Africa's Natural Resources:The Paradox of Plenty

Introduction

Africa is blessed with vast natural resourcesand rich environments (see Chapters 2 and3). It is generously endowed with pro-ductive land and with valuable naturalresources, which include renewableresources (such as water, forestry, andfisheries) and non-renewable resources(minerals, coal, gas, and oil). Naturalresources dominate many nationaleconomies and are central to the livelihoodsof the poor rural majority. These resourcesare the basis of income and subsistence forlarge segments of Africa’s population andconstitute a principal source of publicrevenue and national wealth.

Under the right circumstances, a naturalresource boom can be an important catalystfor growth, development, and the transitionfrom cottage industry to factory production.Indeed, with the right approach naturalresources can be used to make the transfor-mation from a low-value economy that relieson exports of primary commodities to onewith a substantial labor-intensive manu-facturing base.

It is commonly agreed that one of theavenues for getting many of the poorestAfrican countries out of the low-income trapis to provide them with a big demand pushthat will generate enough demandcomplementarities to expand the size ofmarkets and recover the fixed costs ofindustrialization. Natural resource wealth

could be used to pursue this goal.Unfortunately, in many African countriesnatural resource booms have only to alimited extent set off a dynamic growthprocess (see Box 4.1). This is largely due tofailure to implement the right growth-promotion policies and to ensure that stronginstitutions are in place — suggesting that itis very difficult to make the big pushtowards diversification and development ofmanufacturing in the resource-rich parts ofAfrica. The danger is that much of Africa isnot industrialized and is stagnating in astaple trap, dependent on exports of a fewmineral resources.1 In particular, oil resour-ces and other point resource-dependencycould, with the wrong policies, lead to thisscenario.

The failure of natural resource wealth tolead to the expected economic growth anddevelopment has been attributed to severalfactors, including

• the so-called “Dutch Disease” — thesyndrome of rising real exchangerates and wages driving out pre-existing export and import-competingindustries;

• rent-seeking by elites and others thatotherwise could put their energiesinto profit-making activities;

1 See Auty (2001); Auty (2004); and Ploeg (2007)for detailed discussion of these aspects

C H A P T E R 4

Africa’s Natural Resources:The Paradox of Plenty

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• volatility of prices and the “asymmetryof adjustment” (it is easier to ramp uppublic expenditure than to wind itdown again);

• inflexibility in labor, product, andasset markets; and

• tensions between oil-producing andnon-oil producing regions withincountries.

What is the Resource Curse?

The resource curse refers to a situationwhereby a country has an export-drivennatural resources sector that generates largerevenues for government but leadsparadoxically to economic stagnation andpolitical instability.2 It is commonly used to describe the negative developmentoutcomes associated with non-renewableextractive resources (petroleum and otherminerals).3 Essentially, the resource curserefers to the inverse association betweendevelopment and natural resourceabundance. It has often been asserted thatpetroleum, in particular, brings trouble––waste, corruption, consumption, debt over-hang, deterioration, falling apart of publicservices, wars, and other forms of conflicts,among others. Thus, natural resource-abundant countries tend to grow slowerthan expected — considering their resourcewealth — and, in many cases, actually growslower than resource-scarce countries.

A common thread in explaining theresource curse — along with the other broadexplanations provided above — is the

central role of government behavior. Thekey issue here is how governmentsadminister resource wealth and how theyuse natural resource revenues.

Historical accounts indicate that naturalresource booms do not always worseneconomic performance, and can indeedcatalyze economic transformation. A resourceboom can lead to growth expansion, asdemonstrated in the case of Europe (indus-trialization), the “new economies” (Australia,Canada and the United States), and tropicalsubsistence agricultural economies withoutmanufacturing. Today, resource-rich coun-tries like the United Arab Emirates, Kuwait,and Qatar are using revenues from theirresource wealth to construct mega-cities outof desert land, thereby also generating con-siderable down- and side-stream economicactivities and additional incomes. Thesecountries have also undertaken large-scaleforeign investments, which not only promoteeconomic development, but also foster inter-generational equity. The key point is that theoften referred to “natural resource curse” canbe avoided with the right knowledge,institutions and policies.

Key Questions

Drawing on an appropriate theoreticalframework, and on the logic presented inthe previous section, this chapter examinesthe African evidence of the paradox ofplenty and the “resource curse” with a viewto exploring the following issues andquestions:

• Is natural resource abundance inAfrica a curse or a blessing?

• Has the management of naturalresources really stunted the growth

Africa’s Natural Resources: The Paradox of Plenty 97

2 Overseas Development Institute (ODI) (2006)3 Catholic Relief Services (2003)


and development prospects of manyresource-rich African economies?

• How does the volatility in the exportvalue of resources contribute tovolatility of growth in GDP per capitaand to growth and development ingeneral?

• What political and social factorsenable some resource-abundant

countries to utilize their naturalresources to promote develop-ment and prevent other resource-abundant countries from doing thesame?

• How does access or non-access to thecoast (that is, being a landlockedcountry or not) affect developmentparameters?

98 African Development Report 2007

Box 4.1: Cross-Country Evidence of the Natural Resource Curse

There are, indeed, resource-rich countries that benefit from their natural wealth, but overall, the economiesof many resource-rich countries are in a surprisingly poor state. History clearly shows that natural resourcewealth may harm economic performance and make citizens worse off. There are well-known examples ofcountries whose abundant natural resources have been accompanied by bad macroeconomic performanceand growing inequality among its citizens. A dramatic example is Nigeria.

Nigeria has been a major oil exporter since 1965. Its oil revenues per capita have increased tenfold in35 years, but its income per capita has stagnated since independence in 1960, making Nigeria one of the15 poorest countries in the world. During this period, the country’s poverty headcount ratios have almosttripled, while the rich have grabbed a much larger part of income. Huge oil exports have not benefited theaverage Nigerian. Despite the rapid accumulation of physical capital, Nigeria has suffered a declining Total Factor Productivity (TFP), and capacity utilization of manufacturing hovers around a third. Successivemilitary dictatorships have plundered oil wealth and many suspect transfers of funds (of undisclosedamounts) have occurred. Oil wealth has fundamentally altered politics and governance in Nigeria. Other oilexporters such as Iran, Venezuela, Libya, Iraq, Kuwait, and Qatar have also experienced negative growthduring the last few decades and OPEC as a whole has seen a decline in Gross National Product (GNP) percapita.

In contrast, Botswana has managed to beat the resource curse. Forty percent of Botswana’s GrossDomestic Product (GDP) stems from diamonds. It has the second highest public expenditure on educationand has enjoyed the world’s highest growth rate since 1965. Its GDP per capita is ten times that of Nigeria.The Botswana experience is noteworthy, since the country started its post-colonial experience with minimalinvestments and substantial inequality.

The United Arab Emirates also seems to have turned the resource curse into a blessing, The UAEaccounts for close to 10 percent of the world’s crude oil and 4 percent of the world’s natural gas reserves.The UAE’s government debt is very small, inflation is low, and hydrocarbon wealth has been used tomodernize infrastructure, create jobs, and establish a generous welfare system. Major strides in lifeexpectancy 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-scalemanufacturing, agriculture, quarrying, cement, and shipping services. By diversifying, the UAE is investingin sustainable growth.

Sources: Sala-i-Martin and Subramanian (2003); van der Ploeg (2007)


• How, or why, has the potentialresource curse been avoided in somecases and how can it be overcome inthe future?

Stylized Features of Africa’sResource-Rich Economies

In most of the analyses that follow, Africancountries are categorized as:

(1) Resource-rich (oil and mineralexporters);

(2) Resource-scarce;(3) Land-locked (resource-rich and

resource-scarce);(4) Coastal (resource-rich and resource-

scarce), and(5) The SANE group (Africa’s four larg-

est economies: South Africa, Algeria,Nigeria and Egypt).

A complete listing is presented in Appendix4A. Africa has 22 resource-rich countries,defined in the analysis framework for thisReport as countries where fuel and mineralexports contribute over 20 percent to theGDP. These countries represented slightlymore than two-thirds of Africa’s GDP andhalf of its population in 2006 (Table 4.1).Half of these countries are oil exporters,while the other half are mineral exporters. Itis worth noting that only four of theresource-rich countries are landlocked andthat three of Africa’s four largest economiesthat make up the SANE (South Africa,Algeria, and Nigeria) are both resource-richand coastal countries. In contrast, there are31 resource-scarce countries, accounting for30 percent and 48 percent of regional GDPand population, respectively. One-third ofthese countries are land-locked.

High Export Dependence in Africa’sResource-Rich CountriesAfrica’s resource-rich countries continue toexperience high dependence on naturalresource exports for both foreign exchangeand revenues (see Appendix Table 4B). Forexample, of the total increase in exportvalues in African countries between 2000 and2005, fuels accounted for 65 percent;manufactures, 24 percent; and food and rawmaterials about 5 percent each. Sincemanufactures include processed naturalresources, Africa’s export boom seems to belargely driven by natural resources. Since1990, the share of fuels in the total exports ofAfrican oil-exporting countries has increasedby about 12 percentage points, to almost 90percent. The dependence of African non-fuelexports on agricultural commodities hasdeclined, while exports of certain resource-linked manufacturing products have increa-sed. In these countries, manufactured exportsaccounted for nearly 60 percent of all non-fuel exports in 2005, up from 37 percent in1985. Within manufacturing, the majorcategories are precious stones (the share ofwhich has more than trebled since 1985); andsilver and platinum (the share of which hasnearly doubled). Iron and aluminum are theother major product categories.4

High Fiscal Dependence in Africa’sResource-Rich Countries, butImproving Fiscal Performance

Before the current resource boom, resource-rich African countries had been challenged toreap the full benefits of their resourceendowments. Owing to boom-bust cycles,


4 IMF (2006)



Table 4.1: Macroeconomic Indicators

2006, or most recent year with available data

Population Nominal GDP GDP($ billionsAnnual

FDI ($ millions)

PerPPP)

GDP Share

Capita Area Million % % % growth of %

Income (Km2) of Pop share Billions share Billions share Rate Africa share

(US$) of US$ of US$ of 81– Export Millions of

Africa Africa Africa 2006 US$ Africa

Africa 838 30,323 924.3 100.0 1079.4 100.0 1886.5 100.0 3.0 100.0 30669 100.0

Resource-rich countries 991 20,975 482.5 52.2 750.9 69.6 1137.8 60.3 2.4 80.5 19587 63.9

Oil-exporting countries 935 11,537 278.2 30.1 431.0 39.9 519.6 27.5 2.4 55.1 10503 34.2

Mineral-exporting countries 1067 9,438 204.3 22.1 319.9 29.6 618.2 32.8 2.4 25.4 9084 29.6

Resource- scarce, countries 671 9,347 441.8 47.8 328.5 30.4 748.7 39.7 3.8 19.5 11082 36.1

Landlocked countries 264 7,979 225.0 24.3 82.5 7.6 202.2 10.7 3.3 6.7 2330 7.6

Resource-rich, landlocked countries 588 3,241 27.7 3.0 29.0 2.7 46.6 2.5 4.5 3.9 1316 4.3

Resource- scarce, landlockedcountries 208 4,690 194.4 21.0 49.3 4.6 146.1 7.7 2.9 2.0 981 3.2

Coastal countries 1023 22,344 699.3 75.7 996.9 92.4 1684.3 89.3 2.8 93.3 28339 92.4

Resource-rich coastal countries 1016 17,734 454.8 49.2 721.9 66.9 1091.2 57.8 2.3 76.7 18271 59.6

Resource- scarce coastal countries 1132 4,017 209.4 22.7 251.9 23.3 561.2 29.7 4.1 15.6 10047 32.8

SANE 1482 5,528 290.8 31.5 593.7 55.0 1072.0 56.8 3.0 59.4 16239 52.9

Source: AfDB Statistics Department, Computed from AfDB Database, 2007.


weak institutions, poor public financial management, and weak oversight, manyresource-rich African countries were saddledwith unsustainable amounts of external debtas income declined, risks of violent conflictsincreased, and social indicators worsened.However, a new trend seems to have emer-ged with the onset of the current resourceboom (especially with the meteoric rise of oilprices since 2002). There are, indeed,encouraging signs that resource-rich Africanexporters have become more prudent in theuse of natural resource revenues than inprevious booms.

