Natural Resources and African Development

ECON 3510,Carleton

University

Arch RitterMay 29 & June 3

2014

Note: The sources for this section are

1. Class Notes2. Collier Chapter 3

3. Optional: African Development Bank, African Development

Report 2007, Oxford and New York: Oxford University Press, 2007,

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”

OutlineI. Some Historical ObservationsII. Current Role of Resources in African Development– Petroleum, coal, natural gas– Minerals– Forestry products

III. The Main Mineral Sector Development IssuesIV. “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. The New Scramble for Africa’s Resources

I. Some Historical Observations

Pre-Colonial metal-working; since time immemorial

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?

I. Some Historical Observations, cont’dThe 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 ChallengeComing of Renewed Resource Wealth

Iron Ore again; BHP Billiton and Mital-Arcelor

Off-Shore Petroleum?Harnessing Resource Wealth Equitably and

ProductivelyAccessing Resource Wealth: Taxes and LinkagesPro-Poor Sharing of the WealthAvoiding the “Curse of Resource Wealth”The Good Governance Imperative

II. Current Role of Resources in African DevelopmentMineral Export Concentration, Selected Countries. 2005

(Percentage of Total Exports)

Country Main Export Other ExportsBotswana Diamonds 88.2% Nickel 8.1Chad Oil 99.9%Ghana Cocoa 46 Manganese 7.2Kenya Tea 16.8 Flowers 14.2Nigeria Oil 92.2S. Africa Platinum. 12.5 Coal 8; Gold 7.9Tanzania Gold 10.9 Fish 9.7; Copper 8.6Zambia Copper 55.8 Cobalt 7Sub-Saharan Africa Oil 49.2 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 statesImpoverishment and environmental

problems for local peoples (the Ogoni and other groups)

Major Conflict in the Delta

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: significantJob Creation and income generation? May be limited

domestically; Specialized jobs to foreignersLinked economic activity generation? LimitedRising future prices trends? An encouraging future?

III. The Main Oil and Mineral Sector Development Issues

Possible Costs:Fluctuating foreign exchange earnings Declining price prospects? A discouraging

future? [No]Profit repatriationLimited Direct LinkagesEnvironmental costsImpacts on local communities

III. The Main Oil and Mineral Sector Development Issues, continued:

III. The Main Oil and Mineral Sector: Main Development Issues

1. Price volatility generates macroeconomic instability

(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 deposits4. Enclave Character: limited linkages to domestic

economy5. Further processing migrates abroad

III. The Main Oil and Mineral Sector Main Development Issues continued

6. Environmental Impacts7. Impacts on Local Communities8. Insufficient Returns to Governments9. Informal Sector Mining

Conclusion: Don’t Do Petroleum or Mining?

OR: Manage Petroleum and Mining Sectors Intelligently?

1. Mineral Price Instability

2. Terms of Trade and Mineral Prices

2. 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 others

• 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

4. Enclave Character: limited linkages to domestic economies

Explain:– “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

Explain:– “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 QualityAir QualityTailings Noxious WastesLand 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. 150Or the Ogoni people in Nigeria

8. Returns to Government: TaxationTax Regimes and Revenues are ImportantVarieties 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 TaxesBut note the ways corporations can minimize tax

payments: transfer pricing

Are revenues to Governments sufficient?

8. Returns to Government: Taxation, cont’dBut note the ways corporations can minimize tax payments:

Transfer pricing;

Are revenues to Governments and Countries sufficient?

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 MiningExample: Liberia:

Significant in gold and diamondsPerhaps 100,000 miners

Advantages:Job creation, income generation for many peopleSupport for local communitiesLabour intensive technologyLow cost productionStronger linkages to domestic economy via input

provision and income generation for many

9. Informal Sector Mining, continuedDisadvantages:

Minimal tax revenues;Low productivity mining; Superficial extraction: “high grading”Environmental despoliation oftenHealth and safety issuesSubsistence income generationEscape of foreign exchange earningsPossible links to illegality and crime (blood

diamonds!)

Formal or Informal Mining: Which is better?

Policies towards Informal Sector Mining

Major Dilemmas:Formal and informal mining both have advantages

and disadvantagesCase 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 sightGold: 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”

Why? Economic factors:

exchange rate, prices, 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 corruptioni.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

Export “boom” caused by a sudden increase in oil export prices or volumes or mineral export prices or volumes, leads to an appreciation of the exchange rate with negative consequences

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”

Explanation, with diagram on the blackboard

Negative consequences• 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;• Damage to and unemployment in domestic

manufacturing due to cheap imports

Explanation #1: “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 2006-2014 with tar sands and oil prices)

• The Netherlands after its North Sea natural gas boom and before the “Euro”: “Dutch Disease”

• Norway now?

Examples:

• 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 performance

Economic Policy Failures: High resource revenues: – 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 intensified.

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 displaced.

• 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, 2012)

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

Country Years ResourcesAngola 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 1983-2003 (+/-) DiamondsBut 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 wealthInternational 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 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”

1. Central Requirement: Good Governance: Good Governance, Elements:

Rule of law; Representative political system and accountable

leadership; Effective, transparent incorruptible administration; Effective tax regime and regulatory framework for

enterprises Effective social programs Decentralization:

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 InitiativesExtractive Industries Transparency Initiative:

B. Human Rights, Social and Environmental StandardsInternational Council on Mining and MetalsUN Global CompactTimber Certification Scheme

C. Conflict resources Governance PoliciesKimberly Process (Diamond) Certification Scheme

D.Financial Sector Governance PoliciesAnti-Money Laundering Initiative

A. Transparency InitiativesExtractive 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

Web Site: http://eitransparency.org/

B. Conflict Resources Governance PoliciesKimberly 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 CouncilSuccessful 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: To Optimize 1. Tax revenue generation and 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

3. Management of Natural Resource Revenues

a) Ensuring Revenues plus Appropriate Incentive structure for enterprises sustainability

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

Pharaoh– 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, 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. Ensuring Fairness of Benefit Distribution to Local Communities

4. Local procurement of inputs;5. Minimize environmental damage6. 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 Regime2. Pro-Poor Allocation of tax-financed Social

Expenditures 3. Domestic Procurement wherever reasonable 4. Domestic Labor use wherever possible5. Fair Benefits to Local Communities6. Environmental stewardship 7. Stewardship of the resource for the long term8. Good Governance is Indispensable