Beare, M. Five key linkages to enable resource-led growth. GREAT Insights Magazine, Volume 6, Issue 3. July/August 2017.
A robust governance framework in resource-rich countries to promote the linkages to be strengthened for sustainable and diverse economic development is critical to realise the benefits from resource-led growth.
Many countries are endowed with rich but finite natural resources that can be extracted and monetised to promote economic development. The subsequent discovery of natural resource reserves and their extraction does not necessarily lead to higher economic growth, nor does it necessarily translate into better human development outcomes. Weak linkages with a country’s broader economy can lead to the creation of an ‘enclave economy’, disconnected from other sectors, making some macroeconomic indicators look better but without creating jobs or broad-based prosperity.
The resultant skewed currency and fiscal/human resource allocation along with self-enrichment of political elites (perverse rent seeking) may lead to what is known as the ‘natural resource curse’ – exhibited by the failure of many resource-rich countries to benefit fully from their natural resource wealth, and for governments in these countries to respond effectively to public welfare needs.
Figure 1: Sub-Saharan Africa has average growth of 4,5%
As shown by Figure 1, sub-Saharan Africa was forecast to have the highest growth rate in 2015 of any region other than Asia. Nonetheless, apart from Congo and Zambia, which have medium human development indices, many African countries still exhibit low human development indices, as defined by the African Development Bank (see Table 1). For some of these countries, it is their natural resources base – and the relatively high commodity prices that prevailed until 2013/14 – that help to explain their recent high growth rates.
Table 1: Growth versus Human Development (AfDB 2015)
To avoid the natural resource curse, economic linkages between the extractives sector and the rest of the economy need to be strengthened and managed to minimise unbalanced economic development. To benefit from resource-led growth, policy, legislative and regulatory frameworks should be both pro-growth and pro-development, designed to mobilise and integrate human, financial and technical resources. This may include public-private collaboration to harness investments in human resources, infrastructure developments and capital investments, to enable other economic sectors to leverage new opportunities created by a growing extractives sector, such as hotels and agricultural output, to meet the needs of the expanding extractives sector.
Investors look for predictability of fiscal, regulatory and related governance frameworks, to reduce uncertainty and project risk. Good governance is generally regarded as the prerequisite and involves coordination among diverse government ministries and regulatory bodies that can develop and implement policy relevant for linking the resource economy to broader economic development.
Successfully linking natural resource extraction within a robust and transparent governance framework can enable a low-income economy to use natural resources as a platform to ‘jump’ to a path of higher and sustained growth, catching up with middle-income peers and creating an industrialised, diversified economy, as depicted in Figure 2, in Box 1, with reference to Tanzania.
Box 1: Natural resources as a growth accelerator
As natural resources are finite, they should not change the developmental goals of the country but rather be used to enhance the development process by enabling the economy to ‘jump’ to an accelerated growth resource-led path. The enablers involve strengthening the linkages to enhance the extractive sector’s role in the broader economy. Figure 2 depicts how some factors, labelled ‘Enablers’, can provide the opportunity for a country to ‘move up’ to a higher growth rate, ‘keep up’ or sustain this higher growth rate, and ‘look up’ to use the next enabling factors to meet long term development targets. To achieve the ‘natural resource jump’, it is necessary to concurrently secure requisite investments in human capital, physical and economic infrastructure, and new downstream industries, and increase trade in the commodities and services produced. This requires the country to ‘step up’ to the challenges and ‘start up’ the resource economy to enable extraction and capture rents. After the country has ‘caught up’ and ‘moved up’, all human, physical and financial capital developed primarily for the natural resource sector should be used to leverage growth in other sectors, to create further jobs and wealth. The increased pace of learning-by-doing enabled by skills and technology transfers and augmented by, inter alia, amortised capital lowers the overall costs of production in the relevant sectors, and the country is now in a position to ‘keep up’: it can consolidate its development and anchor itself in the relevant global commodity value chains. Economic diversification also translates into additional revenues that should be invested in R&D to leverage the new skills sets, goods and services needed to develop new technologies, such as new mining methods, that improve efficiency and reduce costs. Continuous improvements through research and innovation should be promoted, as the country continues to ‘look up’ to identify the next growth-accelerating jump that may take the economy to the next aspiration level, such as from ‘middle income’ to ‘high income’ status.
