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Patrick v. Shanta, Round 2

Shanta Devarajan's picture

Patrick Bond’s lengthy comment on my response to his blog post merits a separate blog post.

Patrick:
Thanks for your response.  It appears as if there are at least four areas where we end up agreeing, except that I reach these conclusions using economic reasoning, which also serves to highlight some differences.

1. I’m glad you agree that there is a difference between accounting and economic welfare.  But you still don’t seem to accept the result of my simple example of two countries (one following a wasteful trajectory and the other the optimal one) that genuine savings is the same in both cases. 
The only way your desired result, that “genuine savings for Country 1 would be dramatically negative in the year under consideration” would be true is if the valuation of genuine savings were done at shadow prices, rather than at market prices, which is the way that Where is the Wealth of Nations does it. 

2. You also seem to agree that the real problem is with the way in which governments spend their resource revenues.  All the problems you cite, including those of Norway and Botswana, as well as those of the rest of Africa, can be traced back to poor public policies and institutions, many of which have worked against the poor. 

By the way, even your allusion to the Dutch disease is really a problem of the spending of resource revenues, not of resource extraction.  If you define Dutch disease as the appreciation of the real exchange rate following a resource boom (which is not necessarily a bad thing—but that’s a separate argument), then a country suffers from the disease only if it spends resource revenues on nontradables; if all the revenues were spent on tradable goods, there would be no real appreciation, and hence no Dutch disease.  In short, even the Dutch disease is a problem of spending of resource revenues.

If the problem is with the spending of resource revenues, then the solution is to improve the way in which governments use these revenues.  This is not easy to do, and goes back to the challenge of improving the policies and institutions that guide public action.  But this is the challenge we should all be working on.  I’m not sure it’s useful to say that, just because a government has not managed its resource revenues well, it should not extract more resources (especially when resource prices are high).  This does not help the poor.

3. You then list a string of concerns with the recent World Bank loan to South Africa to finance the production of electricity.  This operation, like most things in life, has benefits and costs. 

The benefits are the increased access to power for many people in the sub-region; the costs include some of the points you mention, such as carbon emissions and the financing costs.  Our analysis indicated that the benefits outweighed the costs.  We included estimates of the shadow price of carbon (based on international estimates) and of course the financing costs in that analysis.  If you accept the principle that decisions like these should be based on benefit-cost analysis, then I would encourage you to examine our analysis and its assumptions (all of which are in the public domain), rather than simply list a series of concerns.

4. Finally, I would wholeheartedly agree with you that there are problems with the domestic political consensus prevailing in many, if not all, poor countries (and some rich ones too).  I was using the phrase to distinguish between policies that were imposed from outside the country and those that emerged from a debate within the country.  While the latter is better than the former, there is no question that the political equilibrium that emerges in our countries leaves much to be desired.  That is why we see poor policies persisting.  It is also why we see politicians who advocate policies that are clearly anti-poor getting re-elected. 

There are huge political market failures in our countries, and the poor are the victims, just as they are of regular market failures.  Lest you think that this is an unusual statement from someone at the World Bank, I assure you that these ideas have permeated our thinking at least since the 2004 World Development Report, Making Services Work for Poor People.

But the existence of political market failures is precisely why we have to be careful in advocating solutions that look to government action, such as industrial policy, and in criticizing policies that take into account a country’s comparative advantage.  Many of the problems facing African countries today, including those of employment that you mention, stem from these government failures which were themselves the result of actions aimed at correcting market failures. 

As the history of industrial policy in Africa shows, these well-intentioned interventions backfired.  So in helping Africa industrialize—something we would all agree is necessary—we have to make sure we don’t fall into the same trap as before, namely, of ignoring the political market failures that may have been the cause of the problem in the first place.
 

Comments

Submitted by Paul Cadario on
I agree with your second point, in particular, Shanta. How comprehensive, recent and thorough are the Bank's Public Expenditure Reviews? Are they of a depth, coverage and quality that we can have dialogue with countries, and other donors providing budget support, about how well public spending is allocated, and whether there's a results and accountability framework for seeing that the money is well spent?

Submitted by Anonymous on
Yes, the second point in particular. The problem is not mining or other resource extractive industries. The problem is how the proceeds from those are used. The answer to Patrick's "looting" argument is not to shut down all the mining. That does no-one any good.