In the past five years, buoyant oil, gas,and mineral price increases have enabledresource-rich African countries to increasetheir natural resource exports and thus theirrevenues substantially. These increasedrevenues are a significant source of fiscalincome for resource-rich African countries,demonstrating the importance of naturalresources in output growth and capacity togenerate export revenues. For example, oilrevenues account for more than half of allrevenues in Angola, Congo, EquatorialGuinea, Gabon, and Nigeria, and oil reven-ues increased in USD terms about 31⁄2 timesbetween 2002 and 2006. In addition to rev-enue upsurge, production also expandedsignificantly, by 45 percent on average,especially in Angola, Chad, and EquatorialGuinea.5 Thus, oil-exporting countries, inparticular, are highly fiscal dependent,implying that if the current boom cycle dev-elops — like in the past — to a boom-bustcycle, prudent fiscal discipline will berequired.

The available data shows that in generalgovernment expenditures have risen inrecent years, but not at nearly the same rateas natural resource revenues. Before thecurrent boom in 2002, non-oil deficitsexceeded oil revenues in many resource-rich African countries (such as in Angola,Congo, and Nigeria); since then, the ratio ofnon-oil fiscal deficits to oil revenues hasimproved noticeably (Table 4.2). Thisreflects both the rapid rise in oil revenuesand the narrowing of non-oil fiscal balances.

The relatively cautious fiscal policies inmany resource-rich African countries arehelping these countries reduce their macro-economic vulnerabilities. In other words, agood number of countries have used naturalresource revenues to strengthen theirexternal positions by reducing external debt(especially Gabon and Nigeria); accumu-lating external reserves (Angola, Congo,Equatorial Guinea, Gabon, and Nigeria); andreducing domestic and external arrears(Angola, Equatorial Guinea, Gabon, andNigeria). Cameroon, Angola and Congohave also improved their non-oil primaryfiscal balances.6

Concentration of Foreign DirectInvestment in Resource-Rich Countries

One major concern about Foreign DirectInvestment (FDI) inflows to Africa is that theoverwhelming majority of these go intonatural resource exploitation. Among thetop recipient countries, most of the flows toAngola, Algeria, Sudan, Nigeria, and Gabonwent to oil and gas projects. Similarly, over50 percent of the flows to South Africa and


5 Ibid. 6 IMF (2007)


Tanzania went into gold mining. Indeed, theprimary sector was the largest recipient ofaccumulated FDI flows to Africa, with a 55percent share for the 1996–2000 period.7 Asshown in Table 4.1, by 2006, about 64percent of FDI was concentrated inresource-rich countries in Africa.Furthermore, of the total FDI that came intothe continent during that year, 92 percentwent to coastal countries, with resource-richcountries dominating at about 60 percent.

Growth Performance of Africa’sResource-Rich Countries is Poor (com-pared to Resource-scarce Countries)

Before the first oil shock on the 1970s, theaverage oil-rich African country enjoyed

favorable macroeconomic conditions: robusteconomic growth, moderate inflation,manageable fiscal deficits and external debt,and external current account surpluses. Thepro-cyclical policies they followed during theoil booms of the 1970s and 1980s wereintended to use the oil bonanza for economicand social development and to encourageeconomic diversification. Unfortunately,these objectives were not achieved since theactual results were economic imbalances thatcaused major distress when oil pricesplunged in the 1980s and stayed low for overa decade. The same was true of most othermineral (metals and non-metals) exporters,with exceptions like Botswana.8


7 See Anyanwu (2006) 8 IMF (2006)

Table 4.2: Fiscal Balance, Investment Rates, and Terms of Trade Changes (in %)

1981–1985 2001–2005

FD INV TOT FD INV TOT

1- Resource-rich countries –3.6 22.6 1.6 –0.2 22.6 6.3Oil-exporting countries –4.4 24.5 –0.4 3.3 24.8 8.7Mineral-exporting countries –2.9 20.8 3.5 –3.6 20.3 3.92- Resource-scarce, countries –7.9 21.9 3.2 –4.8 20.0 –1.13- Landlocked countries –4.5 18.1 4.4 –3.2 20.2 1.1Resource- rich landlocked countries 0.2 18.0 3.8 –2.7 27.5 6.1Resource-scarce, landlocked

countries –6.1 14.6 5.9 –3.9 15.2 –1.34- Coastal countries –6.8 24.0 1.8 –2.7 21.5 2.3Resource-rich coastal countries –4.5 23.6 1.0 0.4 21.4 6.3Resource-scarce coastal countries –9.3 24.4 2.2 –6.0 21.9 –1.05- Africa –6.1 22.2 2.7 –2.8 21.1 2.1SANE –7.3 27.7 –3.4 –0.8 22.1 7.3

FD= Fiscal Deficit-GDP Ratio; INV= Domestic Investment Rate; and TOT=Change in Terms of Trade.

Source: AfDB Statistical Department. Computed from IMF (2007), and World Bank (2007b) data.


Indeed, as Figure 4.1 shows, resource-scarce African countries out-performedresource-rich countries in terms of real percapita GDP growth during the 1981 to 2001period, with a reversal occurring thereafter,reflecting the current boom. It should alsobe noted that there were three majorcollapses in real per capita GDP growthduring the period — in 1983, 1985, and 1993— with the latter being the worst.

The GDP per capita of oil- and mineral-rich countries were considerably higher thanthat of resource-scarce countries in 1980,and it still is today (Figure 4.2), but the real

per capita GDP of oil-rich African countrieshas remained resolutely stuck belowUS$1000 for more than 20 years — firstdropping to US$800 in the mid 90’s beforerising again. On the contrary, resource-scarce countries were able to achieve realgrowth during nearly the whole 1980–2005period, albeit at a modest rate, and havethus significantly narrowed the gap withresource-rich countries. Nevertheless, it isimportant to stress that resource-richcountries in Africa — as measured by GDPper capita — are much better off thanresource-scarce countries. Besides the better

Africa’s Natural Resources: The Paradox of Plenty 103In

perc

ent (%

)

5

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

–0.5

–1

–1.5

–2

–2.5

–3

–3.5

–4

–4.5

–5

–5.5Africa

Resource-Scarce countries

Resource Rich countries

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 4.1: Real GDP per Capita Growth — Resource-Rich vs. Resource-Scarce Countries



growth experienced by resource-richcountries in the 1960s and 1970s, anothervery significant factor, as outlined earlier, is geography (many resource-scarcecountries are further disfavored by beinglandlocked).

Analysis — Evidence of StylizedFeatures

Based on the data, tables and figurespresented, the following trends and conclu-sions can be drawn:

• Resource-rich African countries arericher than their resource-scarcepeers. The gap narrowed during the1980–2000 period but is wideningagain in conjunction with the recentresource boom.

• However, cumulatively, resource-richcountries only experienced an aver-age growth rate of 2.4 percent from1981–2006, considerably lower thanthe average of 3.8 percent forresource-scarce countries.


Figure 4.2: Natural Resource Abundance and Real GDP per Capita (at year 2000; US$)


2000 U

S$ p

er

capita

1600

1500

1400

1300

1200

1100

1000

900

800

700

600

500

400

Africa

Resource-Scarce countries

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


SANE


• Resource-scarce coastal countries,which have almost a quarter ofAfrica’s population, have experiencedan average growth rate of 4.1 percent,much higher than the 2.3 percentrecorded by resource-rich coastalcountries. These findings indicate thatbeing resource-rich does not make asignificant difference for coastal coun-tries. Indeed, resource-scarce coastalcountries have a somewhat higherGDP per capita.

• The four SANE countries are by far thewealthiest in terms of GDP and havesustained a significant growth ratesince 1995.

• Land-locked resource-scarce countriesare the poorest, by a significant factor.These countries are five times poorerthan resource-rich countries, andalmost six times poorer than resource-scarce coastal countries. Furthermore,the growth rate in this group ofcountries only averaged 2.5 percentfrom 1981–2006. In other words, themost important of all factors is whethera country is land-locked or not, —more important than being resource-rich or not, or than any other aspectreviewed in this analysis.

Another feature that deserves attention is thefact that over a long-term period, bothaccumulation and factor productivity aresignificantly higher in resource-scarcecountries than in resource-rich countries(see Figure 4.3).

Further analysis of the pace of pro-ductivity expansion (rate of growth in laborproductivity versus rate of technical progress)

in 23 diverse African countries reveal somemarked differences (Figure 4.4). Countriessuch as Egypt, Tunisia and Mauritius havedone very well — especially compared withcountries such as Madagascar, Zambia,Ghana, Rwanda and Nigeria. It is thus notedthat the best performing countries are allrelatively resource-scarce.

Resource-Rich African Countries HaveNegative Genuine Saving

One of the features of many countriesendowed with abundant natural resources isthat they generally save less than what isexpected, considering the rents obtainedfrom extracting and selling natural resour-ces. Presumably, if the countries savedmore, they would grow at a sustainable andfaster rate. To gain a better understanding ofsustainable development, it is useful toexamine the concept of genuine saving.

Genuine saving is defined as public andprivate saving at home and abroad, net ofdepreciation, plus current spending oneducation to capture changes in intangiblehuman capital, minus depletion of naturalexhaustible and renewable resources,minus damage of stock pollutants (CO2 andparticulate matter). Genuine saving, thusdefined, corresponds to an increase in thewealth of the nation. The so-calledHartwick rule demands that any depletionof natural resources or damage done bystock pollutants must be compensated for by increases in non-human and/orhuman capital. This rule of zero genuinesaving can be seen as a rule of thumb ormotivated by max-min egalitarianism. Itrequires that resource-rich countries adopt astrategy for transforming their natural



resource wealth into other forms ofproductive capital.9

Resource-rich countries in Africatherefore need credible and transparent rulesfor sustainable consumption and investmentto ensure that exhaustible natural resourcesare gradually transformed into productiveassets at home or abroad. Furthermore,countries with high population growth ratesneed positive rather than zero genuine savingrates to maintain constant consumption per

head. They thus need to save more than theirexhaustible resource rents — but only rarelymanage to. Figure 4.5 paints a gloomypicture of resource-rich countries (worldwideanalysis in this case). Countries with a largepercentage of mineral and energy rents (ofGross National Income, GNI) typically havenegative genuine saving rates. This meansthat many resource-rich countries becomepoorer each year despite their abundantnatural resources10. Figure 4.6 suggests that


9 Se i.e. World Bank (2006c) and Ploeg (2007) 10 Ibid.

Source: Bosworth and Collins (2003)

1.0

0.8

0.6

0.4

0.2

0.0

–0.2

0.3Resource

Rich

0.5non

Resource Rich

0.9SANE

0.4Landlockedcountries

0.3Resource

Rich

0.3non

Resource Rich

0.4SANE

0.2Landlockedcountries

0.0Resource

Rich

0.2non

Resource Rich

–0.1SANE

–0.1Landlockedcountries

Physical Capital Education Factor productivity

Figure 4.3: Sources of Growth in Output per Worker


this may explain why a country such asVenezuela has negative economic growthrates, while countries such as Botswana andGhana, which have positive genuine savingrates, enjoy substantial growth rates. Highlyresource-dependent Nigeria and Angola havegenuine saving rates of minus 30 percent,thereby impoverishing future generations ona massive scale.

The results suggest that resource-richcountries with negative genuine saving, suchas Nigeria, would experience increases inproductive capital by a factor of five or four,

if the Hartwick rule were applied. Effectively,for countries with negative genuine saving,the erosion of their natural resource wealthexceeds their accumulation of other assets.They effectively squander their naturalresources at the expense of future generations without investing in other forms of intangible or productive wealth.This is an unfortunate feature of severalresource-rich African economies (Figure 4.7).


Egypt

Bubble Size: Average rate of growth in Output (1960–2003)

Rate

of G

row

th in L

abour Pro

ductiv

ity (O

utp

ut per W

or k

er, in %

)

5.30

5.24 4.97

4.09

3.244.31

3.833.76

2.07

3.84

3.40

3.69

3.183.57

2.65

3.34 3.05

2.80

2.59

1.491.69

TunisiaMauritius

Morocco

ZimbabweKenya

Mozambique

Tanzania

Sierra Leone

Mali

Malawi

Cameroon

Uganda

Algeria South Africa

Cote d’Ivoire

Senegal

Nigeria

Ethiopia

Rwanda

Ghana

MadagascarZambia

–1.50 –1.00 0.00 0.50 1.00 1.50 2.00

3.00

1.50

0.00

–1.50

Rate of Technical Progress (Total Factor Productivity, in %)

3.82

2.86Mauritius

Source: ADB Development Research Department Staff with data from Bosworth and Collins (2003).

