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Natural Resources and African Development (with a focus on non-renewable resources). ECON 3510 , Archibald Ritter June 3, 2010. Note: The source for this is African Development Bank, African Development Report 2007, Oxford and New York: Oxford University Press, 2007,

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Natural resources and african development with a focus on non renewable resources l.jpg

Natural Resources and African Development (with a focus on non-renewable resources)

ECON 3510


Archibald Ritter

June 3, 2010

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Note: The source for this is

African Development Bank, African Development Report 2007, Oxford and New York: Oxford University Press, 2007,

Chapters 1, 4, 5, and 6. (Skim chapters 2 and 3)

To access this source on the Web, please “Google” the following title, and follow the link to an “Adobe” pdf. file:

“African Development Bank, African Development Report 2007, Oxford and New York: Oxford University Press, 2007”

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  • Some Historical Observations

  • Current Role of Resources in African Development

    • Petroleum, coal, natural gas

    • Minerals

    • Forestry products

      III. The Main Mineral Sector Development Issues

      IV. “The Paradox of Plenty”

    • The “Resource Curse”

    • Conflict States and Resource Wealth

    • The New “Scramble” for Africa’s Resource Wealth

  • Managing Resources Effectively for Equitable Development

  • VI. The New Scramble for Africa’s Resources

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I. Some Historical Observations

  • Pre-Colonial metal-working; since time immemorial

  • Scramble for Africa, motivated in part by desire for mineral wealth

    Cecil Rhodes and the British in South Africa

    ”Gold Coast” (which became Ghana)

  • A Mineral Resource Treasure House?

  • The Mineral Sector at Independence

  • Non-Petroleum Mineral Activity decline from 1970s to 1990s; Petroleum continues strong

  • 1995-2010 (+/-): Resumption of Mineral Exploration and Development

  • Artisanal/Informal Sector Mining and Large scale Modern Mining

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II. Current Role of Resources in African DevelopmentMineral Export Concentration, Selected Countries. 2005 (Percentage of Total Exports)

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Oil in the Niger Delta, Nigeria:

  • +/- 89% of Gov’t revenue

  • +/- 25% of GDP

  • about 95% of export earnings;

  • 13% of oil revenues to oil-producing states

  • Impoverishment and environmental problems for local peoples (the Ogoni and other groups)

  • Major Conflict in the Delta

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III. The Main Oil and Mineral Sector Development Issues

Benefits and Costs of Mineral and Petroleum Extraction:

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III. The Main Oil and Mineral Sector Development Issues

  • Price volatility generates macroeconomic instability (explanation in class)

  • Long-run downward price trends?

  • Short-term Character of some mining due to finite sixe of ore bodies or petroleum deposits

  • Enclave Character: limited linkages to economy

  • Further processing migrates abroad

  • Environmental Impacts

  • Impacts on Local Communities

  • Insufficient Returns to Governments

    Conclusion: Don’t Do Petroleum or Mining?

    Manage Petroleum and Mining Sectors Intelligently?

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Recent Mineral Commodity Prices, 2000-2009

Source: OECD Development Centre, based on World Bank, 2009

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2. Terms of Trade and Mineral Prices

Current Concern: Is China’s demand for minerals softening?

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4. Enclave Character: limited linkages to domestic economies


  • “Backward Linkages” (ability to provide the inputs needed for

    mining or oil)

  • “Forward Linkages” (ability to undertake further processing of the ores or petroleum)

  • “Consumption Linkages” Payments to people promoting increases in final demand)

    Depends on employment and income patterns and volumes

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6. Environmental Impacts economies

  • Varieties of Impacts:

    • Water and Air Quality

    • Tailings

    • Noxious Wastes

    • Land use and degradation

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7. Impacts on Local Communities economies

  • Local community receives the

    • environmental degradation and

    • often the loss of artisanal mine jobs

    • Social dislocations

  • without the macroeconomic benefits

  • Note case of gold mining in Tanzania, African Development Report, 2007, p. 150

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8. Returns to Government: Taxation economies

Tax Regimes and Revenues are Important

Varieties of Taxes:

Royalties (on metal content of ores extracted)

Income from Production Sharing or State Ownership

Corporate Income Taxes

Personal Income Taxes on People in the sector

Sales Taxes on sales to people in the sector

Import Taxes on Imported Inputs

Export Taxes

Are revenues to Governments sufficient?

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IV. The Paradox of Plenty economiesaka “Resource Curse”

The “curse”

Resource wealth generates great revenues for governments but also may tend to lead to relative economic stagnation and political problems – waste, corruption, political patronage systems, civil conflict & war

i.e. an inverse relationship between resource wealth and genuine development


Economic factors: exchange rate, prices, econ. management

Political factors via

windfall revenues to Governments without need for accountability to tax-payers, and also

windfall revenues “up for grabs” among competing elites.

