Lee-Roy Chetty
Lee-Roy Chetty

Avoiding the resource curse in Africa

Over the last four decades, resource abundant countries in the developing world have consistently under-performed resource poor countries when it comes to economic growth, income inequality and good governance.

It has been well established that the more intense a country’s reliance on mineral exports (measured as a percentage of GDP), the more slowly its economy grows.

As an example, according to the Africa Development Bank (ADB), between the periods of 1960 to 1990, the GDP per capita of mineral rich countries increased by 1.7% compared to the 3.5% growth of mineral poor countries

These counter-intuitive trends however are more complex than the above economic data suggest. The abundance of a resource is after all, not the cause of poor growth.

Rather, the abundance of a specific resource(s) creates incentives for poor wealth management which in turn result in incremental rather than exponential economic growth.

Governments within the developing world depending on a set of few commodities are particularly susceptible to a number of macroeconomic challenges.

The first is the excessive volatility of commodity prices.

This has had severe implications for commodity dependent nations. In other words, nations whose national revenues are mainly drawn from the export of a particular resource – because cycles of booms and busts in real national incomes – create problems for macroeconomic management.

Short-term revenue instability is a particularly challenging context for macro-economic planning and fiscal policy management given that expenditure patterns in these types of countries tend to follow revenue patterns.

Cycles of booms and busts in the commodity price also translate into cycles of booms and busts in fiscal expenditures. As a result fiscal policy becomes pro-cyclical, implying that spending goes up (and taxes down) in periods of booming prices and spending goes down (and taxes up) in periods of price busts.

In addition, the expenditures of pro-cyclical fiscal policies are not necessarily efficient.

Research indicates that spending often fuels expenditure on the current account and a low-return on public investment programs. This approach to fiscal management is an understandably common pitfall when looked at from the perspective of governments which often operate on a short-time horizon.

Always seeking to extend their tenure – be it through elections or expansive state policies – governments in the developing world are likely to spend windfall revenues quickly and in an inefficient manner. An example of this type of short term strategy is increasing wages and subsidies, which for those same political reasons are difficult to reduce once revenue dries up.

Investment in low-return and over-ambitious projects, is another common wealth management mistake made by resource-abundant economies.

The problem of foreign debt accumulation also becomes prevalent because many resource-abundant economies consider busts to be temporary and booms to be long term.

As a result, these countries begin to borrow on the strength of their well-performing commodity and continue to do so as a means to finance their deficits when their commodity performs poorly and their revenue drops.

Yet another common problem that contributes to the resource curse is Dutch disease.

As a country’s management focuses more on the booming sector, the competitiveness of other sectors, primarily manufacturing and agriculture, diminish resulting from the price appreciation of the currency during resource booms.

Related to this issue is the problem of limited economic diversification.

Resource abundant economies tend to over emphasize the importance of resource extraction in their economy which in turn reinforces their dependence on that product and its place in the market cycle.

Perhaps one of the most problematic issues resulting from resource abundance and the poor management of resource wealth is institutional weakening.

There is a tendency for large windfall revenues to weaken institutions.

For instance, direct access to income from the commodity reduces the incentives for a government to establish a tax system. At the same time, however, the implicit reciprocity between tax collection and the social services provided by the state are severed.

As a result, commodity booms thus encourage rent-seeking and patronage networks by removing citizen participation in the creation of state revenues, therefore rendering the state decreasingly accountable to its citizens.

Finally, the macro-economic and fiscal policy challenges created by resource abundance are further pronounced by the uncertainties surrounding the long term sustainability of some natural resources.

Economies dependent on non-renewable resources constantly face a trade-off between current revenues and future revenues. That is, they are not only challenged by inter-temporal budget constraints, or the impact of boom and bust cycles on their revenue, but on inter-generational equity.

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  • 18 Responses to “Avoiding the resource curse in Africa”

    1. MrK #

      ” Rather, the abundance of a specific resource(s) creates incentives for poor wealth management which in turn result in incremental rather than exponential economic growth. ”

      Nonsense. We are talking about the theft of natural resources. What is theft? It is when someone takes something, does not pay the value to the persons who own it, and does not even pay taxes on them.

      First of all, I hate the phrase ‘resource curse’, because it is intended to not name names, and cover up the theft of natural resources.

      Africa will develop, when it’s governments benefit from the country’s natural resources.

      1) All natural resources are sold to the state at a cost only basis and
      2) All natural resources are sold by the state at international market prices only

      This eliminates most wars, most corruption, and most reasons for chancers to want to join government.