Fig 4.4: The Pace of Expansion in Productivity


Low Human Capital Development andWorsened Income InequalityOne of the dilemmas of natural resourceabundance is that it may pervasively cause acountry to neglect human capital develop-ment — the same basic causes and effectsoutlined above in reference to negativegenuine saving. High levels of naturalresource revenues can thus divert attentionfrom diversification and wealth creation,including from institutional and humandevelopment.11 The logical expression ofsuch a potential correlation betweenresource abundance and neglect of human

capital development would, in the medium-long term at least, be reflected in a low basichuman development status. The UnitedNations Human Development Index (HDI),a comparative measure of life expectancy,literacy, education, and standard of living incountries worldwide, provides a standardmeans of measuring human well-being andcountry development status. As reported bythe UNDP in its 2006 Human DevelopmentReport, Africa dominates the low end of theHDI (29 of the 31 countries with a lowhuman development status). Only the IslandStates of Seychelles and Mauritius qualify ashaving a high human development status.The remaining 22 countries, including all


11 Ibid.

0 10 20 30 40 50 60 70

Genuin

e s

avi

ng %

GN

I

40

30

20

10

0

–10

–20

–30

–40

–50

Mineral and energy rents % GNI

Source: World Bank (2006c), Where is the Wealth of Nations?

Figure 4.5: Negative Genuine Saving in Resource-Rich Countries


the North African Arab states, have a middlelevel human development. It is also worthnoting that oil-rich Norway has the highestHDI among all countries in the world.12

A deeper analysis of the HDI data (Table4.3) indicates that the primary factor of thehuman development status seems to begeography and not resource abundance —that is, whether a country is landlocked ornot — as landlocked countries as a groupscore very low in this index calculation

(average 0.42). There is no differencebetween resource-rich and resource-scarcecountries (0.51), but it should be noted thatoil-rich countries are doing considerablybetter in this aspect than primarily mineral-rich countries (0.55 vs. 0.46).

Another important aspect, frequentlyhighlighted as problematic in resource-richcountries, is increased income inequality.Oil, gas, and mining industries are oftencharacterized by their “enclave” nature, withfew forward and backward linkages into theeconomy. During exploitation and produc-tion, such industries employ only a relatively


12 UNDP (2006) — http://hdr.undp.org/hdr2006/statistics/documents/hdi2004.pdf

Source: World Bank (2006c), Where is the Wealth of Nations?

Figure 4.6: Genuine Saving Rates versus Economic Growth, 2003

–10 –5 0 5 10 15

Genuin

e s

avi

ng %

GD

P

40

30

20

10

0

–10

–20

–30

–40

–50

ChinaBotswana

Ghana

Nigeria

Azerbaijan

Angola

Uzbekistan

Central African

Republic Ethiopia

Venezuela, R. B. de

GDP growth % year


small number of highly-skilled, well-paidworkers, and generally import the majorityof inputs. Furthermore, there is a consider-able risk that public expenditure during aresource boom may exacerbate inequality,for example, concentrating expenditure inthe formal sector in towns and cities,skewing distribution (not benefiting ruralhouseholds), and prioritizing the interests ofthe elites and wealthier classes. Because ofthese tendencies, society tends to identifythe production and export of natural

resources with the interests of the rich.13 Asshown in Table 4.3, income inequality inresource-rich African countries is, indeed,noticeably higher (Gini Coefficient of 31.1)than in resource-scarce countries (GiniCoefficient of 26.8). Furthermore, it is worthnoting that income inequality is compara-tively higher in mineral-exporting countries,in landlocked countries, and in the SANEcountry group.


13 Overseas Development Institute (2006)

0 5 10 15 20 25 30 35

% incre

ase

in p

roduced c

apita

l if

standard

Hartw

ick

rule

follo

wed

400

350

300

250

200

150

100

50

0

–50

–100

–150

Zambia

Nigeria

Venezuela, R. B. de

Trinidad and Tobago

Guyana

Bolivia

EcuadorMauritania

Gabon

Algeria Congo, Rep. ofSouth Africa

JamaicaPeru

ZimbabweGhana

Mexico

ChileIndonesiaEgypt, Arab Rep. of

ChinaMalaysia

India

BrazilThailand

Korea, Rep. of

Low capital accum.

High-capital accum.

High resource dependence

Low resource dependence

% share of resource rents in GDP (average 1970–2000)

Source: AfDB Development Research Department, with data from Bosworth and Collins (2003)

Figure 4.7: Counterfactual Exercise — Imposing the Hartwick Rule


Stylized Features for Africa — Summary

The features and issues described andanalyzed above further illustrate thatresource-rich African countries have not fullyexploited the true (potential) benefits ofhaving significant natural resource wealth.However, geographic factors — most import-antly, whether a country is landlocked or not— also play a very significant role in thepresent-day status as landlocked countriesperform worse in nearly all aspects analyzed.

Overall, the 20-year period from1980–2000, in particular, was disappointingfor resource-rich countries in Africa. Hardlessons have been learned from the pastresource boom and bust cycles and fromtwo decades of very disappointing growthrates. These lessons need to be reviewed

and used for the future, especially now thata new boom has gained traction in Africa.The following sections further explore theseissues, taking into account relevanttheoretical aspects and empirical data.

Explaining the Resource Curse:Main Causes, Drivers, andSustainers

There is a large body of literature on thereasons why countries may suffer a “curse”rather than a “blessing” following largeinflows of oil, gas, or mineral revenues.Some authors14 cite three exogenous causes:(1) structuralist policies, (2) Dutch Disease,and (3) export-based theory; and three


14 For example, Auty (2001)

Table 4.3: Resource Abundance and Social Performance

Human Development Index Income Inequality(HDI) (Scale 0–1; Niger (GINI Coefficient Index;lowest with 0.31; Seychelles scale 0–100)*highest with 0.84)

1- Resource-rich countries 0.51 31.1Oil-exporting countries 0.55 15.3Mineral-exporting countries 0.46 46.82- Resource-scarce countries 0.51 26.83- Landlocked countries 0.42 45.0Resource-rich landlocked countries 0.42 41.6Resource-scarce landlocked countries 0.40 42.84- Coastal countries 0.55 22.1Resource-rich coastal countries 0.52 28.7Resource-scarce coastal countries 0.58 14.75- Africa 0.51 45.9SANE 0.63 42.8

* For the GINI Co-efficient Index; 0 corresponds to perfect equality

Sources: UNDP (2006), Human Development Report 2006; World Bank (2006d)


endogenous causes: (1) policy failures, (2) inefficient investment, and (3) rentseeking. This Report further examines thesecauses, which, for analytical purposes, aregrouped as follows15:

• revenue and macroeconomic volatility;• Dutch Disease and crowding out

effects;• the role of the state; and• socio-cultural and political impacts.

Revenue and Macroeconomic Volatility

Commodity booms are typically notpermanent and prices tend to show at leastsome degree of mean reversion over time.As a result, countries that have experiencedone or more commodity export price boomswill typically also have faced high volatilityof export prices. In many cases, resourcebooms have encouraged less prudent fiscalpolicies with limited control and inflation,further hampering growth, equity, and thealleviation of poverty.16 The majority ofresource-rich countries tend to have limitedtransparency in the management of naturalresource revenues, leading to the creation ofparallel budgets. As a result, price stabilityand budgetary discipline suffer. Thus, evenas natural resource money is “pouring in”,countries often have fiscal deficits, and,sometimes, double-digit inflation. Suchvolatility can be detrimental to growth inseveral respects: It is harmful to investment,income distribution, educational attainmentand poverty alleviation. It also hampersexchange rate unification and tradeliberalization. Furthermore, it makes invest-

ments more risky, while public spendingdecisions tend to become compromised,with extravagant commitments made duringbooms that subsequently lead to drastic cutsin vital expenditures during troughs.17

Evidence from recent years shows thatboth oil and non-fuel commodity (includingmetals) prices have experienced extremevolatility. Indeed, resource-rich Africancountries have experienced repeated boom-bust cycles over the past decades (asdemonstrated in Figure 4.8). Despite recentincreases, the prices of most non-fuelcommodities remain below their historicalpeaks in real terms. Over the past fivedecades, commodity prices have fallenrelative to consumer prices at the rate ofabout 1.6 percent a year18. This downwardtrend is usually attributed to large productivitygains in the agricultural and metals sectorsrelative to other parts of the economy.

However, compared with the prices ofmanufactured goods, commodity pricesstopped falling in the 1990s as the growingglobalization of the manufacturing sectorslowed producer price inflation. Indeed,metal prices increased by over 75 percentduring previous cyclical upturns, reflectinglong gestation lags for increasing capacity inthe industry and the low price elasticity ofdemand. Over the past five years, commodityprices have evolved very differently acrossvarious subgroups of the non-fuel index. Forexample, the prices of some non-fuelcommodities have increased more than oilprices — the metals index has risen by 180percent in real terms since 2002, while oil


15 See Stevens (2003)16 Ploeg (2007)

17 Ibid.18 See Stevens (2003)


prices have increased by 157 percent. Theprices of food and agricultural raw materialsincreased much less (by 20 and 4 percent,respectively). As a result, metals have contri-buted almost 90 percent to the cumulative 60percent real increase in the non-fuelcommodity index since 2002.19

Part of the unusually strong run-up inmetal prices experienced in recent years canbe attributed to the low investment in themetals sector in the late 1990s and early 2000s

— following a period of earlier price decli-nes. Some analysts have also suggested thatthe intensity of the price upswing in this cycleis amplified by new factors — the increasingweight of rapidly growing emerging markets(most notably China and India) in the worldeconomy and the investment activity offinancial investors in commodity markets.

Dutch Disease and Crowding OutEffects

Originally, Dutch Disease was used to referto the appreciation of the real exchange rate:


19 IMF (2006)

1986 88 90 92 94 96 98 2000 02 04 Jul. 2006

300

250

200

150

100

50

0

Agricultural Raw Materials

Metals

Oil

Food

Source: AfDB Statistical Department — Computed from IMF (2007) data.

Figure 4.8 Recent Volatility in Commodity Prices

(2002 = 100; monthly data prices deflated by U.S. CPI)


the result of inflation arising from thespending of revenues, leading to anoverheated economy and an appreciation ofthe nominal exchange rate as the domesticcurrency attracted higher demand. Thisusually leads to a contraction in the non-oil,gas, or mineral traded sector. Some scholarsuse the “Dutch Disease concept” in a narrowsense to explain the failure of resource-abundant economies to promote a competi-tive manufacturing sector. However, in mostcases, Dutch Disease has taken on a muchwider meaning and is usually meant toencompass all of the negative macro-economic effects associated with “resourcecurses”.20

Two effects of the Dutch Disease haveevolved as key elements of the resourcecurse: the “resource movement effect” andthe “spending effect”. In the case of theresource movement effect, a higher marginalproduct in the booming resource sectordraws resources out of other sectors21,causing the latter to contract. The spendingeffect occurs when, as a result of the rev-enue windfall, demand rises in both tradableand non-tradable sectors of the economy.Since prices in tradable sectors are largelydetermined by the international market,greater demand is met by higher imports.However, prices in non-tradables riserelative to tradables and, consequently,resources shift from tradables to non-tradables.

Other dimensions of the Dutch Diseasesyndrome, conceptualized as the contrac-tion of the tradable sector, have emerged. A

first dimension of this detrimental develop-ment occurs when subsidies used to protectnon-resource tradable sectors — that areweakened by the boom — aggravate thesector’s problems and eventually becomeunsustainable. A second dimension is the“leap frog effect” which occurs whengovernments miss the labor-intensive phaseof industrialization and move straight to aheavy, capital intensive phase with negativeeffects for the tradable sector. A thirddimension relates to the issue of learning bydoing in the context of Dutch Disease22,which assumes that because learning bydoing benefits only accrue from tradablesectors, a contraction in these sectorsimplies lower productivity. The fourthdimension of the extension of the DutchDisease syndrome relates to the impact ofnatural resources on social capital, wherebyit has been suggested that resource-scarcecountries accumulate social capital fasterthan resource-rich countries.23 The rationalefor this is that limited natural resourcespromote early industrialization and forceearlier urbanization, which, in turn, stiflesentrepreneurship and allows people toescape from villages into urban environ-ments with greater anonymity and betterfunctioning markets. At the same time, thisconfers a saving dividend by reducing thedependency ratio.