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Empirical Validity of the “Resource Curse” economies

Countries that might have the “Resource Curse”

  • High mineral export dependence on one or a few minerals

  • especially petroleum exporters (“Oil Economy Syndrome” )

  • High Foreign Exchange and Fiscal dependence on the resource export

  • High levels of Direct Foreign Investment in the resource sector

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Evidence re Performance: economies

  • Economic Growth (GDPpc)

    • Resource-rich countries are richer than resource poor (GDPpc; tax revenues; foreign exchange earnings)

    • Resource rich grew more slowly than resource poor (2.4% pa vs. 3.8% pa, 1981.2006

    • Resource rich coastal states best off;

    • Resource scarce land-locked, worst off

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Evidence re Performance, continued: economies

  • Negative “Genuine Savings”

    “Genuine Savings” = Public & Private Saving

    - Depreciation

    + Education Spending

    • Natural resource depletion

    • Increase in pollutant stock

  • Worse Income inequality

  • Similar Human Development Indices

  • Civil Conflict: seems pervasive:

    • e.g. Nigeria; Chad; Sierra Leone, Liberia, Sudan

      But other resource poor countries also experience conflict:

    • e.g. Rwanda, Kenya, Somalia, Zimbabwe

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    Explanation: “Dutch Disease” or “Oil Economy Syndrome economies”

    The Phenomenon in Brief:

    Export “boom” caused by a sudden increase in oil export prices or in resource export volumes,

    leads to an appreciation of the exchange rate with negative consequences, such as

    • a major reduction of traditional (pre-boom) exports;

    • unemployment of the factors of production in the traditional export sector;

    • an increased concentration on the resource export and reduced diversity of export structures;

    • damage to import-competing exports;

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    Plus economies

    • an inflationary impact as the demand for non-tradable products increases, which further affects the real exchange rate;

    • irresponsible use or misuse of foreign exchange windfall receipts

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    Examples: economies

    • Spain during its glory days with silver and gold inflows from pillage and later the rich mines of Mexico and South America from perhaps 1530 to 1700

    • Countries undergoing a resource boom (e.g. Canada in a minor way in the 1950s, again in 2006-2008 with tar sands and oil prices)

    • Major oil exporting countries such as Nigeria (with 92% of its exports as petroleum in 2004); Chad (99%) etc.

    • The Netherlands after its North Sea natural gas boom and before the “Euro”

      Explanation, with diagram on the blackboard

    • The diagram represents the foreign exchange (in US dollars) market from the perspective of an oil exporter, in this example, Nigeria.

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    Explanation 2: Other Economic Factors economies

    • Volatility of Foreign Exchange Earnings and Tax Revenues affects economic management and performance

    • Economic Policy Failures:

      • Waste the funds extravagantly when available;

      • Expand consumption

      • Reduce other non-mineral taxes

      • Undertake costly but unwise strategic investments

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    2. Socio-Political Origins: economies“Dutch Disease” becomes “Resource Curse”

    • Increased potential for corruption

    • Rent-seeking and winning is more profitable than productive economic actions;

    • Bad decision making: government does not have to respond to tax payers because rents come resources;

    • Resource revenues feed patronage systems, permitting authoritarian or predator regimes to remain in power;

    • Conflict among elites, regions, ethnic groups may be intensified.

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    Civil Conflict, Fragile States and economies Resource Wealth

    Evidence that resource wealth increases incidence of civil war and conflict (see chart)

    • Oil & diamonds dominate;

    • Diamonds are easily “lootable”

  • But resource mis-management is also a key factor explaining poor economic performance and resource wealth

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    Civil Strife linked to Resource Wealth, 1990-2002 economies

    But note Rwanda, Somalia, Uganda, Kenya: were resources involved in these cases?

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    Resource Wealth Management and Fragile States economies

    Predatory rule is enhanced by resource wealth:

    State power gives direct access to income from resources

    Resource income can finance patronage or clientele systems where rulers pay off support network;

    Support networks may be regional, ethnic, religious, or economic in character.

    Access to resource wealth by various channels: access to tax revenues, pay-offs from foreign companies; kick-backs;

    International spill-overs of civil conflict: diamonds escaping by neighbouring countries

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    V. Managing Resources Effectively for Equitable Development

    Key Question: How can resource wealth be harnessed and utilized effectively to promote equitable and sustained development?


