Competition for Resources:Its Time for Africa?

Parthapratim Pal

Increased demand for resources• Recent and significant revival of commodity prices has led to

renewed interest in the exploration and exploitation of natural resources

• Energy security is increasingly becoming important for many countries.

• The world is growing at different speeds and this is leading to a structural shift of the global demand.

• Manufacturing activity has been largely relocated to China and other fast growing Asian economies

• High growth of manufacturing activities in these countries is creating a massive demand for all primary resources.

International Commodity Prices, IMF Index

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Food and beverage index Metal index Energy index

Commodity Prices and Mineral Rich Developing countries

• The boom in mineral prices has brought development issues related to the extraction of natural resources back into focus.

• The appropriate use of revenues from their exports could enable a number of mineral-rich developing countries to accelerate their development process

• But most mineral abundant developing countries tend to suffer from something called the ‘natural resource curse’.

• It has been noted that the largest percentage of African conflicts is concentrated in regions that have the most abundant natural resources and yet the poorest people. This paradox of wealth in natural resources combined with high incidence of poverty is known as the natural resource curse

Competition for Resources and Africa

• The African continent possesses a generous endowment in natural resources, namely hydrocarbons, minerals and timber, which remain mostly untapped due to decades of political instability, poor infrastructure and lack of investment.

• Arica is considered to be the last frontier of natural resource exploration. In the years to come it is expected that Africa will attract attention of investors from all across the world for its natural resources.

Competition for Resources and Africa• However, entry of developing

countries in Africa is challenging the dominance of established interests, primarily from the US, France and the United Kingdom (UK), all of which produced a pattern of investment that replicated the colonial era

• Among the most prominent newcomers are Asian states (China, India, Malaysia and Singapore) and Middle Eastern countries (Israel, Saudi Arabia and Kuwait).

• This scenario prepares the ground for growing competition for economic and political influence over the continent in the coming decades

Africa and China: Wrong model, right continent

“China knows what it wants from Africa and will probably

get it. The converse isn't true”

The Economist, October 26, 2006

Increasing Economic Cooperation between China and Africa

Increasing Economic Cooperation between China and Africa

Increasing Economic Cooperation between China and Africa: Less Obvious Linkages

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Chinese Economic Assistance to Africa (in billion US$)

Chinese Economic Assistance to Africa US Foreign Operations Budget

Lum et.al. (2009)

Growing tension between China and developed Countries over Africa

• Developed countries accuses China of giving economic assistance with ‘no strings’ undermines their initiative to improve governance in Africa.– China’s development assistance to Africa is not conditioned by

improvements in governance, economic reform, or human rights conditions.

– But China’s African Policy explicitly conditions official relations with African governments on adherence to China’s “One China” principle regarding the status of Taiwan

• Both China and -to a lesser extent- India have been accused of replicating the colonial pattern of exploitation on Africa. Analysis show that export sophistication of resource rich African countries have not improved.

Export Sophistication of Goods over time

China-Africa Trade Pattern 2008

What is there for Africa?• It is important to appreciate that North America, Australia, and Europe

have their own interests to protect in Africa and Latin America, and much of the anti-Chinese/Indian sentiment is driven by these factors.

• To date, China and India also have played only a small, albeit growing, role in terms of capital investment in Africa. – Each accounts for less than 5 percent of the total inbound foreign direct

investment (FDI) stock in Africa, a tiny fraction of that from Europe and the U.S.

• Increased competition among investors may allow Africa to get a better deal.

• But it will be important for Africa to move away from exports on only primary commodities and improve domestic value added

Possible Spillover effectNew Regionalism based on Resources?

• The world is seeing increased protectionism. Along with it, countries are also embracing regionalism in a big way. The new trend is formation of mega trade blocks.

• As some major developed countries are embracing regionalism in a big way, it is possible that new mega blocks may be formed where the resource-endowed countries may be part of such trade blocks.

• For example, USA has made trade deals with Mexico, Canada and Australia

Economic, environmental and social impacts

• Increased presence of big capital in extractive industries is becoming a major policy challenge.

• It may displace and impoverish indigenous population which may lead to increased social tensions.

• It is also quite likely to affect biodiversity of the concerned region

• These problems are aggravated when Trans-national Corporations are involved in such activities. Developing countries often find problems disciplining these firms.

• The story opens in 2154, when Earth’s natural resources have been depleted. Jake Sully goes to Pandora, a moon with a lush, Earthlike environment 4.4 light years away.

• Humans, led by the ‘Resources Development Administration’ and backed with military force, have colonized it for three decades and are mining a rare mineral (called unobtainium), needed for energy generation on Earth.

• A measure of sophistication of a country’s export basket, suggested by Rodrik (2005), assigns an “income” coefficient to each product based on the weighted average of the incomes of the countries exporting the product. These “income” coefficients of the various products are averaged using the export shares in a particular country’s export basket as weights to arrive at the income level “embedded” in the exports. The Figure plots the log of this measure of export sophistication