positive effects:Possible negative effects:

See The Economist, “Out-Sourcing’s Third Wave,” May 21, 2009 and and African Development Report 2007. pp. 131-136

Possible positive effects:

Possible negative effects:

Possible positive effects:Increased foreign exchange; economic growth; tax

revenues, social expenditures ……..Integration of African countries into International System?

Maybe in the longer termA lead-in to exports of manufactures for Asia? Tourism

from Asia?

Possible negative effects:Non-transparencyMinimal concern re authoritarian regimes, human rights

issues, corruptionDiversion of resources from use for Africa to use for AsiaUse of imported Asian labour; reduced domestic learning

effects