    Africa has a generous and under-utilized endowment of resources especially of non-renewable resources (oil & minerals)

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    1. Central Requirement: Good Governance: Development

    Good Governance:

    “virtuous relationship between active citizens and a strong legitimate government dedicated to meeting peoples needs and aspirations through a representative , effective and accountable system”


    Rule of law;

    Representative political system and accountable leadership;

    Effective, transparent incorruptible administration;


    Effective tax regime and regulatory framework for enterprises

    Effective social programs

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    2. International Dimensions of Resource Wealth Management Development

    International efforts to collaborate in improving accountability and transparency in resource income management (i.e. to reduce corruption)

    • Transparency Initiatives

      Extractive Industries Transparency Initiative:

    • Human Rights, Social and Environmental Standards

      International Council on Mining and Metals

      UN Global Compact

      Timber Certification Scheme

    • Conflict resources Governance Policies

      Kimberly Process (Diamond) Certification Scheme

    • Financial Sector Governance Policies

      Anti-Money Laundering Initiative

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    A. Transparency Initiatives DevelopmentExtractive Industries Transparency Initiative:

    • Aimed at gathering, reconciling, publicizing information on royalties and taxes on oil and minerals

    • Objective: ensure transparency, accountability, and absence of corruption

    • Most African and many other countries have joined

      Mauritania , Burkina Faso , Cameroon , Mozambique , Central African Republic , Niger

      Côte d´Ivoire , Nigeria , Democratic Republic of Congo , Equatorial Guinea , GabonRepublic of the Congo , Ghana , São Tomé e Príncipe , Guinea , Sierra Leone , Tanzania , Liberia , Madagascar , Zambia, Mali

      Web Site:

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    B. Conflict Resources Governance Policies DevelopmentKimberly Process (Diamond) Certification Scheme

    An international government led process designed to prevent trade in conflict diamonds;

    Established January 2003;

    Endorsed by UN General Assembly and Security Council

    Successful re labelling and blocking trade in “conflict diamonds”


    • operated by volunteers in two NGOs, Global Witness and Ottawa-based “Partnership Africa Canada”

    • therefore of dubious sustainability

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    3. Management of Natural Resource Revenues Development

    The task: optimizing 1. revenue generation, developmental impacts, 2. benefits for future generations, while 3. maintaining the health of the enterprises involved – foreign, domestic or state

    i.e. converting ephemeral resource revenues into sustained and sustainable human development for the long term

    a) Ensuring Revenues plus Appropriate Incentive structure for enterprises

    Requires sufficient revenues for firm to extract, re-invest, and undertake exploration for future mine development

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    Stabilization funds or citizen dividends How should resource revenues be used?

    c) Stabilization funds:

    • Fat cow / Lean cow rationale (Joseph & the Pharoah

    • a la Norway, Chile, or Alberta (the Heritage Fund)

    • Advantage

    • Disadvantage:

      • they are “raidable”

      • Citizens may object to postponement of expenditures

      • Future economic downswings may be underestimated

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    Stabilization funds or citizen dividends, How should resource revenues be used?continued

    d) Immediate Disbursement to Citizens?

    • Interesting idea; a type of social justice?

    • ”Rent” payment to citizens may be equitable

    • Problems:

      • How then does government finance developmental activities

      • Will this reinforce the Dutch Disease effect of economic over-heating  increased imports with little sustainable benefits?

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    4. Ensuring Fairness of Benefit Distribution to Local Communities

    • Ensure minimum disruption of local communities;

    • Generate jobs for local people (note problem with displacement of artisanal miners);

    • Revenue sharing with local communities and states or provinces;

    • Local procurement of inputs;

    • Minimize environmental damage

    • Decommissioning and clean-up of mine and mine-site

    A caution: There is no automatic conversion of new resource wealth to broad-based, pro-poor, and sustainable development

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    VI. The New Scramble for Africa’s Resources Communities

    Major new participants in resource sector activity: China, India, and South Korea

    Concentrated in oil, minerals and now land for agricultural exports

    Major volumes of direct foreign investment

    Oil, minerals and agri. raw materials dominate African exports to Asia (86% to China in 2005)

    Possible positive effects:

    Possible negative effects:

    See The Economist, “Out-Sourcing’s Third Wave,” May 21, 2009 and and African Development Report 2007. pp. 131-136

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    Possible positive effects: Communities

    Possible negative effects:

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    Possible positive effects: Communities

    Increased foreign exchange; economic growth; tax revenues, social expenditures ……..

    Integration of African countries into International System? Maybe in the longer term

    A lead-in to exports of manufactures for Asia? Tourism from Asia?

    Possible negative effects:


    Minimal concern re authoritarian regimes, human rights issues, corruption

    Diversion of resources from use for Africa to use for Asia

    Use of imported Asian labour; reduced domestic learning effects