      It will make money available for investment in human and physical capital and infrastructure, including free healthcare and education.

      So let’s name the corporations that are dragging our collective resources out of the ground. Anglo-American De Beers, Rio Tinto, Glencore International PLC (which right now owns 49% of South Sudan’s oil, which is 75% of Sudan’s oil total – don’t count on the South Sudan government seeing 49% of South Sudan’s oil though).

      November 10, 2012 at 7:51 pm
    2. MrK #

      Let’s also mention what happens to countries and governments who refuse to comply with the New World Order, because those corporations have connections that go all the way to London, New York and Brussels. Libya. Zimbabwe. Right now, Argentina is under attack for nationalizing it’s main oil company.

      (BBC) YPF nationalisation: Is Argentina playing with fire?, by Vladimir Hernandez, BBC Mundo, Buenos Aires
      href=”http://www.bbc.co.uk/news/world-europe-17740393

      (LAND DESTROYER REPORT) Color Revolutions: Argentina Next?
      Tony Cartalucci
      Land Destroyer
      November 9, 2012
      http://landdestroyer.blogspot.com/2012/11/color-revolutions-argentina-next.html

      November 10, 2012 at 7:52 pm
    3. Of course, the single biggest factor in the Resource Curse, explaining most of why Africa’s genuine wealth is *shrinking* (not growing) by 6% a year, is the depletion of non-renewable resources not compensated for by reinvestment, by transnational extractive-industry corporations. You can find the 6% (2008) figure – which is worsening – here, http://siteresources.worldbank.org/ENVIRONMENT/Resources/ChangingWealthNations.pdf and more explanation here: http://ccs.ukzn.ac.za/default.asp?11,65,3,2799 … and I hope this basic factor is incorporated into everyone’s analysis of Africa’s alleged ‘growth’, as even a few African leaders committed to doing when signing the Gabarone Declaration in May. It obviously changes the political calculus, if taken seriously.

      November 11, 2012 at 9:00 am
    4. Greenpeace #

      SA is lucky, as you note, not to be a single resource economy given the risks that its rentier state model pose. However SA’s greatest resource may be the one which the state treats with the greatest disregard – and which is never acknowledged, appreciated or treated as valuable – namely, the skills and expertise of the middle and working classes, which provide it with a unique but rapidly crumbling industrial base and pockets of world-class expertise amidst large areas of mediocrity. The state however is fixated only on expanding the bloated non-productive public sector which is one of SA’s main competitive disadvantages and which continues to drag SA backwards compared to other African nations.

      November 11, 2012 at 10:43 am
    5. Frans Verloop #

      Your analysis according to economic theory is exemplary, but what about kleptocratic governments? I suspect that that is often the dominant factor. Countries like Nigeria and Angola with all the oil they have, should be as wealthy as Norway but most of its revenue is stolen by the politicians. And then all the economic theories go out the window.

      November 11, 2012 at 10:50 am
    6. Juju Esq. #

      Interesting analysis; mineral resources go boom and bust but renewable resources are more consistent I assume. Those countries most heavily dependent on mineral resources are the most under-performing.

      Maybe the Saudi’s are smarter than we think;

      “We’ll Go 100% Renewable Energy, Says … Saudi Arabia”
      http://www.cnbc.com/id/49503715/We_ll_Go_100_Renewable_Energy_Says_Saudi_Arabia

      Oil-Soaked Saudi Arabia Sets Goal of 100% Renewable Energy

      Read more: http://www.care2.com/causes/oil-soaked-saudi-arabia-sets-goal-of-100-renewable-energy.html#ixzz2Bu3Hu8rk

      >>>

      November 11, 2012 at 11:12 am
    7. beachcomber #

      http://www.nytimes.com/2012/11/11/world/africa/as-coal-boosts-mozambique-the-rural-poor-are-left-behind.html?nl=todaysheadlines&emc=edit_th_20121111&_r=0

      The rape of Mozambique’s resources by multinationals has already begun. Look forward to a repeat of Angola.

      November 11, 2012 at 11:53 am
    8. Read the book “Confessions of an Eco Sinner” by Fred Pearce if you want to get depressed. The world’s multi nationals and mafia criminal gangs are more powerful than the governments. They just deal direct with whoever controls the resources they want to loot whether they are “government” or “rebel”

      November 11, 2012 at 12:17 pm
    9. What is more there was never any “war against Colonial Rule” in Mozambique, the Belgium Congo, or the Western Sahara.

      The Belgians and Portugese just dumped their colonies and went home- and immediately tribal wars broke out with Communist Russia and their Cuban mercenaries backing one side (later joined by Communist China) and Capitalist America the other side.