Submitted by Khadija on
No disrespect to the WB's Shanta but capital-intensive extractive industries prescribed and justified by the Bank shifts the role of development to foreign investors and resource-seeking multinationals (encouraged in a previously published world bank policy document on african mining)....the true costs (such as 79 tonnes of waste for every ounce of gold extracted) are always externalised, concealing socio-ecological burden, affecting sustainable resources. if we were to factor this in, would gold mining still be a 'profitable' industry? the government of tanzania, for instance, one of the continent's leading gold producers, received an average of $22 million annually in gold revenue despite the fact $2.5 billion in gold had been extracted during the past five years. why don't world bank officials take a year long vacation and live in the shacks they have so diligently encouraged the creation of (think - $18 billion invested in arms each year, over 85% imported by rentier regimes financed by mineral and oil revenues that are not accounted for thanks to the lack of corporate-country reporting, mandatory information exchange, foreign exchange controls etc)...

Submitted by Anonymous on
We all agree that the main problem with african countries is revenues allocation. Thus the challenge is to find ways to solve it.

Submitted by Anonymous on
Ok, question is: in the proces of resource extraction, who are the main actors, what are their "enjeux" (stakes or challenges) in the proces ? Perhaps some Africans States have some revenues and use them in a suboptimal way or perhaps other Actors another smal word to say in the african revenue allocation !

Submitted by Anonymous on
Definitely, without even exporting the manufacturing world would be coming for the natural resources. The Question here is not about exporting but how can they attain sustainable development and ensure rent from these resources is used for development and acquisition of appropriate technology. Africa is rich in natural resources an should be ready to use this resources appropriately, every continent is keeping their eyes on this resources and it is upon the African states an international community to implement non exploitation laws to protect this resources.

Submitted by Yemi on
The problem comes from both resource exports and application of the income generated. The latter is due to high cost of resultant products to the initial resource owners. Ways must be found to embark on trasformation process of African resources in Africa to improve local econmies, provide employment, raise living standards and increase growth.

Submitted by Udo Etukudo on
Every country and territory in the world has at its disposal resources to undertake its growth and development. So from that standpoint, I would support the opinion that Africa should continue to export its natural resources as a means to its own growth development. To me the critical question is "How well have African countries made effective use of all resources at their disposal for their development"? This question is fundamentally different from the one on "exploitation" of natural resources for capital gains, as it encapsulates many of the well known development issues of good governance, environmental sustainability, inclusiveness of growth, etc. On the issue of revenues, my view is that because almost (if not all) of what is exported from Africa are so far down the value chain in terms of value addition, these countries receive a fraction of the true potential of the export value. The reason for this, has much to do with the poor management of natural resources for economic growth and dvelopment mentioned above.

Submitted by MAIGA Oumar on
how do you want African government to find the way to spend their resource approprietly if there is no sector and global planning in the country. they run the country like a family day by day expenses. that's why corruption occurs because they plan on their own how to spend the resources in order to get bribes. The World Bank must help to set up in every country a Ministry of Planning which will plan and classify projects for a sustainable development.

Submitted by Mutwiri on
The local natural resources in Africa are exploited sucessfully by citizens but they lack the aspect of value addition.They are exported as raw materials at low cost and processed elsewhere.They are then imported back as finished products at high prices.Hence the balance of payments problems in Africa. Recently, we have seen some countries from developed world offer finanacial and technical assistance to African Countries for infrastructural development.In return, these developed countries get raw materials for their industries.The Extractive Industries Transparency Initiative should therefore be actualized to disclose the proceeds from the extractive industries.