Based on a series of international rank-ings, it is evident that private investors inAfrica face more hurdles than investors inother economies. Infrastructure constraintsand unfavorable business environments


20 Sarraf and Jiwanji (2001)21 Farmanesh (1991)

22 Gylfason et al. (1997)23 Woollcock et al. (2001)


impose significant costs on the private sectorin terms of starting a business, the time ittakes to register property, and the rigidity oflabor markets, and so on. These are some ofthe factors that, among others, have led tolow business diversification in Africa, mostsignificantly, in oil-rich countries. As Table4.4 clearly shows, the diversification indexof resource-rich countries as a whole ismuch lower than that of resource-scarceAfrican countries (see also Figure 4.9). In2005, for example, the diversification indexof resource-rich countries was only 4.1,while that of resource-scarce countries wasalmost double this level, at 8.4. However, itis worth noting that low diversification isprimarily a problem in oil-exporting coun-tries (with a score of only 1.9 in 2005),whereas this issue is less problematic inmineral-exporting countries (a score aver-aging 6.3).


Table 4.4: Natural Resource Abundance and Diversification Index, 2001–2005

2001 2002 2003 2004 2005

1- Resource-rich countries 5.5 5.1 5.1 4.5 4.1Oil-exporting countries 2.6 2.2 2.1 2.0 1.9Mineral-exporting countries 8.4 7.9 8.2 7.1 6.32- Resource-scarce countries 10.1 9.4 9.5 8.6 8.43- Landlocked countries 4.7 4.6 4.5 4.4 4.6Resource-rich landlocked countries 3.9 2.3 3.0 2.3 2.2Resource-scarce landlocked countries 4.6 4.4 3.9 4.0 3.94- Coastal countries 9.6 8.8 8.9 7.9 7.4Resource-rich coastal countries 5.8 5.7 5.6 5.0 4.5Resource-scarce coastal countries 13.0 11.5 11.7 10.2 9.85- Africa 8.2 7.6 7.7 6.9 6.6SANE 16.5 15.3 15.2 13.4 12.3

Source: OECD and AfDB (2007), African Economic Outlook 2007

Fig 4.9: Diversification Index

2001


Resource-scarce countries

Africa

15

10

5

02005 2002

2004 2003


In terms of competitiveness in Africancountries, Table 4.5 shows that there is littledifference between the performance ofresource-rich and resource-scarce Africancountries. While landlocked countries under-perform, the performance of mineral-exporting and resource-rich coastal countriesis marginally better than that of the resource-rich group at large.

Economic Policy Failures

The effect that natural resource revenueshave in exposing existing policy failures —including, on economic investment,regulatory reform, and trade — are alsolinked to the Dutch Disease. For example,policy decisions on economic diversification— choices governments make in supportingregulatory reform, skills development,

business support, and public investment inphysical infrastructure such as ports androads — have an impact on the way in whichthe Dutch Disease affects the economy. Atleast two features have a key impact here: theeffect of resource booms (throughgovernment investments and industrialpolicy) on tradable versus non-tradablesectors; and, the differential effect of thisimpact depending on whether governmentpolicy is skewed towards sectors that are“close to”, or “far from”, the natural resourcemarket.24

Poor Industrial Policy

In the 1970s and 1980s, in particular, manyresource-rich countries adopted industrial


24 Ploeg (2007)

Table 4.5: Natural Resource Abundance and Competitiveness Index, 2007

Overall Basic Efficiency Innovation Index requirements enhancers enhancers

Score Score Score Score

1- Resource-rich countries 3.4 3.8 3.1 3.1Oil-exporting countries 3.3 3.7 2.9 3.0Mineral-exporting countries 3.5 3.9 3.3 3.22- Resource-scarce countries 3.4 3.7 3.2 3.33- Landlocked countries 3.1 3.3 2.9 2.9Resource-rich landlocked countries 3.2 3.6 3.0 2.7Resource-scarce Landlocked countries 3.0 3.2 2.9 3.04- Coastal countries 3.7 4.0 3.3 3.4Resource-rich coastal countries 3.5 3.9 3.2 3.2Resource-scarce Coastal countries 3.9 4.2 3.5 3.65- Africa 3.4 3.8 3.1 3.2SANE 4.0 4.4 3.6 3.7

Source: World Bank and AfDB (2007), The African Competitiveness Report


policies that were based on importsubstitution characterized by the introductionof subsidies (based on the infant industryargument) and growing protectionism. Thiswas seen initially as the means to break outof the circle of underdevelopment — avariant of the “big-push” argument. However,these subsidies became unsustainable whenrevenues fell (the bust cycle). In addition,with subsidies and protection in place,continuing resource revenues reduced theincentive to create competitive manu-facturing industries. Given that manydevelopment economists regard competitivemanufacturing as a key source of tech-nological progress this has had seriousimplications on economic progress.25

Thus, the relaxation of market disciplineand the associated accumulation ofeconomic distortions retards competitivediversification and lies at the heart of thegeneral underperformance observed inmany resource-rich African countries in the1980s and 1990s. However as described andoutlined through empirical evidence earlierin this chapter, there are some indicationsthat (thanks to the lessons learned) thepolicies pursued today in exploiting thecurrent resource boom are, indeed, moresustainable — or, at least, less damaging toresource-rich economies. However, any firmconclusions in this regard will have to waitfor a downtrend or the full completion of aresource boom-bust cycle.

The Role of the State

In most countries and legal regimes, oil, gas,and minerals are the property of the state;

the revenues in the first instance accrue tothe government, inevitably inviting govern-ment action in one way or the other tospend some of the accrued revenues. Thereis a recurrent debate on how or why thisvery often results in policy failures and poorgovernance. Several strands of argumentsare presented below.

Bad Decision-Making

The first strand argues that large windfallrevenues lead to poor general decision-making by governments. This is attributableto several factors26:

• Resource booms raise expectationsand increase appetite for spending.The promise of natural resourcewealth dramatically expands thehorizons of governments in naturalresource-exporting countries. A boommentality not only affects the waygovernments behave — creatinggrandiose plans and ideas; it alsoshapes how people respond. Workethics may be undermined resulting ina decline in productivity.

• The development of oil, gas, or min-erals raises expectations among thepopulation. This pressures govern-ment to “do something”, thus encour-aging speedy responses. This oftenleads to quick, inappropriate, andpoorly coordinated decisions.

• Having more money to “play with”tends to weaken prudence and normalprocedures of “due diligence”. Inparticular, governments may decide on


25 Ibid.

26 Also refer to Ploeg (2007); Auty (2001); Auty(2004); Stevens (2003)


capital spending without due thoughtto recurrent spending implications.

• Governments often dramaticallyincrease public spending based onunrealistic revenue projections. Inresource-dependent countries, wind-falls increase both public spendingand the appetite for transfers by afactor that is more than proportionateto the size of the boom itself. Thismeans that spending quickly surpas-ses revenues. Nonetheless, differentinterests and groups continue todemand even larger shares of nationalincome when natural resource rev-enues go into a downtrend.

Enhanced Corruption and Rent-Seeking

Natural resource booms often decrease thequality of public spending and encouragerent seeking.27 The centralization and,hence, concentration of fiscal resourcesfrom resource booms fosters excessive andimprudent investment. It often also leads tosome level of mismanagement and misal-location of resources and in the most severecases, massive corruption.

The key issue is that natural resourcerevenues tend to replace more stable andsustainable revenue streams, exacerbatingproblems related to development, transpar-ency and accountability. With sizeableresource revenues, the reliance on non-resource taxes and other governmentincomes decreases. This tends to free naturalresource-exporting governments from thetypes of citizen demands for fiscaltransparency and accountability that arise

when people pay taxes directly to thegovernment. Thus, natural resource exportearnings actually sever important linksbetween the people and their governmentsthat are related to popular interests andcontrol mechanisms.

The larger the public purse, the lessnoticeable the leakage to interest groups.Rent-seeking is greater in resource-richcountries because wealth is concentrated inthe public sector (or possibly in a smallnumber of companies). Therefore, the bulkof the rents created in these economies arechanneled by bureaucrats, the majority ofwhom are members of the politically domin-ant groups. Such rent-seeking behaviorproduces undesirable results for the eco-nomy. First, rent-seeking behavior imposessignificant losses on many economies.Second, it distracts attention away from long-term development goals towards maximizingrent creation and capture. Third, rent seekingcreates extremely powerful lobby groups thatare able to block needed economic reforms.Fourth, societies face severe impediments toinnovation as a result of the behavior ofspecial interest groups. Fifth, rent seekingmakes it more difficult for governments toadjust spending when faced with revenuefluctuations. Finally, rent seeking is tanta-mount to the creation of monopoly power inan economy and the social costs of suchmonopolization are higher if the costs tomaintain that monopoly are added.28

Governance indicators such as govern-ment effectiveness, voice and account-ability, political instability and violence, therule of law, regulatory quality, and control


27 Ibid. 28 See Stevens (2003)


of corruption are markedly weaker in oil-rich African countries (see Table 4.6).Perhaps, surprisingly, mineral-rich countriesactually perform much better and at thesame level as resource-scarce countries,implying that this problem is by far mostcommon in relation to oil exploration andrevenue, at least at the present phase of thecurrent resource boom.

Revenue Misallocation and PoorInvestment Decisions

Relevant studies and literature emphasizethe role of governments in the misallocationof resource revenues.29 Resource booms

have adverse effects because they provideincentives for politicians to engage ininefficient redistribution of revenues andincome in return for political support.However, it is important to note that thestatus of existing institutions (before theresource boom) is crucial, as they determinethe extent to which politicians can respondto these perverse incentives. Nevertheless,regardless of the starting point, pressurefrom the public to raise public spending islikely to be significant — leading toinefficient redistribution in the form ofpublic employment provisions, subsidies tofarmers, labor market regulations, andprotection of domestic industries from inter-national competition.


29 Ibid.

Table 4.6: Natural Resource Abundance and Governance Indicators

Voice and Political Government Regulatory Rule Control of Accountability Stability Effectiveness Quality of Law Corruption

2006 2006 2006 2006 2006 2006

1- Resource- rich countries –0.8 –0.7 –0.8 –0.7 –0.9 –0.8Oil-exporting countries –1.3 –1.0 –1.0 –1.0 –1.1 –1.0Mineral-exporting countries –0.4 –0.3 –0.5 –0.5 –0.6 –0.52- Resource-scarce countries –0.5 –0.4 –0.7 –0.7 –0.6 –0.53- Landlocked countries –0.6 –0.6 –0.7 –0.7 –0.7 –0.6Resource-rich landlocked countries –0.6 –0.5 –0.7 –0.6 –0.7 –0.6Resource-scarce landlocked

countries –0.5 –0.6 –0.7 –0.6 –0.6 –0.74- Coastal countries –0.6 –0.4 –0.7 –0.7 –0.7 –0.6Resource-rich coastal countries –0.9 –0.7 –0.8 –0.8 –0.9 –0.8Resource-scarce coastal countries –0.4 –0.3 –0.6 –0.7 –0.5 –0.45- Africa –0.6 –0.5 –0.7 –0.7 –0.7 –0.6SANE –0.5 –1.0 –0.2 –0.3 –0.4 –0.4

Source: Kaufmann, D., Kraay, A and Mastruzzi, M (2007)


Socio-Cultural and PoliticalImpacts

As outlined above, countries that haveabundant point-source natural resources(such as minerals or oil) tend to have lessprudent policies and poor governance. Theyalso tend to have weaker institutionalcapacities. In essence, natural resources areoften associated with weak institutions.30

Some of the reasons for this relationship andreflections on how it may be avoided arediscussed in the following paragraphs.

Resource rents are an invitation to non-productive lobbying and rent seeking. Thisproblem occurs mostly in countries with“grabber-friendly” institutions, while coun-tries with “producer-friendly” institutionsgenerally do not suffer from the curse. Inother words, countries that avoided theresource curse in previous resource boomsdid so because they had transparent andsound institutions and because they adoptedspecific policies — including institutionalstrengthening — to minimize the impact ofand damage caused by, the resourcewindfalls.