      When the Spanish withdrew as colonisers from the Western Sahara the Moroccans just moved in as the new colonisers (which was, no doubt, why Zuma mentioned them as a dig in has Mbeki speech). Morroco has been in illegal occupation of the Western Sahara ever since, and has refused to join either the Organisation of African Unity or the African Union, because Western Sahara owns most of the world’s phosphate which all farmers need for fertiliser!

      As for Mozambique – I was there myself on the day of Independence!

      November 11, 2012 at 2:58 pm
    10. manquat #

      Why doesn’t this happen in oil rich Saudi Arabia? I wish that the oil money and gold and diamond money can uplift and empower local countries. A major problem is rich countries with poor citizens. How can the wealth generated through industry trickle down to the man on the street?
      It’s for this very reason that we have major social problems. Huge inequality creates social instability, a lack of trust between citizens and high homicide rates.
      “If money doesn’t flow to the man in the street, blood starts flowing in the street.” Gerald Celente.

      November 12, 2012 at 2:12 am
    11. MrK #

      Frans Verloop,

      ” Your analysis according to economic theory is exemplary, but what about kleptocratic governments? I suspect that that is often the dominant factor. ”

      You suspect wrongly. I would love to live in a world where *all* of the nation’s resources were stolen by the government. That would make things very easy. All any population would ever have to do was hold their own country’s government accountable.

      The problem is that Chevron, BP, etc. are not in business to make dictators rich. I would roughly guess that 90% of the wealth goes to the transnational corporations, to Switzerland and Bermuda, and from there on no one knows.

      November 12, 2012 at 8:56 am
    12. Manquat

      Saudi Arabia is a police state run by fanatical Wahabi Religious Police who won’t even allow women to drive cars, or go outside the house unless accompanied by a male who must be a relative.

      The Religious Police act entirely in the interests of the Polygamous Saudi Royal Family who spend almost half the oil profits on themselves.

      November 12, 2012 at 9:42 am
    13. The Creator #

      Hi, Patrick!

      Anyway, as a matter of idle curiosity, why is this article headed “avoiding the resource curse in Africa” when it says nothing about this?

      November 12, 2012 at 11:00 am
    14. Zeph #

      The Dutch Disease virtually destroyed Zambia’s attempts at diversifying its economy based on the Kenyan model of high labour/ high cost produce for the European markets.
      There is a lesson there for South Africa and the nationalization debates:
      1. Anglo American worked the mines.
      2. Zambia nationalizes them and kicks AA out
      3. High capital investment and maintenance defeats the Zambian nationalization cause (inept management due to complacency in a state monopoly didn’t help [sound familiar?]
      4. Desperate Zambia calls for bids from multinationals to rescue them
      5. Mines returned to multinationals at knock down prices (Guess who got ‘em? AA of course)
      6. Fraction of potential revenue goes to Zambia. Large scale mechanization so most money spend on offshore for equipment.
      7. Concurrent currency appreciation with improvement in copper mining
      8. Leads to virtual death of diversification
      But will our government take heed of this?

      November 13, 2012 at 11:18 am
    15. Lennon #

      MrK and Lyndall pretty much said what I wanted to.

      @ The Creator: Do you honestly think that a supporter of Friedman economics is going to mention the obvious solution?

      November 13, 2012 at 11:34 am
    16. MrK #

      Zeph,

      ” Zeph #

      The Dutch Disease virtually destroyed Zambia’s attempts at diversifying its economy based on the Kenyan model of high labour/ high cost produce for the European markets. ”

      Nice pitch for Anglo. However…

      “Dutch Disease” is where an increase in natural resource wealth increases the value of the currency, thereby reducing manufacturing exports because they have become too expensive relative to currencies of neighboring countries.

      This is such a theoretical construct that in my opinion the term can best be forgotten. In the real world, trade policies have a much greater impact on manufacturing than a highly valued currency.

      Certainly the rise in money from copper didn’t finish off the Zambian manufacturing sector – that were the neoliberal free trade policies which exposed Zamian manufacturers to cheap Chinese imported goods.

      Zambia started on the road to neoliberal free market economics from 1991 onwards, and it devastated domestic manufacturing, as it has everywhere else on the planet.

      November 13, 2012 at 10:26 pm
    17. Zeph #

      Mr K, not punting AA, just illustrating the folly of short sightedness.

      November 15, 2012 at 9:36 am
    18. Zeph #

      and I was mentioning the agriculture – not manufacturing.

      November 15, 2012 at 12:19 pm

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