Brière, B. de la, Filmer,D. From mines and wells to well-built minds: turning Sub-Saharan Africa’s natural resource wealth into human capital. GREAT Insights Magazine, Volume 6, Issue 3. July/August 2017.
Sub-Saharan Africa’s natural resource-rich countries should invest some of their rents in the foundations of human capital, a smart strategy to convert finite resource wealth into broad-based long-term development.
Sub-Saharan Africa’s natural-resource-rich countries—those endowed with minerals or hydrocarbons such as oil and natural gas—fare poorly in terms of human development. Children in these countries are more likely to die before their first birthday, more likely to be chronically malnourished, and less likely to attend school than are children in other countries with similar national income. Resource-rich countries in Sub-Saharan Africa (SSA) spend less on education and health than other countries in the region and less than resource-rich countries in other regions. Their spending is also less effective and more unequal; in these countries, additional spending on education and health yields poorer outcomes than elsewhere and the gap between the richest and the poorest is larger, especially in oil-rich countries.
Recent commodity price declines have highlighted the risks inherent in relying on natural resources for development. Just a few years ago, the issue in SSA was how to manage the wealth created; today, the challenge is how to protect the right expenditures during the necessary fiscal adjustment. Despite the current downturn, the extractives sector is and will remain an important part of SSA’s growth story. Many countries in the region need to rise to the challenge of managing the resource flows and using rents optimally.
There is a strong case for government involvement in improving human capital. Families underinvest relative to the socially optimal level because of the cash and credit constraints they face and because additional benefits accrue to societies over and above what families receive themselves. However, many governments in SSA also face credit constraints and resource-rich countries face specific governance challenges. Rents from natural resources can potentially relieve governments of their credit constraints and enable them to ratchet up investments in the education and health of their people.
Governments face a choice of how best to allocate resource rents between spending, investing in human or physical capital, and investing in global financial assets (through a sovereign wealth fund, for example). The optimal choice will vary across countries, depending on the relative rate of return to each choice. Rates of return to investing in physical and human capital will be high in countries where the capital stock is low. Moreover, higher levels of human capital make investments in physical capital more productive, and vice versa, which suggests that the optimal portfolio will involve investing in both. Human capital should be prioritised in many of Sub-Saharan Africa’s resource-rich countries because of their low starting point.
Human capital has an additional advantage: it helps to reduce the risks of conflict, which is all the more important in conflict-prone, resource-rich countries. First, human capital is embodied in people and thus hard to expropriate. Second, human capital investments make work more attractive and increase the opportunity cost of giving up productive work to go fight. Third, education increases the moral cost of fighting, especially if schooling transmits values of cooperation and tolerance.
Investing effectively in human capital is hard because it ultimately involves delivering social services – health, education, social assistance – which involve a large number of actors and activities, multiple levels of responsibility and decision-making, and complex interactions between providers, users of the services and their households and communities. Using resource rents to fund this investment exacerbates governance challenges for three main reasons. First, resource rents tend to be subject to less accountability than other public funds since they come off as “free money”. Second, resource rents are (relatively) large in volume, and it is hard for weak public financial systems to absorb them. In particular, public investment management is key to improving the effectiveness of spending. Third, resource rents are volatile, which makes optimal investment strategies difficult and uncertain.
Strengthening institutions, incentives, and information can help governments address these governance challenges. Institutional structures govern the management of the resource rents themselves and shape the allocation of revenues to areas of government: decentralising and leveraging the private sector are key entry points.
Incentives affect the way provider organisations, managers, and staff are held accountable for their behaviours and ability to deliver services with quality and efficiency.
Revenues from natural resources can fund financial incentives to strengthen either providers’ performance (that is, linking rewards to measurable actions or achievements) or demand for the services (that is, conditional or unconditional cash transfers to potential beneficiaries of services). Information opens channels for redress, monitoring and citizens’ actions.
