Natural Resources and African Development

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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

Main Export

Other Exports

Botswana

Diamonds 88.2%

Nickel 8.1

Chad

Oil 99.9%

Ghana

Cocoa 46

Manganese 7.2

Kenya

Tea 16.8

Flowers 14.2

Nigeria

Oil 92.2

S.

Africa

Platinum. 12.5

Coal 8; Gold 7.9

Tanzania

Gold 10.9

Fish

9.7; Copper 8.6

Zambia

Copper 55.8

Cobalt 7

Sub
-
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 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

0
50
100
150
200
250
300
350
400
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009(f)
2010(f)
Petroleum
Copper
Aluminium
Gold
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 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

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

Country

Years

Resources

Angola

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
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; 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

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

, Z
ambia
,
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 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


楮捲敡獥搠業灯牴猠睩w栠
汩l瑬攠獵st慩湡a汥l扥湥晩f猿


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 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 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