It has also been argued that countries inwhich governance (hence transparency) isinitially poor face a substantial risk of turningresource windfalls into catastrophe (see Box4.2). Indeed, there is evidence that gover-nance is likely to deteriorate further in aresource-boom, even from a low-start status,because of the windfalls. Governance andeffective public spending are thus critical forboth living standards and private activity and,since the public sector is a large part of the

economy, its own productivity growth is akey component of overall growth. This inturn requires that government aspires tooverall national goals and hence becomeaccountable to citizens, regardless of its owninterests and aspirations.

Poor economic performance duringprevious natural resource booms under-scores the importance of sound macro-economic policies and strong institutions.The large public investment projects of the1970s and 1980s, when governance andinstitutions were extremely weak in most ofAfrica, were often undertaken with littlescrutiny and accountability. The return on public investment was correspondinglylow. Meanwhile, poor macroeconomicmanagement of natural resource price cycles in several African countries resulted inlarge exchange rate appreciation, erosion ofthe competitiveness of non-oil sectors, andhigh inflation. Given that many Africancountries leveraged their natural resourcewealth to access credit from foreign suppliersand governments, the early 1990s witnesseda sharp rise in external debt, well above 100percent of GDP and, in most cases, resultingin unsustainable external debt levels. Thesemacroeconomic imbalances have eventuallycalled for very painful policy adjustments,such as sharp fiscal contraction, tradeliberalization, exchange rate adjustment, anddebt rescheduling.31

In addition, with weak institutions andlegal system dysfunctions, there is a higherreturn on rent seeking, and a higheroccurrence of crime, corruption, unfaircompany take-overs, and other shady


30 See Stevens (2003) 31 Collier and Goderis (2007)


dealings. A resource bonanza thus elicitsmore rent seekers and reduces the numberof productive entrepreneurs. In the longrun, profits fall and, as a result, the economyis worse off. Weak institutions may explainthe poor performance of oil-rich countriessuch as Angola, Nigeria, and Sudan;diamond-rich Sierra Leone, Liberia andCongo; and drug states like Columbia orAfghanistan. Thus, if institutions are weakand conditions are not favorable,dependency on oil and on other naturalresources effectively hinders democracy andthe quality of governance.32

The general recognition that manyAfrican countries have relatively weakinstitutions, low human development status,and poor governance raises great concernabout how the current resource boom willaffect development in the resource-richparts of Africa. Current data is not alldiscouraging — as pointed out earlier, thereare indeed resource-rich countries in Africathat have put in place strong institutions andenjoy consistent high economic and humandevelopment growth.


32 Ross (1999); Ploeg (2007)

Box 4.2: Governance and Transparency

Governance remains the overarching and most critical challenge for natural resource exploitation andmanagement. Although African governments bear prime responsibility for managing natural-resource wealthin a transparent, fair, and accountable way, they are only one part of an intricate web of interests andrelationships, which include multinational extractive companies foreign governments, and regional actors.The main governance-related challenges facing resource-rich countries can be summarized as follows:

TransparencyTransparency is the key issue in establishing accountable governance structures and fighting corruption.However, this has to start with the concession contract itself, as well as with revenues accruing from the saleof the resources:(1) Corruption in the allocation of resource concessions not only undermines governance in resource-richcountries and also entails a poor deal for their citizens. There is overwhelming evidence that concessionallocation is obscure and involves a lot of corruption;(2) Concession contracts often contain confidentiality clauses and are therefore not open to public scrutiny.Without knowing the details of the deals signed by their government, the citizens of a given country haveno way of holding their politicians’ accountable; and,(3) Transparency is equally important for the revenue flows of natural-resource rents between extractiveindustry companies and host governments. If the companies publish what they pay and the governmentspublish what they earn, the revenue flows can be traced and governments can be held accountable forsustainable management of these revenues and fair distribution of the wealth.

Sources: Heinrich Boll Foundation (2007); Alley et al. (2007)


Civil Wars and Other Forms ofConflict

There is strong evidence that resourceabundance increases the incidence of civilconflicts and wars and stimulates violence,theft, looting, and fighting between rivalgroups.33 Over half of the conflicts listed inTable 4.7 (see also Figure 4.10) are in Africa.Since many African states are highlydependent on oil, gas, and mineral exports,they are unusually prone to resource-relatedconflicts (Table 4.8). Conversely, theregion’s mineral abundance helps explainwhy a significant share of the world’s civilwars has taken place in Africa. Furthermore,while mineral wealth is linked to the onsetof non-separatist conflicts, evidence showsthat booty futures have been used toprolong conflicts and wars. Booty futuresrefers to advance rights granted by a rebelgroup (and sometimes by governments) tocompanies to extract natural resources inareas that the rebels hope to capture duringa civil conflict. However, it should be notedthat another important reason for this trendis the persistence of poverty in Africa —poverty significantly raises the risk of civilwar. A downtrend has been observed inrecent years, but this should not mask thefact that Africa experienced seven civil warsin the 1970s, eight in the 1980s, and fourteenin the 1990s.34

Altogether, between the 1960s, whenmost African countries became independ-ent, and the 1990s, there were more than 80

violent changes of government in thecontinent. Country after country has beenengaged in internal strife, conflict, or civilwar.35


33 E.g. Collier and Hoeffler (2004); (2005);Anyanwu (2002); Hodler (2006)

34 Ross (2003); Collier and Hoeffler (2004); (2005);Hodler (2006) 35 Adedeji (1999)

Table 4.7: Civil Wars Linked to Resource

Wealth, 1990–2002

Country Duration Resources

Afghanistan 1978–2001 Gems, opium Angola 1975–2002 Oil, diamonds Angola (Cabinda) 1975– Oil Burma 1949– Timber, tin,

gems, opium Cambodia 1978–97 Timber, gems Colombia 1984– Oil, gold, coca Congo, Rep. 1997 Oil Congo, Dem. Rep. 1996–97 Copper, coltan,

diamonds, gold, cobalt

Congo, Dem. Rep. 1998– Copper, coltan,diamonds, gold, cobalt

Indonesia (Aceh) 1975– Natural gas, marijuana

Indonesia (W Papua) 1969– Copper, gold

Liberia 1989–96 Timber, dia-monds, iron, palm oil, cocoa, coffee, marijuana, rubber, gold

Morocco 1975– Phosphates, oil Papua New

Guinea 1988– Copper, gold Peru 1980–1995 Coca Sierra Leone 1991–2000 Diamonds Sudan 1983– Oil

Source: Ross (2004), What do we know about natural

resources and civil war?


A couple of salient characteristics dis-tinguish the post-Cold War civil conflicts inAfrica:

1) Natural resources figure as aprominent feature in the conflicts,both in situations of natural resourceabundance (oil and minerals) and

environmental scarcities (land). Insome countries, like Sudan, conflict isrelated to both types of resources, oilin the South and land in Darfur; and,

2) These conflicts involve local non-stateactors, non-professional fighters, orcombatants often challenging theauthority and legitimacy of fragilestates, regional actors, and neighbor-ing states, and trans-global forces andnetworks.

Nature-based conflicts, including violentconflict, civil wars and secessionist move-ments, have thus been commonplace inAfrica. The “blood diamonds” in SierraLeone and Angola, timber conflicts inLiberia, oil conflicts in Nigeria and Sudan,and mineral wars in the DemocraticRepublic of Congo are popular examples.36

Even so, local disputes over land, water,wildlife and forests are, in fact, far morecommon. In many places, such conflictsoverwhelm rural courts and traditionalmediation platforms.37

The root causes of civil wars in Africa arecomplex and lie in a combination of factors,whether in resource-rich or resource-scarcecountries. However, there is a growing bodyof empirical evidence that rents on naturalresources and primary commodities,especially oil and other point-source naturalresources, increase chances of civil conflicts


36 Bannon and Collier (2003); Lind and Sturman(2002); Cilliers and Dietrich (2000); Reno (2000);Lipschutz (1987)

37 Wolf et al. (2005); Veit and Benson (2004); LHRC(2003); Newmann (1998); Shivji (1998); Shivji andKapinga (1998); Lane (1996)

Table 4.8: Countries Ranked by Mineral

Dependence, 2000

Rank Country Mineral ConflictDependence 1990–2000

1 Bahrain 63.44 0 2 Qatar 53.37 0 3 Turkmenistan 49.91 0 4 Gabon 48.83 0 5 Nigeria 48.75 3 6 Saudi Arabia 44.74 0 7 Papua New Guinea 41.52 0 8 Trinidad and Tobago 41.16 0 9 Congo, Rep. 41.07 9

10 Brunei 37.65 0 11 Kazakhstan 36.11 0 12 Libya 35.91 3 13 Algeria 35.75 27 14 Botswana 35.10 0 15 Kuwait 32.41 3 16 Azerbaijan 28.83 9 17 Angola 27.88 74 18 Zambia 27.12 0 19 Liberia 26.76 14 20 Norway 25.97 0 21 Oman 25.65 0 22 Iran, Islamic Rep. 25.55 42 23 Mongolia 25.45 0 24 Russian Federation 25.38 15 25 Venezuela, RB 23.54 0 26 Yemen, Rep. 22.32 2 27 United Arab Emirates 22.13 0

Source: Ross (2004), What do we know about natural

resources and civil war?


and wars — especially in sub-Saharan Africa— by weakening the state or financingrebels. Sometimes this can even be relatedto engagements by multinational corpora-tions. It is important to investigate whethercivil strife and wars are the result ofgrievance, a sense of injustice about how asocial group is treated (for example,systematic economic discrimination), orgreed possibly induced by massive rents ofpoint-source resources, as commonly high-lighted in the cases of Angola, Congo, andSierra Leone.38

Other studies show39 that the largestsingle influence on the risk of conflict is theextent to which a country depends onprimary commodity exports, and the effectis nonlinear. For instance, the probability ofcivil conflict in a country with no naturalresources is only 0.5 percent, but it is morethan 23 percent in a country with a share ofnatural resources (oil and minerals) of morethan 25 percent in the GDP. This suggeststhat many conflicts are driven by greedrather than by grievance. Based on theseresults, the different variants of the “resourcecurse” theory attribute the poor resourceexploitation record in resource-dependentstates, either to the “predatory” inclinationsof the state or to the “greed” of rebels. Apartfrom other empirical results pointing to thecontrary, such conceptualization suggestsirrational behavior by the main actorsinvolved in the control and management ofnatural resources.

However, the above explanation missesthe crucial point that waste and degradation

of natural resources in conflict-pronecountries can most commonly be traced togovernment policy failures. Governmentofficials sometimes induce and engage inunsound natural-resource exploitation inorder to pursue economic and politicalobjectives that are, in principle, unrelated tothe natural-resource sector. Even rebelgroups depending on the strength orweakness of their organizational structures,often pursue various broader programmaticand political objectives.40

As mentioned earlier, empirical evidencealso strongly suggests that conflict is morelikely to erupt in countries with a low levelof GDP per capita and low rate of economicgrowth. The three factors that determine theonset of armed conflict — natural resources,low income per capita, and low growth —are prevalent in large parts of the Africancontinent. The literature41 highlights otherfactors that may be significant, such asvertical and horizontal inequality andreligion. The conflicts in Rwanda andBurundi, for instance, were not primarilydriven by economic factors.

The effect of natural resources on theincidence and duration of civil wars alsofeatures strongly in the political scienceliterature.42 In fractionalized countries,many rival groups fighting for naturalresources may well harm the quality of thelegal system and thus undermine propertyrights. The resulting destruction of outputoutweighs the increase in output due to theresource boom. Fractionalization and


38 Murshed (2002); Olsson and Fors (2004)39 Collier and Hoeffler (2004); (2005)

40 Weinstein (2005)41 E.g. Stewart (2000; 2002)42 E.g. Ross (2004); Fearon and Laitin (2003)


fighting for natural resource bounties canthus lead to dissipation of natural resourcerents. Erosion of property rights, when thereare many natural resources, can easily leadto the resource curse, especially if there aremany rival fractions.43 The “idea” is thateach group manages to appropriate morenatural resources if it fights more and thequality of the legal system is poor, butfighting also undermines effective propertyrights. There is some cross-country empiricalevidence that the resource curse is more

severe in countries that have many ethnic orreligious fractions and many languages.

