Natural Resources and African
Development
(with a focus on non-renewable resources)
ECON 3510
,
Archibald Ritter
June 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”
Outline
I. Some Historical Observations
II. Current Role of Resources in African Development
–
–
–
Petroleum, coal, natural gas
Minerals
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
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 Development
Mineral Export Concentration, Selected Countries. 2005
(Percentage of Total Exports)
Country
Botswana
Chad
Ghana
Kenya
Nigeria
S. Africa
Tanzania
Zambia
Sub-Saharan Africa
Main Export
Diamonds 88.2%
Oil 99.9%
Cocoa 46
Tea 16.8
Oil 92.2
Platinum. 12.5
Gold 10.9
Copper 55.8
Oil 49.2
Other Exports
Nickel 8.1
Manganese 7.2
Flowers 14.2
Coal 8; Gold 7.9
Fish 9.7; Copper 8.6
Cobalt 7
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
III. The Main Oil and Mineral Sector
Development Issues
Benefits and Costs of Mineral and Petroleum
Extraction:
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 deposits
4. Enclave Character: limited linkages to economy
5. Further processing migrates abroad
6. Environmental Impacts
7. Impacts on Local Communities
8. Insufficient Returns to Governments
Conclusion: Don’t Do Petroleum or Mining?
Manage Petroleum and Mining Sectors Intelligently?
1. Mineral Price Instability
Recent Mineral Commodity Prices, 2000-2009
400
350
Petroleum
Copper
Aluminium
Gold
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: OECD Development Centre, based on World Bank, 2009
2009(f)
2010(f)
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 Quality
Tailings
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 gold mining in Tanzania, African Development
Report, 2007, p. 150
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 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
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. management
Political 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
Evidence re Performance, continued:
– Negative “Genuine Savings”
“Genuine Savings” = Public & Private Saving
- Depreciation
+ Education Spending
- Natural resource depletion
- Increase in pollutant stock
- 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, Zimbabwe
Explanation: “Dutch Disease” or “Oil Economy Syndrome”
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;
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
Country
Years
Resources
Angola
1975-2002
Oil, Diamonds
Chad
2008-
Oil
Congo, Republic
1997
Oil
Congo Dem. Rep.
1996-97; 19982007
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
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; kickbacks;
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 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”
Elements:
Rule of law;
Representative political system and accountable leadership;
Effective, transparent incorruptible administration;
Decentralization:
Effective tax regime and regulatory framework for
enterprises
Effective 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 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
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 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
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 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
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 damage
6. Decommissioning and clean-up of mine and minesite
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 investment
Oil, 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 term
A lead-in to exports of manufactures for Asia? Tourism
from Asia?
Possible negative effects:
Non-transparency
Minimal concern re authoritarian regimes, human rights
issues, corruption
Diversion of resources from use for Africa to use for Asia
Use of imported Asian labour; reduced domestic learning
effects