Figure 2: Natural resources as a growth accelerator
The key linkages to enable the resource ‘jump’ are the following:
1. Fiscal linkages: capture resources rents and use them strategically
A country’s fiscal regime consists of the laws, regulations and/or individual agreements that determine the channels through which resource revenues will accrue to the government. The government needs to balance its interest in maximising its income with investors’ need to be confident of getting a worthwhile return in a risky environment. Governments also need to use the revenues that accrue to them strategically to boost the wider economy. It may be prudent to save some revenues, either with a view to providing stability in the event of future resource price volatility or making overseas investments to provide returns for future generations.
2. Spatial linkages: critical infrastructure to enable resource extraction
Extractives companies typically need to invest in infrastructure such as pipelines, electricity generation plants, roads and ports, and governments often contribute significant funding towards some components of the required infrastructure. Investments in new infrastructure should be carefully planned, with governments working in partnership with extractives companies. Such investments can be designed to maximise benefits to other economic sectors – for example, electricity generation plants that also serve local villages, or roads that improve the functioning of local markets.
3. Backward linkages: development of suppliers into the resource sector
Backward linkages involve extractives companies employing local people and procuring goods and services from local companies. This can bring significant social and economic benefits, with a multiplier effect of wages and revenues spent locally providing a further boost to local economic development. From the extractives company’s perspective, it can help to secure their ‘social licence’ to operate. The success of an Local Content/Supplier Development (LC/SD) strategy depends on the political will of governments, the willingness of the private sector to engage, and the feasibility of building the capacity of the local economy to meet the extractive sector’s demands for particular goods, services and types of labour, in terms of both quantity and quality. LC/SD policies could include the government funding training institutions, providing incentives for extractives companies to provide ‘on the job’ training and development agencies to enable local SMEs to access the financing and support to grow.
4. Forward linkages: resource utilisation for further value addition
Forward linkages involve boosting the broader economy by processing the natural resources to produce intermediate or finished goods, rather than exporting them in their raw state. This can help to retain more of the natural resource wealth in the country, as well as promoting job creation, industrialisation and economic diversification. However, it has generally proved counterproductive simply to obligate investors to beneficiate raw materials in country as part of their extraction licenses, as many are not forward-integrated. Instead, governments can provide fiscal instruments to incentivise investors to support beneficiation, even if they do not invest themselves, and enter into strategic public-private partnerships to boost downstream industries. Such fiscal incentives should be used with care, however – they are complex, costly to administer, and run the risk of unintended consequences.
5. Knowledge linkages: sector skills development and technology innovation
Success in creating other kinds of linkages is closely related to success in creating knowledge linkages. Local workers and companies often lack the knowledge to service the needs of extractives companies. Technology imported by extractives companies is often not shared with or taken up by local companies. The benefits of investment in creating knowledge linkages are often not immediately politically visible, but they can be significant in the longer term. New technology, innovation and research and development brought in by foreign extractives companies can become an essential input into a country’s industrial growth agenda, if mechanisms are put in place to transfer the technology and related skills to the host countries.
Indicative policy instruments and their intended outcomes are outlined in the table below:
Whilst these linkages are not discrete or obviously tangible channels, they help to explain how the various sectors in the economy can supplement each other to produce additional benefits beyond the direct impacts expected from the extractives sector. In practice, accountable line ministries should lead the interventions for strengthening of a particular linkage, often with the facilitation and cross cutting support from other ministries.
The author wishes to acknowledge the inputs of the following co-authors of the original paper from which this paper has been drawn, namely Alan Roe, Nicholas Travis, Esméralda Sindou.
About the author
Mark Beare, Oxford Policy Management (OPM).
Photo: Pouring liquid gold. Credits: Dan Brown via Flickr.
This article was published in GREAT Insights Volume 6, Issue 3 (July/August 2017).