Information increases citizens’ ability to understand their rights, to know the standards of services they should expect, and to hold governments and providers accountable. Producing information, making it available, and increasing social accountability offer potential ways to reduce information asymmetries and stimulate citizens and third-party monitoring of government expenditures and of service providers.
Establishing governance regimes that underpin smart investments of resource wealth in human capital takes time. However, governments often face high expectations and considerable pressure to demonstrate quick results from resource rents. Successful countries such as Botswana, Chile and Malaysia show that putting in place the right elements early is possible.
Human development underpins prosperity at the micro and macro levels. High returns on education are well documented but evidence is also accumulating on very high returns on early life investments. Investments in early child development—from both mother and newborn health to early childhood nutrition, care, and education—significantly improve outcomes in childhood and later on in life. They provide high externalities by launching a virtuous circle of better nutrition, better learning, better public health and lower fertility. Higher education and better health decrease the likelihood of civil conflict and crime.
Human capital investments have lifelong and intergenerational effects. Early life conditions lay the foundations for adult human capital both in terms of cognitive and non-cognitive skills, and capabilities such as health and social functioning. Learning begets learning for the current and future generations: mothers with better health and education have healthier and more educated children, who will face fewer chronic diseases linked to stress and under-nutrition.
Investing early is more cost-effective. The early years of life are periods of both great vulnerability and great opportunities. Failure to invest early is difficult and expensive to compensate for later.
The three main priorities are thus ensuring that mothers and their children are healthy, that children are ready for school and that they learn what they need to succeed in the workplace and beyond: cognitive, behavioural and socio-emotional skills such as conscientiousness, perseverance, sociability and curiosity. Given their low starting point, resource-rich countries in SSA may reap very high rates of return on their investments if they can manage the scale and ensure quality.
Poor households may still face barriers in accessing available services: poverty itself is one as it forces trade-offs between food and other basic needs; other barriers include distance, cultural and social norms.
In the context of resource-rich countries, cash transfers—either conditional or unconditional—can play three main roles. First, they provide a way to distribute the resource rents. Second, they significantly reduce short-term poverty and potentially poverty-induced stress. Third, they lift demand-side barriers to household investments in child education, nutrition, and health, as well as increase the investment in productive assets that foster further income generation. In that dynamic, mothers and girls are key agents to break the inter-generational transmission of poverty.
The wealth derived from oil, natural gas, and minerals is non-renewable. Investing in human capital should be a central part of a strategy to convert finite natural wealth into long-term development. Indeed, across the world, countries that have avoided the so-called resource curse and set a course for long-run development have pursued a balanced approach that has included investing in people.
Human capital is perpetuated through the generations, it helps promote growth by distributing wealth broadly and thus lays the foundations for broad-based development as the resources taper off. In SSA where the needs in education and health are great, the returns will be especially high.
But investing well in human capital is hard, especially in resource-rich countries. Many emerging resource-rich countries in SSA stand at a crossroad. The flow of revenues they expect from mineral wealth may evaporate or be diverted before people and economies reap their full benefits. However, sound institutions, coherent incentives for service delivery, and open access to information will help both governments and citizens to channel the resources to investments that sustain broad-based development.
Starting at the source, in early childhood, will set the course for better health and education, improve the prospects that youth and adults will be productive, and decrease the risk of civil conflict.
Distributing the wealth will also widen the space for the reforms that governments will need to invest in public investment management and service delivery. Together with other investments in infrastructure, these elements will enhance the flow of revenues and harness the potential of natural resources as a basis for inclusive and shared prosperity.
About the authors
Bénédicte de la Brière (left) and Deon Filmer (right) are lead economists at the World Bank.
Photo: Schoolchildren in Gao, Mali. Credits: UN Photo/Marco Dormino via Flickr.
This article was published in GREAT Insights Volume 6, Issue 3 (July/August 2017).
Bénédicte de la Brière