Don’t put natural resources aside

Inclusive Economy20 Nov 2013Jan Rieländer

While overcoming dependence is key, abundance of natural resources is not a bad thing in itself.

Africa’s decade of growth did not create enough jobs for Africans: without faster and much more profound economic transformation, the continent might lose out on the demographic window of opportunity that Asia was able to tap decades ago. By contrast with most of Asia, however, the solution for Africa lies not in abundant, cheap labour but in its immense wealth of natural resources: for it is in energy, mining and agriculture that the continent has a comparative advantage. And yet, contrary to the cry that Africa’s growth relies too much on commodities, its natural resources are contributing less than they could.

Our African Economic Outlook (AEO 2013) shows that Africa’s share of global resource assets in agriculture and mining actually declined during the recent boom, while other regions have invested more in exploration and agriculture. For example, in mining, spending on exploration in Africa has remained below $5 per square kilometre, whereas in Canada, Australia and Latin America the average is $65 per square kilometre. Conventional wisdom dictates that, for development to take off, a country must leave commodities behind and focus on building factories. Should African countries therefore not leave most of their mineral resources in the ground and their fields underused? We do not believe so. In AEO 2013 we find that, while overcoming dependence is key, abundance of natural resources is not a bad thing in itself. As countries get richer, the relative importance of resources in the economy declines and other sectors, like industry and services, become more important, but the absolute volume of natural resources available for exploitation continues to increase, with more investment and new capabilities for exploration and exploitation.

To diversify beyond natural resources into secondary or tertiary activities, you must start by diversifying amongst natural resources. Most of the time, countries with a lot of iron ore will also have gold or other metals and minerals, and some arable land. When that happens and the primary sector covers a range of different resources, the country’s industrial capacity will benefit. In other words, given the right conditions, natural resources can be an important source of diversification. Chile, for example, used proceeds from copper to invest in new agricultural commodities, such as salmon, that it previously did not export. Malaysia invested its oil revenues in forestry and palm oil, building very successful industries. Indonesia used oil revenues to supply fertilizer to farmers and develop new crops, building the basis for the country’s green revolution.

So, instead of putting natural resources aside, African countries should look to them for their strengths and the opportunities they offer to create a diversified economy. Because most countries have low capabilities to start with, they need to take an active policy stance to push natural resource-based structural transformation and seize the opportunities for employment and technological spillover:

1. Get the basics right, e.g. good public services, good infrastructure, clear land management and a reasonable level of property rights. Agricultural and mining commodities especially need a good business environment to thrive; they offer the highest opportunities for economic linkages and employment creation. By contrast, high-rent resources like oil and gas can thrive in any environment, but offer much less in terms of linkages and employment; they can quickly lead to dependence, and therefore need strong management.

2. Help private local firms become the suppliers of multinationals. Eventually some will accumulate capacity and expertise, and develop into internationally competitive industries, as seen in South Africa.

3. Help capabilities accumulated in resource sectors be applied in other sectors. Remember Berkeley and Stanford began as mining schools for California’s emerging resource economy in the late 19th century!

4. Invest the tax revenues generated from natural resources to help the local economy seize the opportunities they offer.

This is not to say that the resource curse does not exist; it is formidably difficult to turn oil or gold or cotton into development for all. But the curse can be removed by pursuing comprehensive natural resource-based development strategies.