Natural Resources for Sustainable Development

Natural Resources and African
ECON 3510,
Arch Ritter
May 29 & June 3
Note: The sources for this section are
1. Class Notes
2. Collier Chapter 3
3. Optional: African Development Bank, African Development
Report 2007, Oxford and New York: Oxford University Press,
Chapters 1, 4, 5, and 6.
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”
I. Some Historical Observations
II. Current Role of Resources in African Development
Petroleum, coal, natural gas
Forestry products
III. The Main Mineral Sector Development Issues
IV. “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
VI. The New Scramble for Africa’s Resources
Some Historical Observations
Pre-Colonial metal-working; since time
European “Scramble for Africa”, motivated in
part by desire for mineral wealth
Cecil Rhodes and the British in South Africa
”Gold Coast” (which became Ghana)
“Cote d’Ivoire”
Today: A Mineral Resource Treasure House?
Some Historical Observations, cont’d
The Mineral Sector at Independence
 Foreign-owned;
 Major source of foreign exchange and taxes for many
countries; weak linkages to domestic economies;
Non-Petroleum Mineral Activity declined from 1970s to
1990s; Petroleum continued strong
 Some nationalizations; some multinationals retreat;
 Exploration and mine development stops;
 “Milking the cash cows to death.”
2000-2014 (+/-): Renewed Mineral Exploration & Dev’t
New mines commence operation;
Note: Artisanal/Informal Sector Mining and Large-scale
Modern Mining
Liberia’s Opportunity and Challenge
Coming of Renewed Resource Wealth
Iron Ore again; BHP Billiton and Mital-Arcelor
Off-Shore Petroleum?
Harnessing Resource Wealth Equitably and
Accessing Resource Wealth: Taxes and Linkages
Pro-Poor Sharing of the Wealth
Avoiding the “Curse of Resource Wealth”
The Good Governance Imperative
Current Role of Resources in African Development
Mineral Export Concentration, Selected Countries. 2005
(Percentage of Total Exports)
Main Export
Other Exports
Diamonds 88.2%
Oil 99.9%
Nickel 8.1
Cocoa 46
Tea 16.8
Oil 92.2
Manganese 7.2
Flowers 14.2
S. Africa
Platinum. 12.5
Gold 10.9
Coal 8; Gold 7.9
Fish 9.7; Copper 8.6
Sub-Saharan Africa
Copper 55.8
Oil 49.2
Cobalt 7
Diamonds 12.6; Copper7.8
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
III. The Main Oil and Mineral Sector
Development Issues
Benefits and Costs of Mineral and Petroleum Extraction:
Possible Benefits:
Taxes and Royalties and Government Programs they
support e.g. education, health, security,
infrastructure, state management
Foreign exchange earnings: significant
Job Creation and income generation? May be limited
domestically; Specialized jobs to foreigners
Linked economic activity generation? Limited
Rising future prices trends? An encouraging future?
III. The Main Oil and Mineral Sector
Development Issues, continued:
Possible Costs:
Fluctuating foreign exchange earnings
 Declining price prospects? A discouraging
future? [No]
Profit repatriation
Limited Direct Linkages
Environmental costs
Impacts on local communities
III. The Main Oil and Mineral Sector: Main
Development Issues
1. Price volatility generates macroeconomic
(explanation in class)
2. Long-run downward price trends? [Not Likely]
3. Short-term Character of some mining due to
finite sixe of ore bodies or petroleum deposits
4. Enclave Character: limited linkages to domestic
5. Further processing migrates abroad
III. The Main Oil and Mineral Sector
Main Development Issues continued
6. Environmental Impacts
7. Impacts on Local Communities
8. Insufficient Returns to Governments
9. Informal Sector Mining
Conclusion: Don’t Do Petroleum or
OR: Manage Petroleum and Mining
Sectors Intelligently?
1. Mineral Price Instability
Terms of Trade and Mineral Prices
Terms of Trade and Mineral Prices
3. Short–term Resource Life?
• All mineral and petroleum resources are
ultimately finite
• Some ore or oil resources more finite than
• Many general resource areas are large
despite finite mine or oil deposit life
• The game: Translate resource wealth
into general and sustainable human and
economic development
Enclave Character: limited linkages to
domestic economies
– “Backward Linkages:” (ability to provide the
inputs needed for mining or oil)
– “Consumption Linkages” Payments to
people promoting increases in final
demand. Depends on employment and income
patterns and volumes
5. Enclave Character continued:
Further processing migrates abroad
– “Forward Linkages” (ability to undertake
further processing of the ores or petroleum)
– Transportation costs and the nature of
mineral sector production chains mean that
most further processing migrates towards
the final producers of metal-bearing
products – mainly the high income
countries plus China and India.