Easily lootable resources such as gem-stones tend to prolong conflicts — that is,when rebel groups and rulers and theircronies fight each other over the control ofpoint-based resources. For example, with theexception of Botswana, Namibia, and SouthAfrica, diamond abundance on the AfricanContinent has been shown to generally leadto depressed growth, mostly so in countrieswith weak institutions.44


43 Hodler (2006) 44 Ollson (2007)

Source: DFID (2006b)

Figure 4.10: Natural Resources and Conflict


Natural Resource WealthManagement in Fragile AfricanStates

Africa has a considerable number of fragilestates, by far the highest number of anycontinent. While there are several defini-tions of what a fragile state is, what is mostimportant in the context of this Report is thestrong overlap between underperforming,resource-rich countries and countries widelyaccepted as being fragile in one form oranother. It is worth noting that fragilecircumstances take different forms indifferent countries and even within the samecountry at different times. There are majordifferences in terms of political and publicsecurity environments, institutional capacityand performance, government account-ability, and commitment to progress along acredible reform path. These differenceshave major implications for the scope andnature of engagement by developmentpartners. Indeed, experience has shown thata uniform approach to widely differingcircumstances on the ground often fails toproduce desired results and, in manycircumstances, has precluded forms ofselective engagement that could be bothjustified and effective.45

A stylized categorization of thesedifferent circumstances illustrates asimplified continuum along which fragilecircumstances typically fall — ranging frommarked deterioration to active conflict orprolonged crisis, to post-crisis and trans-ition, and, finally, to gradual improvement(Figure 4.11). The categorization also sets

out, in broad terms, strategic avenuesthrough which governments and donorsmight address development in a fragile state.Needless to say, for natural resource-richcountries, the natural resource sector is anextremely important focal point, consider-ing the whole spectrum of opportunities andchallenges natural resource wealth implies(as outlined in earlier sections).

In reality, movement along thiscontinuum (Figure 4.11) is neither automaticnor unidirectional, as countries may moveback and forth between various fragilesituations. The goal is to help preventcountries at risk from slippage and to helpcountries in post-conflict and post-crisissituations move towards more stable politicaland economic development. Helping coun-tries (resource-rich as well as resource-scarce)progress along the continuum requires aninternationally coordinated strategic effortthat covers a country’s political, security, andsocio-economic domains. The key, in thisregard, is a differentiated and flexibleresponse.

Analyzing the management of mineral(and oil) resources in fragile states furtherreveals that it has largely been molded byfour interrelated conditions that are definedby the interplay of state power, contest, andconflict over the control of mineralresources. These are (1) public policyfailures; (2) state predation or “shadowstate”, where rent-seeking substitutes rentcreation; (3) rebel-dominated war (shadow)economies; and, (4) vested interests ofregional and international actors. Two ofthese conditions have been discussed in the earlier sections of this chapter. Thefollowing analysis thus focuses primarily on


45 AfDB (2007c)


state predation and on regional and inter-national actors.

State Predation

The attainment of political independencedid not transform the structure of a goodnumber of African states, which remainedforceful and authoritarian. Thus, instead oftransforming the state and making it relevantfor the satisfaction of the needs andaspirations of the people, some emergingpost-colonial leaders were content with

using the enormous authoritarian structuresof the state to appropriate economic gainsfor private ends. In response to the forces ofglobalization, epitomized by the end of theCold War, growing pressures for botheconomic and political liberalization, as well as increasing internal resistance anddemands for democratization, many stateregimes have resorted to repression andpredation. A predatory state is characterizedby the concentration of power at the top and the personalization of networks for


Post-crisis/transition

• Post-conflict situation after peace agreement, reconstruction phase

• Post-crisis/political transition after reconciliation-agreement

Gradual improvement

• Broadly stabilized situation

• Improving government functions

• Presence of macro-economic reforms, increased donor support

• Restoration of positive trends in key income and social indicators, albeit slowly and perhaps with reversals

• Improved access to external finance

Marked deterioration

• Failing economic and financial management

• Significant corruption and poor governance

• No consensus between partners and government on development priorities

• Deteriorating economic and social indicators

Active conflict and/or prolonged crisis

• Absence of legitimate government

• Breakdown of effective administration

• Civil conflict and/or domestic political impasse

• IFI and/or international sanctions

• Marked reversals in economic and social indicators

Strategic approach

Focus on Prevention — policy dialogue

Focus on improving governance-support

Build knowledge base

Stay engaged — policy dialogue

Stabilization — policy dialogue

Graduation, reform and normalization

Post conflict/crisis-reconstruction

Focus on turnaround and graduation

Source: AfDB (2007c), Enhanced Engagement in Fragile States, Discussion Paper

Figure 4.11: Continuum of Fragile States’ Concept


delegation of this power, which is enforcedby ruthless repression. In this context,economic inducements for governmentofficials and generalized corruption are thegovernment way of life.46

Predatory rule has two major con-sequences on natural resource wealth andrevenue management in most fragile Africanstates. First, access to state power isequivalent to access to wealth and to thesources of future wealth. Second, politicalsupport is built around clientele networks,which link power-holders with segments ofthe population. The concern of the variouselites, ultimately connected to the top ofstate power, is how to gain support andconsolidate clienteles while maximizing theamount of resources needed to obtain thissupport. These networks are formed alongethnic, regional, territorial, religious, andeconomic lines.47

Predatory states use different violent andnon-violent strategies to manage mineraland oil resources and to appropriate theproceeds accruing from their exploitationand sale. Since minerals are extracted inenclave production centers, sometimeslocated off-shore, the common strategy is tonegotiate royalties and other agreementsdirectly with foreign companies. These dealsare often shrouded in mystery, making itdifficult, if not impossible, to track howmuch money is generated or how theserevenues are spent. According to oil industryexperts, OPEC countries on average retainsome 75 percent of their oil revenues for thestate budget, allowing for operating

expenses. In the case of African oilproducers, this proportion, even in the best-case scenario, falls in the range of 55 percentto 70 percent. The difference representssupplementary profits shared by the oilcompanies and African elites. Similarpractices have been identified in themanagement of uranium mines in Niger,phosphates in Togo, and bauxite andaluminum in Guinea. Only meager revenuesreach the state treasury, if at all, while thereal royalties are paid directly into theforeign bank accounts of politicians.48

The Vested Interests of Regional andInternational Actors

The plundering of natural resources is notalways confined to the warring factionswithin the boundaries of a given fragilestate, but sometimes involves neighboringcountries. Regional actors become involvedin the exploitation of a neighboring state’snatural resources through (1) the inter-related processes of proliferation of “wareconomies” and regional conflict forma-tions; and, (2) direct military intervention insupport of either the incumbent governmentor of armed insurgents.

State fragility or failure produces anumber of economic ripple effects that arefelt by other states in the region, with war or“shadow” economies as direct consequen-ces. The interlinked conflict processes inLiberia and Sierra Leone, for example, haveallowed huge amounts of timber anddiamonds to be smuggled out by miners andshadow economic entrepreneurs.49 An


46 Castells (2000)47 Ibid.

48 Hibou (1999)49 Humphreys (2005)


important aspect of resources and conflict isthe role of third-party governments seekingto profit from resource-rich neighbors. Of allthe post-Cold War civil conflicts in Africa,none reflects the complexities of theconnection between natural resources andconflict more than the civil war in the DRC— referred to as “Africa’s world war”.

The corporate business practices ofinternational actors are another issue. Sincethe end of the Cold War, foreign involve-ment in African conflicts has changed,giving way to the more subtle activities ofnon-state actors, especially private securityfirms, multinational corporations (MNCs),and non-governmental organizations. Thisforeign involvement falls into two maincategories. The first, and perhaps the mostcontroversial, is by foreign mercenary firms,euphemistically described as private securityorganizations (PSOs). Economic globaliza-tion has led to greater profits from invest-ments in natural resource extraction,particularly in fragile African states, wherethere are impressive opportunities forprofits. This has spurred increased invest-ment by MNCs.

The second, and perhaps mostimportant, type of external involvement inAfrican conflicts, is by foreign multinationalextractive companies (MECs), many ofwhich have exploited situations of conflictto maximize their own profits. Unlikemanufacturing or other secondary or tertiaryindustries, extractive industries do not divestor relocate when conflicts erupt. Given thenature and strategic importance of naturalresources (especially oil and gas), thepotential profits, and the capital-intensiveand long-term nature of the investment,

MECs are not deterred by unpredictable ordangerous situations. Although some MECshave been known to divest in situations ofinstability and violence, the typical patternof these companies is to factor in the costsof extra risks and stay on course. Thebusiness practices of MECs in African fragilestates have, in various ways, contributed toconflict promotion.50

Transboundary Natural ResourceManagement

Africa faces numerous transboundarychallenges, ranging from the continent’sshaky political and economic spectra, tosectoral issues related to health, agriculture,natural resources management, and theenvironment. Regional cooperation has afairly long history in virtually all parts ofAfrica, although the focus had, for a longtime, been on regional economic integrationschemes. While some progress has beenmade in this direction, new challengesrelated to water scarcity, deforestation,desertification, droughts, floods, and otherenvironmental and natural resource issueshave emerged in recent years.

These challenges have focused attentionon regional cooperation in addressingtransboundary issues to an extent that is farbeyond conventional political and trade-related dimensions. Global warming, amongothers, requires response strategies that go farbeyond national borders. In the water sector,the Nile River Basin is a very good exampleof a common pool of resources, which canonly be harnessed through effective coopera-tion across countries. Another example is the


50 Ballentine (2004)


observed coastal erosion in West Africa,which poses a transboundary challenge, as itis closely associated with deforestation in thetropical rainforests and in mangroves. Similarissues have emerged in East African coastalareas. Numerous examples can be providedon current and potential severe environ-mental and social impacts in Africa that aretransboundary in nature (cause or effect).Some of the most important are related torenewable natural resources, such as water and land (described in Chapter 2).Others are related to non-renewable resour-ces, for instance extraction of hydrocarbons(Box 4.3).

Sound “Transboundary Natural ResourceManagement” is essentially concerned withensuring that goods, resources, and servicesof a transboundary nature — whose benefits

and costs spill over national borders — areeffectively managed through shared com-mitment and collective action, or collectiveefforts from all individuals or groups thatbenefit directly or indirectly from the goodsor services. In the absence of cooperationand collective action, problems of extern-alities (positive or negative) arise.51

Addressing the Challenges

While sovereignty remains crucial in dealingwith Africa’s transboundary challenges, thepolitical will of countries to perceivecommon challenges and to concludebinding agreements is the key determiningfactor. Joint strategies, policies, frameworksand subsequent commitments to addresstransboundary issues only yield meaningfulresults if the commitments are honored, orthe common rules mutually respected.While mechanisms for sanctioning violatorsmay sometimes become incentives forcooperation on transboundary issues, lackof cooperation, in most cases in Africa, isrelated to lack of means for honoring thecommitments. This is particularly the casefor many of Africa’s small countries, whichmost often lack the technical, financial, andhuman resource capacity to honor trans-boundary commitments such as thoserelated to river basin management, crossborder trade in forest resources, conflictresources, international wildlife, and deserti-fication. There is a clear need to strengthenAfrican countries’ capacity to implementtransboundary commitments.


51 Bromley (1992)

Box 4.3: Transboundary Cooperation

in Extraction of Hydrocarbons

Hydrocarbon reserves in East Africa have beenthe focus of considerable attention andspeculation in recent years. If not managedcarefully, the potentially rich reserves in theGreat Lakes region risk becoming adestabilizing factor among the nations, ratherthan an opportunity for joint development. InMarch 2007, a summit of 22 of the region’senergy ministers was convened in Mozambiqueto discuss related issues. The hydrocarbonsresources in the region have the potential toameliorate the energy crisis significantly.However, successful exploitation of theresources will depend on security and stability,as well as on regional cooperation

Source: Oxford Analytica (2007), Africa: Middle East

and Africa Executive Summary


Another important issue relates to thenegotiation power of small and largercountries in Africa, with huge divergence intheir technical, human, and financialcapacities. In the case of river basin manage-ment, up-to-date technical knowledge of theshort- and long-term dynamics of the watersituation is required by all parties for equalbargaining power at negotiations. Thus,capacity building and technical assistance —to level the playing field — are crucial ele-ments that should not be neglected inaddressing transboundary issues. By its verynature, transboundary cooperation requiresa lot of coordination and synchronization ofactivities, since everyone’s participation andcontribution are critical to minimizingexternalities (positive and negative) andavoiding free riding on the efforts of others.

