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GREAT insights Magazine

Treasure Hunt: Do Extractive Resources Work for Development?

July 2012

Ramdoo, I. 2012. Treasure Hunt: Do Extractive Resources Work for Development? GREAT Insights, Volume 1, Issue 5, July 2012. Maastricht: ECDPM.

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Africa hosts at least a third of the world’s known extractive resources. A glance at economic prospects of the past few years suggests that the continent has been able to capitalise on the increasing dynamism of the extractive sector. This article argues that despite remaining challenges, the opportunities, if well harnessed, could make extractive sectors work for development.
Today, some 4 billion people, i.e. almost half of the world’s population, live in countries where mining, oil and gas are key economic activities. Although their importance varies across countries, these resources have shaped to a large extent the economic trajectories of many countries. Only a handful, notably the United States, Canada, Norway or Australia, have succeeded in using their wealth as a stepping stone towards sustained development and are today among the wealthiest countries. Notwithstanding challenges, some others – Chile, Botswana, Namibia or South Africa – have also fared quite well in transforming their endowments into wealth. But for many others, the danger of getting trapped into a sort of “resource curse” is still real.
Africa is known to host about 30% of world’s reserves of extractive resources and produce over 60 different types of metals, ores and minerals. In 2010, Africa had over 10% of the world’s oil reserves and supplied over 12% to the global market. But this is largely underestimated. As pictured below, new discoveries of hydrocarbons estimates show that Sub-Saharan Africa is home to some 115 billion barrels of oil, 75% of which are in the Atlantic ocean, and 744 trillion cubic feet of gas, most of it lie offshore of East Africa, mainly in Tanzania, Mozambique, Madagascar or Seychelles.
Figure 1: Mining in Africa, 2012
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Figure 2: Estimate of undiscovered oil and gas, 2012 
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A glance at economic prospects: mixed feelings

After a few lost decades, economic prospects on the continent are very promising. Many African countries have been extremely resilient to the global financial crisis: while most developed countries are still battling with their debt crisis and have difficulties in achieving positive growth rates, a number of African countries have recorded growth rates exceeding 5% on average, compared to less than 2% between the period 1978-95. In 2011, Africa was the second fastest growing region after Asia and seven African countries were among the world’s ten fastest growing economies. The number of Foreign Direct Investment projects grew by 27% in Africa between 2010 and 2011(1)In general, good economic performance was the result of profound economic reforms and efforts to capitalise upon windfall gains from the commodity boom. Dependence on development assistance is expected to shrink significantly, in part due to donors’ diminishing resources but also because of Africa’s increasing capacity to mobilise its own resources. At the same time however, progress remain uneven. Victims of the “paradox of the plenty”, many countries continue to be plagued with rising inequality, to fall short of their Millennium Development Goals targets, to face high poverty levels and to have largely undiversified economic structures.

But good prospects in themselves do not automatically translate into meaningful development. While it provides the necessary dynamism to conduct sustainable policies, it also requires complementary “endogenous” efforts on the part of countries to provide a business-friendly climate, to undertake profound and sustainable economic reforms, to manage resources efficiently and to set up strong and transparent regulatory and institutional frameworks. A closer look at the impressive growth performance in Africa however reveals that in many cases, much of the growth has been driven by “external” demand, with a large share of trade and investment being concentrated in the extractive sectors.

A number of challenges remain…

The demand for extractive resources is likely to continue to expand, given the combined effect of rising demand both from developing and developed countries and slow supply adjustments. A number of challenges however need to be addressed.

For instance, many countries are highly dependent on extractive resources, in terms of contribution to their national income but also as a source of foreign exchange. This renders countries vulnerable to price fluctuations and market conditions. It also shapes the political system because it creates a climate for self-interested behaviours, such as rent-seeking. This is generally accompanied by transparency and governance challenges, leaving the civil society at large only with illusions and speculations about what they see and what they could actually get.

Additionally, extractive sectors have operated in a closed circuit for far too long, with little link to the broader economy. The challenge is therefore to create productive linkages with other sectors of the economy, including by diversifying both within and outside the sector and by moving up the value chain. Creating physical linkages by bridging the large infrastructure deficit will also serve development purposes. Complementary to this is the need to address crippling capital, skills and technology deficits and asymmetric geological information about resources.