6. Environmental Impacts
Varieties of Impacts:
Water Quality
Air Quality
Noxious Wastes
Land 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 Barrick gold mining in Tanzania,
African Development Report, 2007, p. 150
Or the Ogoni people in Nigeria
8. Returns to Government: Taxation
Tax Regimes and Revenues are Important
Varieties of Taxes:
• Royalties (on metal content of ores extracted)
• Income from Production Sharing or Joint State
Ownership or State Ownership
• Corporate Income Taxes
• Personal Income Taxes on People in the sector
• Sales Taxes on sales to people in the sector
• Import Taxes on Imported Inputs
• Export Taxes
But note the ways corporations can minimize tax
payments: transfer pricing
Are revenues to Governments sufficient?
8. Returns to Government: Taxation, cont’d
But note the ways corporations can minimize
tax payments:
Transfer pricing;
Are revenues to Governments and Countries
Assuring a Fair Return to the Nation
• Transparency and Accountability
• Adequate Taxation is vital
• Joint Venture Ownership Forms?
– Standard for petroleum; Common for minerals
– To assure national interests
• Domestic Input Sourcing
• Procurement from domestic enterprises and local
communities where possible
• Maximum Employment in all possible areas
• Further processing where realistic and viable
9. Informal Sector Mining
Example: Liberia:
Significant in gold and diamonds
Perhaps 100,000 miners
Job creation, income generation for many people
Support for local communities
Labour intensive technology
Low cost production
Stronger linkages to domestic economy via input
provision and income generation for many
9. Informal Sector Mining, continued
Minimal tax revenues;
Low productivity mining;
Superficial extraction: “high grading”
Environmental despoliation often
Health and safety issues
Subsistence income generation
Escape of foreign exchange earnings
Possible links to illegality and crime (blood
Formal or Informal Mining: Which is better?
Policies towards Informal Sector Mining
Major Dilemmas:
Formal and informal mining both have advantages
and disadvantages
Case by case approach is reasonable
e.g. Liberia:
Iron Ore: no alternative to large scale formal mining
Diamonds at this time, no formal mining in sight
Gold: possible future coexistence of both?
Policies towards Informal Sector Mining
• Can state plus “legality and regulation”
establish a presence in informal mining ?
• Can it be taxed?
• Can the state purchase the output?
• Can the environment be protected and
health and safety standards be upheld?
• Can productivity and incomes be increased?
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,
 economic stagnation
 civil conflict & war
i.e. Perhaps an inverse relationship between
resource wealth and genuine development??
IV. The Paradox of Plenty aka “Resource Curse”
Economic factors:
exchange rate,
economic management
Political factors via
windfall revenues to Governments without need for
accountability to tax-payers,
windfall revenues “up for grabs” among competing
elites.; feeding corruption
i.e. Resource wealth promotes dysfunctional political
regimes (says Paul Collier)
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
– The Canadian Case the 1950s and the 2010s?
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
Evidence re Performance, continued:
Resource Bonanza countries experience:
- Worse Income inequality
- Similar Human Development Indices
- Civil Conflict: seems pervasive:
- e.g. Nigeria; Chad; Sierra Leone, Liberia, Sudan
[But other resource poor countries also experience
conflict: e.g. Rwanda, Kenya, Somalia]
– Negative “Genuine Savings”
Savings” = Public & Private Saving
- Depreciation
+ Education Spending
- Natural resource depletion
- Increase in pollutant stock
Explanation #1: “Dutch Disease” or “Oil
Economy Syndrome”
Export “boom” caused by a sudden increase in oil
export prices or volumes or mineral export prices or
leads to an appreciation of the exchange rate with
negative consequences
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 #1: “Dutch Disease” or
“Oil Economy Syndrome”
Negative consequences
• a major reduction of traditional (pre-boom)
• unemployment of the factors of production in
the traditional export sector;
• an increased concentration on the resource
export and reduced diversity of export
• damage to import-competing exports;
• Damage to and unemployment in domestic
manufacturing due to cheap imports
• 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
• 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
• Countries undergoing a resource boom (e.g. Canada
in a minor way in the 1950s, again in 2006-2014
with tar sands and oil prices)
• The Netherlands after its North Sea natural gas
boom and before the “Euro”: “Dutch Disease”
• Norway now?