The New Scramble for Africa’sNatural Resources

The last decade has seen a rapid increase intrade and investment flows between Africaand Asia, especially with China and India.India has a long history of trade and foreigndirect investment in East Africa, in particular,given the many expatriate Indiancommunities in the sub-region. China’s tradeand investment in Africa date back decades,with heavy early investments in infra-structure such as railway systems. The basicfacts about trade relations between Asia andAfrica are as follows:52

• The volume of African exports to Asiais accelerating. It grew by 15 percent


52 Broadman (2007)

Box 4.4: The African Development Bank and Transboundary Issues

As the leading development institution on the continent, the African Development Bank has long recognizedits important role in helping Africa to overcome its transboundary challenges. In this regard, the Bank isactively providing support in critical areas of transboundary cooperation, which include river basinmanagement, regional economic integration, regional cooperation on health, collaborative research(especially in agriculture), cooperation on infrastructure, and conflicts and conflict resolution. The BankGroup continues to deepen its focus on programs that provide opportunities for overcoming thesechallenges to improve the access of the poor to productive resources (notably water and land), technologyand knowledge, and social services.

In the area of transboundary river basin management, the Bank is actively supporting river basinauthorities and institutions. Examples include the Volta Basin Authority (West Africa), the Nile Basin Initiative(NBI) in Eastern and Northern Africa, and the Okavango and Limpopo Basins in Southern Africa, amongothers. The Bank’s support is provided in the form of grants for project operations, as well as supportextended through the African Water Facility.

With its current structure, which includes a “Knowledge Centre” (The Office of the Chief Economist), theBank has further boosted its efforts in knowledge generation and dissemination, including research andtraining, and the provision of research and knowledge-related support to its RMCs. A key focus istransboundary issues.

Source: AfDB (2007b), Regional Cooperation: Addressing Trans-Boundary Challenges


between 1990 and 1995; and it hasgrown by 20 percent during the lastfive years (2000–2005).

• Since 2005, Asia’s share of Africanexports (27 percent) has been on parwith EU (32 percent) and the US (29percent) shares.

• Asian exports to Africa are alsogrowing rapidly. In the last five years,they have grown 18 percent morethan exports from any other region,including from the European Union.

• Eighty-six (86) percent of Africa’sexports to China and India are oil,metals, and agricultural raw materials.

• Five oil- and mineral-exportingAfrican countries account for 85percent of exports to China, whileSouth Africa alone accounts for 68percent of exports to India.

As illustrated in Figure 4.12, one of themost significant developments for Africa isthe growing importance of capital flowsfrom Asian countries such as China, India,South Korea, and Malaysia.

Foreign direct investment (FDI) fromAsia to Africa has increased significantly inrecent years. In 2005, Asian countriesaccounted for about 15 percent of the USD31 billion FDI flows to Africa. Such invest-ment contributes directly to the country’sgross domestic product, generates employ-ment, and reduces poverty. Africa is likely tobenefit from Asian investments in a numberof other ways:

• Asian investments facilitate thetransfer of skills and technology toAfrica. With their low-cost, low techn-ology, Asian firms could create condi-

tions for facilitating competition forAfrican domestic firms, thus enhanc-ing productivity.

• Asian firms provide capital goods andintermediate inputs, which enableAfrican firms to manufacture productspotentially for exports, particularly toother developing countries, therebyboosting trade.

• Evidence suggests that Asian firms inAfrica interact with Africa’s informalbusiness sector, thereby affectingdemand and supply in the informalsector.

The discussion on the role of China andIndia in Africa has often highlighted thepotential negative aspects of the growingdemand for, and control of, natural resourcesby these emerging Asian powers. China andIndia have grown fast and have rapidlymodernized their industries. As they developand continue to grow, together with otherrapidly expanding nations, the demand fornatural resources, especially for oil andmetals, is likely to increase even further.

The new interest in Africa, in particular, inthe continent’s resources, has certainly notbypassed the Western World. Systematic newefforts to tap further into this natural wealthbecame visible with the adoption of theAfrican Growth and Opportunities Act by the out-going Clinton administration in theUnited States. Simultaneously, the EuropeanUnion has sought to renegotiate its relationswith the Africa, Caribbean, and Pacificcountries under economic partnershipagreements. These negotiations have sinceentered critical stages and provoked ongoingcontroversies, including the criticism that the




70

60

50

40

30

20

10

0

–10

–20

Exports

Imports

Trade Balance

Africa Trade Balance with Asia(Billions of US Dollars)

2001 2002 2003 2004 2005

Main African Exporters to Asia, 2005(Billions of US Dollars)

SUDAN; 4.9CONGO; 3.6

NIGERIA; 3.3

EGYPT; 3.2

LIBYA; 3.1

ALGERIA; 2.6

EQ.GUINEA; 2.2

MOROCCO; 2.0

Others; 9.2

SOUTH AFRICA; 17.8

ANGOLA; 7.8

Main African Importers from Asia, 2005(Billions of US Dollars)

SOUTH AFRICA; 14.8

EGYPT; 6.7

NIGERIA; 5.9

LIBERIA; 4.1ALGERIA; 3.8

MOROCCO; 2.6

SUDAN; 2.6

ANGOLA; 2.4

KENYA; 1.9

LIBYA; 1.6

Others; 14.0

Source: ADB (2007a), Africa and Asia: Partners in Development.

Figure 4.12: Development in Trade Relationship between Africa and Asia


EU’s trade department is trying to bullythrough its own interests.53 The positivenews in this new scenario is that the dayswhen Africa was considered a less importantor forgotten continent — to some extent —are gone. Still, Africa remains on the“commodity supplying end”, with others onthe receiving end in this scramble for thecontinent’s minerals and fossil resources.

The new offensive pursued by China,India, and others (in particular, Russia andBrazil) seeking access to fossil energyresources and other minerals and metals tofuel their own rapid industrializationprocesses, is likely to add further pressure tothe scramble for access to limited and oftennon-renewable resources. This new stage ofcompeting forces on the African continenthas resulted in a plethora of recent analysesdealing mainly, if not exclusively, with theChinese impact and practices. In general,the analyses criticize China for being yetanother example of predatory capitalism,and also for being non-transparent andsupportive of autocratic regimes. However,many tend to ignore the effects that theexisting socio-economic imbalances andpower structures (in Africa) have longcreated and consolidated. The criticism ofChina seems to be more a reflection of fearof losing one’s own interests than of agenuine concern for African people. Ofcourse, this does not whitewash the currentChinese offensive and its potentiallydamaging impact. The emerging Chinesetrack record does not suggest that themajority of African people will benefit.Nevertheless, the medium- to long-term

interests of China and of other foreigninvestors in Africa have to be the creation ofa calculable and “investor-friendlyenvironment”. Ultimately, this must includethe rule of law (in contrast with the law of the ruler) and other business-like practices.54

A recent World Bank study55 uses awealth of survey data on businesses inAfrica to underline how China and India’sgrowing trade with, and investment in,Africa presents an excellent opportunity forgrowth and international integration ofAfrica into the global economy. Although atpresent Africa mainly exports naturalresources to China and India, it is becomingincreasingly attractive with respect to labor-intensive manufacturing. There is growingAsian demand for processed commodities,light manufactured products, and tourism,and Africa has a great unused potential tofulfill this demand. The diagnosis cautionsthat the opportunities engendered by Chinaand India’s trade and investment in Africawill not necessarily be converted intogrowth and poverty reduction in the region.A critical finding of the study is that it is notjust the quantity of these trades andinvestment flows that matters — but also thequality of the overall commercial relation-ships underlying as well as shaping theseflows. Thus, both African and Asian policymakers need to devise appropriate policyresponses to make the quality of theserelationships even better. The World Bankstudy points to the following principles forreform (among others):


53 Development Today (2007)

54 Ibid.55 Broadman (2007)


At-the-Border Policy Reforms which include:— lowering the overall level of tariffs (all

countries);— eliminating the escalating tariffs that

limit Africa’s leading exports (Chinaand India);

— eliminating anti-export bias in importtariff policies, bias in investmentdecisions and disincentives forproduct diversification (for mostAfrican countries);

— eliminating trade barriers, includingtechnical standards as protectionistmeasures (most countries);

— rationalizing and harmonizing exist-ing “spaghetti bowl” bilateral andregional agreements (primarily forAfrican countries);

— strengthening the role of investmentpromotion agencies and public-private investors’ councils (Africancountries); and

— tailoring export and investmentincentives to country-specific circum-stances and in concert with WorldTrade Organization rules (Africancountries).

Behind-the-Border Reforms which include:— enhancing domestic inter-enterprise

competition by eliminating funda-mental economic and policy barriersto entry and eliminating exit barriers(primarily for African countries);

— improving governance throughgreater transparency and account-ability of public officials andestablishing and securing efficientinstitutions that facilitate effectiveresolution of commercial disputes

(primarily for African countries); and— reducing poverty impacts from

domestic price/production changesby trade flows through promotion oflabor mobility, including enhancingflexibility of labor markets andimproving the effectiveness of socialsafety nets (all African countries).

Between-the-Border Reforms which include:— further developing trade facilitation

infrastructure for integration into theglobal market as well as regionalintegration within Africa, includingimprovement and modernization ofports, roads, and rail transport, andmodernization of telecommunications/IT (primarily for African countries);

— implementing customs reform byimproving coordination among border-related agencies, simplifying customsprocedures and making customs codes rule-based, transparent, andcommercially-oriented and introducingthe use of IT into the customs system(primarily for African countries);

— addressing imperfections in theinformation market for trade andinvestment opportunities, includingtechnical standards (most Africancountries); and

— reviewing measures that restrict themovement of professionals (primarilyfor African countries).

The dramatic new trend in South-Southeconomic relations is transforming tradi-tional patterns of economic development.As outlined above, this is nowhere moreevident than in African-Asian trade andinvestment flows. Thus, while China and



India are emerging as economic giants inAsia, Africa is coming into its own, finding avital role in this transformation. These newSouth-South economic relations present realopportunities — as well as challenges — toAfrican countries. It is important toemphasize that Africa does not need anyone-size-fits-all policy reforms orapproaches, since the available naturalresources and the economies in Africa arehighly heterogeneous. Reforms and policiesshould thus take into account country-specific circumstances.

Summary

This chapter presented and analyzed somestylized features of Africa’s resource-richeconomies, offering explanations on whynatural resource wealth may stunt growthand development prospects. However,actual analysis of the data, tables and figurespresented reveals the following trends andconclusions:

• Resource-rich African countries arericher (in terms of revenues, GDP andper capita GDP) than their resource-scarce peers. The gap narrowedduring the 1980–2000 period, but it iswidening again in conjunction withthe recent resource boom.

• However, cumulatively, resource-richcountries only experienced anaverage growth rate of 2.4 percentfrom 1981–2006, considerably lowerthan the average 3.8 percent forresource-scarce countries.

• The group of resource-scarce coastalcountries, which have almost aquarter of Africa’s population, hasexperienced an average growth rate

of 4.1 percent, much higher than the2.3 percent recorded by resource-richcoastal countries. Indeed, beingresource-rich does not seem to makea significant difference for coastalcountries.

• Land-locked resource-scarce countriesare the poorest, by a significant factor.They are five times poorer thanresource-rich countries, and almost sixtimes poorer than resource-scarcecoastal countries. Furthermore, thegrowth rate in this group of countriesonly averaged 2.5 percent from 1981 to2006. In other words, the mostimportant factor is whether a country island-locked or not — this is evenmore important than being resource-rich or resource poor, or than anyother aspect reviewed in this analysis.

• Available evidence also stronglysuggests that the three factors thatdetermine the onset of armed conflict— natural resources, low income percapita and low growth — are preva-lent in large parts of the Africancontinent. The literature also high-lights other significant factors such asvertical and horizontal inequality,religion, and policy failures.

• The management of mineral (and oil)resources in fragile states has largelybeen molded by four interrelatedconditions defined by the interplay ofstate power, contest, and conflict overthe control of mineral resources.These conditions are public policyfailures; state predation or ‘shadowstate’, where rent-seeking substitutesrent creation; rebel-dominated war



(shadow) economies; and, vestedinterests of regional and internationalactors.

