How can African economies turn the resource curse into a blessing?

4 July 2012

According to a recently published study by consultancy Oxford Policy Management, the number of commodities-dependent countries with low and middle incomes has risen by more than 30 per cent between 1996 and 2010 – up from 46 to 61 countries – leaving them vulnerable to the resource curse. Half of the countries identified as being at ‘high risk’ are in Africa. Recognising that the effects of the resource curse are avoidable, this article identifies some of the challenges facing these countries, and attempt to show how they can be overcome by working with the private sector and donors to enhance the levels of development attributed to mining.

The arrival of mining multinationals often appears to be a golden opportunity. New mines bring jobs, government revenue, income for local suppliers and possibly even improvements in infrastructure. When the salaries of workers and suppliers are re-invested in the local economy, a multiplier effect provides benefits to a broader cross-section of society.

Yet history shows that extractive industries often fail to deliver sustainable growth. Instead, countries experience appreciation of real exchange rates (rendering non-mineral exports less competitive), skilled workers are drawn away from other manufacturing industries into the mining sector, and the jobs that do materialise are fewer than expected and less suited to local communities. Tax payments take a long time to materialise, the arrival of immigrants in search of jobs in mining communities puts pressures on public services, and the unpredictable nature of government revenues increases the risk of rent-seeking and corruption. Together these consequences are loosely referred to as the “resource curse”.

An increase in resource dependence

The challenges of managing resource wealth are significant. In 2010 some 95 countries gained more than a quarter of their tangible export revenues from minerals (including fuels). Around three quarters of these were low- or middle-income countries. The degree of mineral dependence has also increased. This trend is particularly evident amongst countries dependent on non-fuel minerals such as copper, gold and iron ore: between 2005 and 2010, fourteen such countries increased their dependence ratio by at least 25 percentage points. In Burkina Faso, the mining sector accounted for just 2 percent of exports in 2005, but 41 percent five years later; in Somalia, over a third of export revenues are now generated by the mining industry, up from 5.4 percent in 2005.

Non-fuel, mineral-dependent countries often exhibit lower economic development than other countries, including countries dependent on oil and other fuel minerals. The top-20 countries with the lowest GDP per capita include the Democratic Republic of Congo ($319), Sierra Leone ($808) and Mozambique ($885) – all with substantial mineral resources.

Economic and institutional preparedness matters

The challenge is how to manage this resource wealth effectively. First, a stronger and more diversified economy helps to maximise the positive impacts of mining. Where overall economic development is lacking, governments may be inclined to spend revenues as they arrive, leaving less potential for linkages between foreign companies and local suppliers. Second, institutional development is needed to secure government’s ability to both collect revenues from mineral extraction and to spend them effectively on physical and social infrastructure.

The study shows that 12 countries – all highly dependent on mineral exports and with low economic and institutional development – are at particular risk of falling victim to the resource curse. Seven of these are in Africa: Burkina Faso, DRC, Ghana, Mali, Mauritania, Tanzania and Zambia.

Six steps to resist the resource curse

What can be done to mitigate the risks and enhance the positive impacts of large-scale mining in these countries?

· Understand and manage broader macroeconomic impacts
When revenues from extractive industries enter small, undiversified economies, the result is often price inflation – increasing input costs for local producers and undermining the competitiveness of export sectors (e.g. manufacturing and agriculture) that employ many more people than mining. Moreover, mining typically attracts skilled workers away from other exporting sectors. To avoid this ‘crowding out’ effect, governments need to adopt an economic life-cycle approach for the extractive industries and invest in vocational capacity building to meet demand for skills.

· Use mineral receipts to invest in productive assets
The lack of effective public finance management systems in poorer countries, coupled with enormous demands for increased government spending, can easily result in profligacy and pro-cyclical spending. To secure the broad benefits of mineral wealth, governments should invest mining returns in productive assets such as infrastructure and education, rather than recurrent expenses (e.g. public sector salaries).

· Integrate mining more closely with other economic activities
To the dismay of local communities, modern mining typically offers little direct employment. However, there may be significant opportunities in the mining supply chain for consumables and services. Locally owned and operated companies can meet some of this demand if supported by government (e.g. providing infrastructure and securing property rights) and foreign investors (e.g. supply chain development programmes). The African Mining Vision formally launched by the African Union/UNECA in December 2011 embraces this approach.

· Understand your local economic and social impacts
From inflation to immigration to pollution, the impacts of mining are often best felt in the local community – long before production begins, and even longer before tax revenues start flowing. It is essential to study the likely impacts of a new mine in order to help target activities and guard against a backlash. Baseline studies need to examine local political economy factors – as well as socio-economic indicators – and be monitored through regular household surveys in neighbouring communities (e.g. every two years).

· Manage expectations through effective communication and consultation
The fundamental mismatch between local expectations and what a mine can actually deliver in terms of benefits is a driver of frequent social tensions around resource projects. Companies need to manage expectations by establishing and sustaining dialogue with communities, and being frank about the number of jobs created and the skills they require. It is essential to recognise that benefits for the community will be more limited if (as in northern Tanzania) large-scale mining displaces pre-existing livelihoods of artisanal miners.

· Strengthen accountability mechanisms
The large and erratic nature of fiscal receipts from mining makes them prone to rent-seeking and corruption. To tackle this, greater accountability is needed at every stage of the value chain, from the awarding of licences and monitoring environmental impacts to revenue collection, spending and closure. The Extractive Industries Transparency Initiative (EITI) has enhanced accountability around revenue payments, but the multi-stakeholder approach has yet to be effectively applied in other areas.[1] The critical insight is that policies are ineffective unless accompanied by careful attention to implementation throughout the extractive industries policy chain, including well-resourced and well-incentivised inspectors.

Conclusion
Unlike their richer counterparts, low- and middle-income countries often lack the institutional arrangements to cope with the challenges of translating mineral wealth into human development. The resource curse is not a foregone conclusion for any of the mineral-dependent African countries, but it needs to be dealt with. None of the above steps are – in isolation – sufficient to mitigate the risks of the resource curse. Yet taken together they represent an overall framework for thinking about what different actors can do in order to nudge countries towards a sustainable path of mineral development.

Note: The Oxford Policy Management study “Blessing or Curse? The rise of mineral dependence among low- and middle-income countries” can be found here

Author: Dan Haglund is an economist with Oxford Policy Management’s Extractive Industries Portfolio.

[1] The EITI aims to increase transparency around revenue payments in extractive industries, by requiring companies to disclose what they pay; governments to disclose what they receive; a multi-stakeholder forum to oversee the process; and audits to reconcile revenue flows. See http://eiti.org/ .

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