• Major oil exporting countries such as Nigeria
(with 95% of its exports as petroleum);
• Chad (99% of its exports as petroleum)
Digression: Do high levels of development
assistance lead to currency appreciation and
reductoion of other exports?
Explanation #2: Other Economic Factors
Volatility of Foreign Exchange Earnings and
Tax Revenues affects economic management and
Economic Policy Failures: High resource
– Lead to extravagant Wastage;
– Expanded consumption;
– Reduction of other non-mineral taxes;
– Undertake costly but unwise prestige
expenditures or investments
Explanation #3. Socio-Political Character:
“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
Collier’s Thesis:
• Resource Hyper-wealth promotes patronage,
corruption, and autocracy
• Democratic politics becomes deformed and
dysfunctional, permitting the most corrupt
politicians to thrive while the altruistic are
• Contrast Norway and Chad
See also: Geoffrey York, “South Sudan’s $4-billion
query answered: Oil revenue stolen by corrupt
officials Southern Sudan (Globe and Mail, June 6,
Explanation #4: Civil Conflict, Fragile
States and Resource Wealth
Evidence that resource wealth increases
incidence of civil war and conflict (see chart)
- Oil, gold & diamonds dominate;
- Diamonds are easily “loot-able”
- But resource mis-management is also a key
factor explaining poor economic performance
and resource wealth
Civil Strife linked to Resource Wealth, 1990-2002
Oil, Diamonds
Congo, Republic 1997
Congo Dem.
1996-97; 1998- Oil, Diamonds,
Copper, Gold, Cobalt
1975- 2009
Sierra Leone
1983-2003 (+/-) Diamonds
But note Rwanda, Somalia, Uganda: 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 resources
Resource 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;
Capture of the State permits control of resourcre wealth
International spillovers 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
Africa has a generous and under-utilized
endowment of resources especially of nonrenewable 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”
1. Central Requirement: Good Governance:
Good Governance, Elements:
Rule of law;
Representative political system and accountable
Effective, transparent incorruptible
Effective tax regime and regulatory framework for
Effective social programs
2. International Dimensions of Resource Wealth
International efforts to collaborate in improving
accountability and transparency in resource income
management (i.e. to reduce corruption)
A. Transparency Initiatives
Extractive Industries Transparency Initiative:
B. Human Rights, Social and Environmental Standards
International Council on Mining and Metals
UN Global Compact
Timber Certification Scheme
C. Conflict resources Governance Policies
Kimberly Process (Diamond) Certification Scheme
D. Financial Sector Governance Policies
Anti-Money Laundering Initiative
A. Transparency Initiatives
Extractive Industries Transparency Initiative:
• Aimed at gathering, reconciling, publicizing
information on royalties and taxes on oil and
• Objective: ensure transparency,
accountability, and absence of corruption
• Most African and many other countries have
Web Site:
B. Conflict Resources Governance Policies
Kimberly 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 Council
Successful re labelling and blocking trade in “conflict
• 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: To Optimize
1. Tax revenue generation and developmental
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
3. Management of Natural Resource Revenues
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 Resourcefinanced 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
Stabilization funds or citizen dividends
c) Stabilization funds:
– Fat cow / Lean cow rationale (Joseph & the
– a la Norway, Chile, or Alberta (the Heritage Fund)
– Advantage:
– Disadvantage:
• they are “raid-able”
• Citizens may object to postponement of expenditures
• Future economic downswings may be underestimated
Stabilization funds or citizen dividends,
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
2. Generate jobs for local people (note problem
with displacement of artisanal miners);
3. Revenue sharing with local communities and
states or provinces;
4. Ensuring Fairness of Benefit Distribution to Local
4. Local procurement of inputs;
5. Minimize environmental damage
6. Decommissioning and clean-up of mine-site
7. For Indigenous Peoples: Free, Prior and
Informed Consent
A caution: There is no automatic conversion of
new resource wealth to broad-based, pro-poor,
and sustainable development; this is a most
difficult task.
Conclusion: Optimizing the Socio-Economic
Gains from Resource Development
1. Tough but Reasonable Tax Regime
2. Pro-Poor Allocation of tax-financed Social
3. Domestic Procurement wherever reasonable
4. Domestic Labor use wherever possible
5. Fair Benefits to Local Communities
6. Environmental stewardship
7. Stewardship of the resource for the long term
8. Good Governance is Indispensable