The Curse of African Resource Abundance

Although much of the African continent possesses a myriad of natural resources, modest economic growth has come largely absent development. Much of the African continent experiences conditions of abject poverty, and in some countries poverty has increased in recent decades. Africa is experiencing the effects of a “resource curse”, where resource extraction actually contributes to conditions of poverty and stagnated development. In part the result of a “Dutch disease”, growth inhibited by resource extraction is multifaceted, involving government failures, unfair or opaque contracts by firms, and missed opportunities for sustainable reinvestment. Despite the challenges associated with contractual renegotiations and improving institutional competency, natural resource abundance in many African countries presents opportunities to pair economic growth with sustainable development.

The natural resource endowment of many African countries has precipitated a multi-decade resource boom. Massive infrastructure spending for resource extraction has been taking place in Mozambique, for example, where the discovery of gas deposits off the northeast coast has spurred infrastructure spending. Ghana, Tanzania, and Uganda are experiencing similar resource booms. Oil producing African countries has driven economic growth over the past decade. According to World Bank, Sub-Saharan Africa is expected to grow at 4.8 percent in 2012, despite global economic uncertainty and potential slowdowns in key export markets such as China. Oil, natural gas, diamonds, gold, copper, and coltan are abundant. However, it is unlikely that material gains will result in evenly distributed improvements in standard of living or sustained economic development. Resource dependence reduces long-run output, and often increases instances of poverty.

As Jeffrey Sachs and Andrew Warner have observed, the extent of resource endowment in developing countries tends to undermine real economic growth and development by way of a resource curse. One aspect of the resource curse is the Dutch disease, where extractive resource dependency undermines industrial diversification by causing real export rates to rise while draining productive resources from other industries, impeding their development. An overemphasis on oil production by Nigeria in the 1970s came at the expense of its comparative advantage in agricultural production. Resource price variability for African exporters also tends to create high per capita output volatility. Concurrent capital outflows tend to aggravate unemployment. Resource revenues in African countries are also typically very low, due in part to exploitative contracts, but also political instability and corruption.

Operational opacity and exploitative contracts starve resource endowed countries of revenue for reinvestment. As Joseph Stiglitz suggests, countries should encourage competition and transparency in extraction, renegotiate contracts, and impose windfall taxes. frican countries should also reset legal frameworks, utilize checks and balances,1 stipulate government’s share of revenue from extraction activity, impose value-chain transparency,2 and make public extractive revenue figures. Zambia’s recent copper mining industry renegotiations resulted in increased royalties, direct taxes, and the introduction of a windfall profit tax, estimated to generate an extra $415 million in revenue. Liberia and Democratic Republic of Congo have undertaken asset freezes and judicial recovery efforts to repatriate the proceeds of illegal resource exploitation.3 Concurrent improvement to the quality and capacity of public financial management systems is crucial.

Perhaps more importantly, in order to break the resource curse and stem the effects of Dutch disease, African countries must responsibly deploy extractive revenue for multi-sector growth. Stiglitz suggests focusing on training local workers, developing small and medium-sized input enterprises to serve extraction industries, investing in domestic processing, and tightening economic integration. However, resource revenue surpluses can discourage secondary sector development. According to Carlos Lopes, extractive rents should drive investment in infrastructure,4 research, and human capital development. Governments should enhance regulatory mechanisms and impact assessments prior to extraction projects’ approval. World Bank and IMF can promote MDGs (millennium development goals) via sustainable infrastructure development. Finally, private sector cooperation can ensure transparency, fairness, and environmental sustainability in extraction.

Although resource booms in many African economies bring the promise of economic growth, the resource curse inhibits sustained growth and development. Poverty pervades these regions, and ineffective institutions, unfair contracts, and corruption and institutional incompetence undermines the potential benefits of resource endowment. African economies are inhibited by the Dutch disease, which retards the development of non-extraction industries. Despite these impediments, African countries possess the means to properly exploit their resource endowment. Competitive and renegotiated contracts, repatriating stolen revenue, and creating more effective financial oversight brings with it the promise of multi-sector development, improved education and rural infrastructure, and environmental sustainability. However, long-run improvements also require oversight by non-government organizations, OECD and non-OECD assistance, and cooperation from extraction firms in order to bring about sustained regional development.

Written by Jon Milani. Posted on July 25, 2013. Filed under Economics. Tagged: , , , , , , , .