LSE’s Martin Namasaka explores how some African countries can overcome the curse of being blessed with extensive resources.

In a remote corner of south eastern Guinea, the lush green highlands of Simandou are at the centre of a transformation being felt all over Africa after the discovery of one of the world’s richest and most coveted repositories of iron ore, the core ingredient of making steel. Today multinational companies are competing for a stake in Simandou’s ore, with billions of dollars of investment in prospect.

Together with recent landmark discoveries of natural resources in Ghana, Uganda, DR Congo, Kenya (now ranked Africa’s fastest growing economy), Ethiopia, Mozambique, and Tanzania and many more, Africa is standing on the edge of an enormous opportunity in the global economy. But historically, these resources have often been more of a curse than a blessing leading to a variety of explanations for the failure to convert their natural resources into development assets.

Illustration by Gado

Illustration by Gado

First, Africa remains an exporter of unprocessed or lightly processed commodities (UNCTAD, 2005). This is exemplified in the case of DR Congo, the world’s largest exporter of cobalt, in the form of unprocessed ore – with value added elsewhere, namely, by a smelting industry in China, Guinea exports of bauxite are processed into aluminum overseas; Angola and Nigeria export (low value-added) crude oil and import (high value added) petroleum and petroleum-based plastics and fertilisers (Africa Progress Panel, 2013).

A study by the Southern African Development Community of the value chain for a range of minerals in Africa found that the value chain of unprocessed products was typically 400 times greater than the equivalent unit value (by weight) of the raw material. To unlock the full potential of its natural resources, Africa needs to climb the value-added chain of mineral processing and manufacturing.

Second, Africa lacks efficient redistributive policies in the sense that its resource wealth has bypassed the vast majority of people and built fortunes for a privileged few. Notable examples include a lawsuit accusing President Omar Bongo Ondimba of Gabon, Denis Nguesso of the Republic of Congo and Teodoro Obiang Nguema Mbasogo of Equatorial Guinea of buying luxury homes with state funds. Nguesso allegedly owned 24 estates and operated 112 bank accounts in France, while Bongo and his relatives allegedly owned about 30 luxury estates on the French Riviera and in Paris and its suburbs (Transparency International, 2009).

A similar case was reported in the US against President Teodoro Obiang Nguema Mbasogo’s son Teodoro Obiang Mangue, for owning assets such as a Gulfstream jet, a variety of cars -including eight Ferraris, seven Rolls-Royces and two Bugattis – a 12-acre estate in Malibu valued at US$38 million and white gloves previously owned by Michael Jackson with money stolen from the people of Equatorial Guinea.

There is also the problem of weak unaccountable states. Majority of African resource-rich countries tend to have limited transparency in the management of natural resource revenues. There are no substitutes for public scrutiny in developing effective and equitable policies. African governments must rise to the challenge posed by fiscal policy, tax reform and the development of industrial policies. They must manage their country’s oil, gas and mining resources efficiently and share revenues fairly.

Interestingly, Botswana is one of a few African countries which has successfully used its natural resource capital to extend opportunity, combat poverty and support dynamic inclusive growth (African Progress Panel, 2013).

Forty per cent of Botswana’s gross domestic product (GDP) stems from diamonds (Curry and Robert, 1987). It has the second highest public expenditure on education as a fraction of its gross national product and has enjoyed the world’s highest growth rate since 1965. The Botswana experience is noteworthy, since the country started its post-colonial experience with minimal investments and substantial inequality.

The United Arab Emirates also seems to have turned the resource curse into a blessing, The UAE accounts for close to ten per cent of the world’s crude oil and four per cent of the world’s natural gas reserves. The UAE’s government debt is very small, inflation is low, and hydrocarbon wealth has been used to modernise infrastructure, create jobs, and establish a generous welfare system. Major strides in life expectancy and literacy have been made through universal and free access to education and health care. In anticipation of the depletion of its natural reserves, Dubai has diversified into light manufacturing, telecommunications, finance, and tourism, and the other emirates have focused on small-scale manufacturing, agriculture, quarrying, cement, and shipping services. By diversifying, the UAE is investing in sustainable growth (African Development Bank, 2007).

Noting that Africa loses twice as much in illicit financial outflows as it receives in international aid, building on the African mining vision, African governments should adopt legislation that requires multinational companies bidding for concessions and licenses to fully disclose their beneficial ownership and avoid tax evasion channels such as non-declaration, under-invoicing, smuggling, falsification of documents and a failure to conduct independent audits.

African governments acting alone cannot resolve the intractable natural resource governance challenges. The international community should also shoulder some of the responsibility. When, for instance, foreign investors make extensive use of offshore companies and tax havens, they weaken disclosure standards and undermine the efforts of reformers in Africa to promote transparency. Such practices facilitate tax evasion and in some countries corruption, draining Africa of revenue that should be deployed against poverty and vulnerability. The G8 and the G20 should step up to the mark to show leadership in the development of a credible and effective multilateral to tax evasion and avoidance.

Africa will arguably emerge with impressive gains in gross domestic product (GDP) as well as export activity stemming from natural resources. But the wellbeing of nations is not measured by growth alone. What matters for African people is the rate at which new resource wealth reduces poverty and expands opportunity (Pedro and Antonio, 2006). Many resource-rich countries in Africa stand to reap a public revenue windfall over the next decade. The degree to which these revenue streams reduce poverty, improve human development and foster inclusive growth will be determined by policy choices in individual countries.

The question is: will Africa invest its natural resource revenue in its people, generating jobs and opportunities for millions in present and future generations? Or will it squander this opportunity allowing jobless growth and inequality to take root?

Martin Namasaka is a postgraduate student at LSE. Follow him on twitter @Martinnamasaka.

 

 

The views expressed in this post are those of the author and in no way reflect those of the Africa at LSE blog or the London School of Economics and Political Science.