There is a stunning paradox: some mineral rich countries have also the worse financial and economic situations. Consider the Democratic Republic of Congo (DRC) for instance – it is known to have most of the world’s critical natural resources, including 40% of the cobalt reserves and immense reserves of oil, copper, tantalum, gold, diamond and wood. But yet, it is one of the world’s poorest countries, has a GDP per capita of only $180, is a highly indebted country, has a poverty ratio of 71.3% and a life expectancy of only 48 years. Although faced with more profound underlying structural questions, the case of DRC shows that the management of resources remain one of the biggest challenges for many resource rich countries.

The fiscal regimes applying to extractive sectors are determined by the capital intensive nature of the projects and their long gestation period before the latter become profitable. While it is important to strike the right balance in the share of risks and reward between companies and the government, many countries have provided too generous fiscal exemptions, at the cost of government revenue. In addition, many companies have abused of their complex financial structures to avoid and evade taxes, using tax havens as instruments. The Global Financial Integrity Report estimated in 2009 that between 1970 to 2008, Africa lost the astronomical sum of US$ 854 billion in cumulative capital flight <(2). Enough to wipe out the region’s outstanding debt of US$ 250 billion and potentially leaving US$ 600 billion for poverty alleviation and other development priorities. It leaves some food for thought for those who still have doubts on Africa’s capacity to leverage sufficient endogenous sources of financing for development.

… but there are numerous opportunities

The impressive economic prospects of recent years give good hopes that as the demand for extractive resources expand, challenges could be turned into opportunities. One could therefore expect that high returns and comfortable rents from resources could genuinely contribute to increasing wealth and therefore help countries achieve inclusive and sustainable economic development.

The role of the private sector is crucial, provided one is clear about which private sector and what role it could be playing. Historically, large extractive companies have been involved in the production and exports of raw/ unprocessed products. There has been little value addition, beneficiation, transformation or growth of indigenous local industries. Where small-scale artisanal industries existed, they remained in the informal sector, were often delinked from the “real business” and therefore contributed little to community development. Promoting linkages along the value chains and more importantly, encouraging and giving the means to the private sector to do so, are essential elements in the transformation of African economies and in the generation of new growth poles around and outside extractive industries.

By their very nature, extractive industries are not “footloose” and therefore have significant impacts on local communities. In this regard, many large companies are involved with the community as a way to maintain “peace”, to obtain and retain their social license to operate, but also because there are business benefits to be gained. Often criticised by local NGOs and international watchdog organisations for problems of accountability and transparency and their lack of constructive engagements with local communities, many companies have set up corporate social responsibility (CSR) initiatives. And beyond CSR activities, some have been involved in the financing of infrastructure or social projects, in addition to paying taxes, royalties and other production-related fees to national and local authorities.

While these are valuable initiatives, there is still a missing link with other development initiatives, undertaken either by the government or through the support of development partners. Projects are rather done independently, without much coherence and coordination with national or local development plans, or without synergies with what the development community is doing. This creates duplications but most importantly, since they are not entrenched in local/ national authorities development plans, they fall short of expectations and results when mining activities decline or when companies decide to move on to some other pet projects. Proper policy coherence, coordination and harmonisation among all those who want to make extractive industries work for development is therefore central. It has the potential of leveraging funds and pooling resources together for improved and sustainable development of communities where extractive sectors are found.

Recent years have witnessed quite fundamental shifts in the geostrategic relationship between African countries and the rest of the world, with the increasing presence of emerging powers, driven, in part, but not only, by their interests for extractive resources. Although often seen as a threat by some traditional partners, probably because of the fear of losing grip on the longstanding and privileged relationship, these newcomers could potentially play a positive role, since competition in the market is generally healthy. While the presence of new players have brought in choice and much needed investments, one must ensure the rules of the game remain in favour of resource rich countries in terms of good deals, industrial,
fiscal and economic benefits.

Ultimately and fundamentally, though, it is not only what countries decide to do with their natural resources that matter, but rather how they do it. Home-grown African initiatives, must be pursued in a systematic, coherent and sequenced way, not only at the national level, but more importantly with a link to regional and continental initiatives – and done the African way…

Isabelle Ramdoo is the lead expert on extractive sector at ECDPM

Footnotes

  1. See Ernst and Young attractiveness survey 2012: Building Bridges, Africa.
  2. Just for the period 2000-2008, the cumulative flows were estimated at $ 437 billion. It comprises about 3% of illicit flows from corruption, bribery and theft out of government coffers; about 30 – 35% of criminal proceeds, due to drug trafficking and counterfeiting and about 60 – 65% of commercial tax evasion due to transfer mispricing, tax havens, secrecy jurisdiction etc..

This article was published in GREAT Insights Volume 1, Issue 5 (July 2012).

Economic Transformation and TradeExtractive Sectors