Debating the real curse behind Africa’s resource wealth
Why do some of the world’s most resource rich countries have the poorest populations?
Africa, with its 54 unique countries, is rich in natural resources. According to David Hale, economist and founder of David Hale Global Economics, the continent produces 74% of the world’s platinum, 62% of cobalt, 54% of diamonds and 11% of oil, to name a few.
However, despite this mineral wealth, Africa remains the poorest continent in the world. During last week’s Investing in African Mining Indaba in Cape Town, a number of economists, policy makers and mining companies discussed this contradiction, alongside the notion of a resource curse in Africa.
Economist and Rhodes University professor, Gavin Keeton, said a lot of the thinking surrounding the economic theory that a country’s resources can negatively impact its growth and development is based on a study by Jeffrey Sachs and Andrew Warner. In their economic article, Sachs and Warner made a comparison of per capita economic growth and natural resource endowment and found a negative relationship between these.
“And this was very quickly taken up in popular discourse and I think still feeds thinking today,” said Keeton.
Dr Duncan Clarke, founder of advisory firm Global Pacific & Partners and author of a number of books concerning resources and economics in Africa, argues against the existence of a resource curse. During a discussion with How we made it in Africa, Clarke said the idea that there is a resource curse in Africa is both arbitrary, and distracts from the real issues stunting the continent’s economic growth and development.
A curse of politics
Why do some of the world’s most resource rich countries have the poorest populations? According to Clarke, relating the existence of natural resources in a country to poverty lacks “empirical, historical and intellectual grounds”. He added that if there were no natural resources in Africa, even less would filter down to the poor.
“There is no resource curse in Africa. There is a curse of politics – institutions and politicians – and sometimes vested interests which block the arteries of economic growth... But economic growth, and high rates of economic growth over long, sustained periods of time, will [lead to] rising income... on the principle generally of rising tides raise all the boats. It also requires intelligent, sensible governance, institutions, others to help articulate it.”
Mike Roy, mining and metals director for Africa advisory services at EY, told How we made it in Africa he does not believe Africa has taken full advantage of the resources lying beneath its surface, compared to countries like Australia. He added that with country boundaries overlapping many mineral reserves, African governments should look to regional solutions, although “efforts to reach those are proving difficult”.
A curse of poor policies and reliance on resources
Africa is home to some of the world’s fastest growing economies, and much of this growth is from natural resources. One argument supporting a natural resource curse in Africa is that these countries are vulnerable to revenue volatility due to global commodity market swings.
“Minerals are not a curse provided countries pursue the right governance structures both in the private sector and in the public sector,” said Roger Baxter, chief operating officer at the Chamber of Mines of South Africa, during a speech at the Mining Indaba.
“They can certainly be the best boon for development and so I am certainly of the view that the resource curse is only for those countries that don’t pursue those right sorts of policies.”
According to Keeton, policy makers need to ensure that the extraction of natural resources in their country do not lead to over-valued exchange rates, resulting in the Dutch disease.
The Dutch disease is another economic theory tied to the notion of resources being a curse. The idea is that growth in a country’s revenue from natural resource discoveries will cause its currency to become stronger, making its other exports – from its manufacturing or agriculture sector – more expensive for other countries to import, and therefore less competitive in the world market.
However, Clarke said the Dutch disease is almost non-existent in Africa and does not pose a threat for two reasons. Firstly, the continent’s resource-rich countries have weak, not over-appreciated, currencies. Secondly, many African countries that have experienced mineral or oil and gas discoveries, did not have a strong manufacturing or agricultural sector to diminish.
“In fact, it’s increased on the value chain in Equatorial Guinea,” highlighted Clarke. “And in Angola with all the service supply – they build rigs there [now] – and the development of local content programmes, etc.”
A curse of illicit deals and lack of transparency
According to Louis van Breda, Africa mining and metals director for EY, there are legacy issues tied to the extractive industry in Africa that are still being dealt with.
“So in the past I would say that the mineral reserves of Africa was a curse [for the continent’s economic growth] because companies came in, operated not necessarily in compliance with laws and regulations, operated in such a manner to ensure maximum return without giving much thought to how the country and the people of a particular country could benefit,” van Breda told How we made it in Africa.
“I think that that is the past... but in order for this to no longer be a curse, the companies – all the mining houses, be that juniors or mid-tiers or majors – need to then have constructive engagement with government, in order to manage and have clarification regarding regulatory aspects.”
According to a 2013 report by the Africa Progress Panel, the continent loses more through illicit outflows than it receives through aid and foreign direct investment.
“Billions and billions of dollars are leaving Africa,” Caroline Kende-Robb, executive director of the Africa Progress Panel, told How we made it in Africa. “We calculated, with the help of Global Financial Integrity, that there was US$38bn leaving Africa every year… [through] trade mispricing, where you undervalue the prices of your imports and exports so you don’t have to pay the appropriate amount of tax.”
Other illicit outflows – such as funds that are illegally earned, transferred or utilised, as well as unrecorded private financial outflows – are estimated to total $25bn.
“And we estimate when we look at the Democratic Republic of the Congo that they undervalued just five deals by $1.4bn… over a matter of two years,” continued Kende-Robb. “And these are massive amounts of money that are flowing out, that people have difficulty tracking, because of the lack of transparency.”
However, she added that there has been some improvement by mining companies, as well as some governments and policy makers, concerning transparency in mining deals and taxation in Africa.
“If you look at governments, a country like Guinea is now publishing contracts online. They have now 60 contracts online within the last year. Nobody thought that that would happen about a year ago.”