The analysis further illustrates that the truepotential benefits of having significantnatural resource wealth has not been fullyexploited by resource-rich African countries.Overall, the performance of resource-richcountries in Africa has been disappointing,especially from 1980 to 2000. Hard lessonslearned from past resource boom and bustcycles and from the disappointing growthrates of the two-decade period need to bereviewed and lessons drawn for future use,especially now that a new boom has gainedtraction in Africa.

The last part of this chapter reviewedtwo key aspects of future development inAfrica: (1) transboundary natural resource

management, and (2) the new scramble forAfrica’s resources. The former calls forcooperation especially at the regional level,while the latter calls for a number of keyreforms if Africa is to benefit from thescramble.

In conclusion, despite the challengesand issues involved, a natural resourceboom can, under the right circumstances, bean important catalyst for growth anddevelopment. The often referred to “naturalresource curse” can be avoided with theright knowledge, institutions, and policies.Several countries in Africa have dem-onstrated this, and there is some reason forcautious optimism that more countries havelearned hard lessons from the past resourcebooms, and, in future, will pursue strategiesand policies that will allow them to fullyreap the benefits of natural resource wealth.



138 African Development Report 2007A

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helle

sM

aurita

nia

Mauritiu

sTanza

nia

Som

alia

Moza

mbiq

ue

Moro

cco

Togo

Nam

ibia

Nig

er

Tunis

iaSie

rra L

eone

Rw

anda

South

Afric

aSao T

om

e &

Princip

eTanza

nia

Senegal

Seyc

helle

sSom

alia

Sw

azi

land

Togo

Tunis

iaZim

babw

eZam

bia


Africa’s Natural Resources: The Paradox of Plenty 139A

pp

en

dix

Ta

ble

4B

: A

fric

an

Ex

po

rts

, 2

00

5

Th

ree m

ain

exp

ort

s, w

ith

th

eir

sh

are

in

to

tal exp

ort

s*

No

of

pro

du

cts

(i

n %

)acco

un

tin

g f

or

mo

re t

han

75 p

erc

en

t o

f exp

ort

sP

roduct I

Pro

duct II

Pro

duct III

Alg

eria

Cru

de p

etrole

um

(67.2

)N

atu

ral gas,

liq

uefie

d (13.2

)N

atu

ral gas,

gase

ous

(5.6

)2

Angola

Cru

de p

etrole

um

(95.8

)1

Benin

Cotton, not card

ed,

Edib

le n

uts

fre

sh, dried

Oth

. non-ferr. m

eta

l w

ast

e (6.4

)3

com

bed (55.3

)(1

6.5

)

Bots

wana

Dia

monds.

exc

l. in

dust

rial

Nic

kel m

attes,

sin

trs.

etc

1(8

8.2

)(8

.1)

Burk

ina F

aso

Cotton, not card

ed, com

bed

1(8

4.5

)

Buru

ndi

Coffee, not ro

ast

ed (88)

1

Cam

ero

on

Cru

de p

etrole

um

(48.8

)W

ood, non-c

onife

r, s

aw

n

Bananas,

fre

sh o

r dried

4(1

4.1

)(8

.7)

Cape V

erd

eFis

h, froze

n e

x. f ille

ts

Tro

use

rs, bre

eches,

etc

.G

as

turb

ines,

nes

(4)

4(6

1.4

)(6

.3)

Central

Dia

monds.

exc

l. in

dust

rial

Wood, non-c

onif,

rough, unt

Cotton, not card

ed, com

bed

3A

fric

an

(40)

(33.8

)(8

.9)

Republic

Chad

Cru

de p

etrole

um

(94.9

)1

Com

oro

sSpic

es,

ex.

pepper, p

imento

Ess

entia

l oils

(14.2

)Fis

h, froze

n e

x.f illets

(12.7

)3

(57.9

)

Congo

Cru

de p

etrole

um

(88.7

)1

Congo

Dia

monds.

exc

l. in

dust

rial

Oth

. non-ferr. ore

, concntr

Cru

de p

etrole

um

(16.7

)3

Dem

ocra

tic (

42.6

)(1

7.2

)R

epublic

Cote

d’Iv

oire

Cocoa b

eans

(38.2

)C

rude p

etrole

um

(12)

Cocoa p

ast

e (7.7

)7

Djib

outi

Bovi

ne a

nim

als

, liv

e (20)

Tro

use

rs, bre

eches,

etc

. O

thr. ferrous

wast

e, sc

rap

17

(7.2

)(7

)

Egyp

tN

atu

ral gas,

liq

uefie

d (15.8

)C

rude p

etrole

um

. (1

0.3

)Portla

nd c

em

ent, e

tc. (4

.7)

46

Equato

rial

Cru

de p

etrole

um

(92.6

)1

Guin

ea

Eritrea

Natu

ral gum

s, resi

ns,

etc

Sesa

me (se

sam

um

) se

eds

Mollu

scs

(7.6

)14

(17.3

)(8

.7)


140 African Development Report 2007A

pp

en

dix

Ta

ble

4B

(contin

ued)

Th

ree m

ain

exp

ort

s, w

ith

th

eir

sh

are

in

to

tal exp

ort

s*

No

of

pro

du

cts

(i

n %

)acco

un

tin

g f

or

mo

re t

han

75 p

er

cen

t o

f exp

ort

sP

roduct I

Pro

duct II

Pro

duct III

Eth

iopia

Coffee, not ro

ast

ed (47.8

)Sesa

me (se

sam

um

) se

eds

(20.2

)

5

Gabon

Cru

de p

etrole

um

(76.7

)W

ood, non-c

onif,

rough, unt

Manganese

ore

s, c

oncentrs

1(1

0.6

)(6

.9)

Gam

bia

Edib

le n

uts

fre

sh, dried

Mech.s

hove

l etc

.s-p

ropld

Gro

undnuts

(peanuts

) (7

.7)

6(4

3.5

)(9

.9)

Ghana

Cocoa b

eans

(46.1

)M

anganese

ore

s, c

oncentrs

Wood, non-c

onife

r, s

aw

n8

(7.2

)(6

.7)

Guin

ea

Alu

min

um

ore

, concentrat

Alu

min

a (alu

min

um

oxi

de)

Copper ore

s, c

oncentrate

s3

(50.9

)(1

7.2

)(7

.8)

Guin

ea

Edib

le n

uts

fre

sh, dried

1B

issa

u(9

3.5

)

Kenya

Tea (16.8

)C

ut flo

wers

and folia

ge (14.2

)O

th. frsh

, chll.

vegeta

ble

s (8

.1)

27

Leso

tho

Jers

ys, pullo

vrs,

etc

. kn

it Tro

use

rs, bre

eches,

etc

.D

iam

onds.

exc

l. in

dust

rial

4(2

9.2

)(2

2)

(15)

Lib

eria

Ship

s, b

oats

, oth

er. v

ess

els

Spec. purp

ose

vess

els

etc

Natu

ral ru

bber la

tex

(8)

2(7

3.9

)(8

.9)

Lib

yaC

rude p

etrole

um

(95.3

)1

Madagasc

ar

Jers

ys, pullo

vrs,

etc

. kn

itC

rust

aceans,

fro

zen (13.2

)Spic

es,

ex.

pepper, p

imento

14

(19.4

)(9

)

Mala

wi

Tobacco, st

em

med,

Tea (7.6

)Sugars

, beet or cane, ra

w (5.3

)4

stripped (59.2

)

Mali

Cotton, not card

ed ,com

bed

1(8

1.8

)

Maurita

nia

Iron o

re, concntr. not agg

Mollu

scs

(24)

Fis

h, froze

n e

x. fi

llets

(13.5

)2

(51.3

)

Mauritiu

sSugars

, beet or cane, ra

w

T-s

hirts

, oth

er. v

est

s kn

itShirts

(7.6

)10

(21.4

)(1

8.7

)

Moro

cco

Inorg

anic

acid

, oxi

de e

tc

Insu

ltd w

ire, etc

. condctr.

Natu

ral calc

. phosp

hate

s (5

.6)

32

(7.2

)(6

.8)

Moza

mbiq

ue

Alu

m., a

lum

. allo

y, u

nw

rght

Cru

staceans,

fro

zen (4.7

)2

(73.4

)


Africa’s Natural Resources: The Paradox of Plenty 141A

pp

en

dix

Ta

ble

4B

(contin

ued)

Nam

ibia

Dia

monds.

exc

l .in

dust

rial

Radio

-activ

e c

hem

icals

Zin

c, zi

nc a

lloy,

unw

rght. (9.7

)5

(39.1

)(1

1.4

)

Nig

er

Radio

-activ

e c

hem

icals

1

(79.5

)

Nig

eria

Cru

de p

etrole

um

(92.2

)1

Rw

anda

Coffee, not ro

ast

ed (51.9

)O

re e

tc. m

oly

bdn. nio

b. etc

Tin

ore

s, c

oncentrate

s (9

.8)

3(1

9)

Sao T

om

e

Cocoa b

eans

(55.2

)Vess

els

, oth

. flo

at. s

truct

Dra

win

g, m

easu

rg. in

strm

nt (7

.6)

4and P

rincip

e(1

0.9

)

Senegal

Inorg

anic

acid

, oxi

de e

tc

Mollu

scs

(9.8

)Fis

h, fresh

, chilled, w

hole

(6.4

)8

(38.8

)

Seyc

helle

sFis

h, pre

pard

, pre

srvd

, nes

Fis

h, froze

n e

x.f illets

(27.5

)Ship

s, b

oats

, oth

r. v

ess

els

(11)

3(4

4.1

)

Sie

rra L

eone

Dia

monds.

exc

l. in

dust

rial

Cocoa b

eans

(7.2

)C

ulti

vatin

g m

achin

ery

. etc

(4.1

)4

(62.7

)

Som

alia

Sheep a

nd g

oats

, liv

e

Bovi

ne a

nim

als

, liv

e (19.7

)Fis

h, froze

n e

x. fi

llets

(7.8

)5

(34.6

)

South

Afric

aPla

tinum

(12.5

)O

th. coal,

not agglo

mera

td (8)

Gold

, nonm

ontry

exc

l ore

s (7

.9)

39

Sudan

Cru

de p

etrole

um

(89.2

)1

Sw

azi

land

Sugars

, beet or cane, ra

w

Food p

repara

tions,

nes

(9.3

)Fla

vours

, In

dust

rial use

(9)

20

(14.1

)

Tanza

nia

Gold

, nonm

ontry

exc

l ore

s Fis

h fi

llets

, frsh

, chilld (9.7

)C

opper ore

s, c

oncentrate

s (8

.6)

15

(10.9

)

Togo

Cocoa b

eans

(22.4

)N

atu

ral calc

. phosp

hate

s C

otton, not card

ed, com

bed (18.6

)8

(19.8

)

Tunis

iaC

rude p

etrole

um

(9)

Tro

use

rs, bre

eches,

etc

. In

sultd

wire, etc

. condctr (6.7

)36

(8.7

)

Uganda

Coffee, not ro

ast

ed (31.1

)Fis

h fi

llets

, frsh

, chilld (24.3

)Tobacco, st

em

med, st

ripped (7.5

)5

Zam

bia

Copper; a

nodes;

allo

ys

Cobalt,

cadm

ium

, etc

. unw

rtC

otton, not card

ed, com

bed (5.7

)5

(55.8

)(7

)

Zim

babw

eTobacco, st

em

med, st

ripped

Nic

kel,

nckl

. allo

y, u

nw

rgt

Nic

kel ore

s, c

oncentrate

s (1

2.3

)16

(13.9

)(1

2.6

)

Afric

aC

rude p

etrole

um

(49.2

) D

iam

onds.

exc

l. in

dust

rial

Nic

kel ore

s, c

oncentrate

s26

[18]

(3.7

) [1

2.6

](2

.8) [1

7.5

]

Note

s: *

Pro

ducts

are

reported w

hen a

ccountin

g for m

ore

than 4

perc

ent of to

tal exp

orts.

** F

igure

s in

[ ] re

pre

sent th

e s

hare

of A

fric

a in the W

orld e

xport for each p

roduct.

AD

B S

tatis

tics

Departm

ent; P

C-T

AS 2

001–2

005 Inte

rnatio

nal Tra

de C

ente

r U

NC

TA

D/W

TO

–UN

Sta

tistic

s D

ivis

ion


Documents

Africa's Natural Resources:The Paradox of Plenty