Submitted by Njang Jolly Ete... on
Africans are the only problem they can ever have and they are the only solution to their problems, not multi national companies, United Nation institutions, US, Canadian, European governments etc. African governments are convassing for multi national companies to extract resources in their country in order to create employment and increase on national income, and at the same time these institutions defraud these revenues via their executives, knowing well that they don't in place rigid internal control system. Instead of the World Bank to impose on African governments to implement IFRS as they have done to listed European companies, they are rather encouraging multi national companies to extract natural resources in Africa, knowing very well that the revenues generated from these extractions shall be defrauded by this same multi national companies in collaboration with Africans executives. God did not create Africans as thieves and then white peoples as angels, but it is the situation that Africans are passing through that has push them to defraud their economy. The worst financial scandals in the world have happened in the US and Europe. The Sarbanes Oxley Act was created after the Enron scandal.The Accounting system used by most African countries except South Africa was inherited from their colonial masters which is porous and static and it is not in line with the US, Canadian and European Accounting systems that create these policies for Africans.They have not lived in Africa and it shall be difficult for them to create policies that will suit with Africans.The world bank should invite intellectual Africans from divers field of studies e.g.(Chartered Accountants, Actuarists, IT engineers, civil and mechanical engineers, legal experts, police investigators, economists, etc) to debate on African issues. It shall be difficult for non Africans to achieve ever lasting solutions to improve on the economy of Africa.The greatest problem the World is facing is the fact that some countries are very very poor and some are very very rich.The crimes committed around the world are organised by poor individuals for survival. The advancement in technology that has made the US to top the World economy was not only invented by US citizens. God did not create only US citizens to be inteclectuals or have technological insight but equal to all human beings. It is only the situation that Africans are passing through that makes them backward in technology. Conclusion: Africans should export natural resources like US, Canadian, European countries etc are doing but prior to the exploitation and exportation there should ensure that controls are in place to guard these revenues. Njang Jolly Etengeneng

Submitted by Otabor Isaac on
In my view, Africa would have been richer or better off, if she was able to transform or process her natural resources to finish products that are of more economic value in the international market, than exporting the natural resources. Better still, Africa would have been better off, if the African governments had optimally utilized the revenue derived from the export of her natural resources than mismanaging the revenue. Indeed, the problem comes from both resource exports and wrong application of the income generated from export.So, Africa must effectively and efficiently embark on transformation process of her natural resources and value system, to improve local economies, provide employment, raise living standards and increase growth, among other things. Thank you,

Africa indeed mismanages its income from abundant natural resources. That will not justify it discontinuation to export. On the other hand using most of the abundant resources could stimulate industrialization in Africa such that the indigenous manufacturing companies could utilize them as raw material. The argument is apt both ways. For the latter to be applicable, infrastructure and competence would have to be repositioned everywhere in Africa particularly sub-Sahara. Industries would be hungry for raw material. For Industries to thrive issue of power must be addressed too. It is a chain of things in that nature. On the other side, where the structure is not set, and raw material are not utilized effectively the only acceptable evil will be to export them. The argument of leader embezzling derived funds is quite another matter. Accountability, Integrity improvement and good governance will check that. It is rational to conclude that until Africa can utilize its raw material to produce finished goods for exports, the only export product readily available for earning foreign exchange to my mind is exporting Natural resources.

Submitted by nuvaga on
I hate the phrase 'natural resources' for natural gives the impression that these are free gifts, 'dash' like manna from heaven. When you are dealing with what you consider a free gift, the value you attach to it is low. The natural tendency will be to get it for free!!!! All resources, human, financial etc are natural so its time we start putting these resources in their true perspective irrespective of where they are found. Should these resources be exported? Will this bring about sustainable development? Everything being equal and put together can the prices dictated by the purchaser guarantee sustainable growth for african countries? Current events have proven that buyers of these resources will prefer situations of chaos, bad governance to operate. They even encourage it with arms and shaddy deals to get the resources for almost free. Look at the situation in the congo, Chad, Sudan Darfour, Liberia, etc Who is fooling who here? The only area where Africa has a comparative advantage over the others is with her resources especially the extractive minerals. The question should be 'How best can we reap from these resources? Bauxite ends up being the body of the plane after transformation. Compare the value of these plane parts with bauxite, aluminiun etc. Why the huge gab? Because of OPEC, oil producers have succeeded in reaping something reasonable from crude oil. What African countries need to do is to get togethernaround the other minerals and products of flora and fauna, ecotourism eg diamond producers should get together and play on the simple economic theory of demand and supply. This to me is the only way forward !! My one franc contribution

Submitted by Tomasz Majek on
Ask who set it up, and you'll know whose interest it is in. "Africa" does not export the resources. Who owns, controls, finances the majority of the exploration, oil, gas, mining, infrastructure, etc companies? Who finances the governments (corrupt or otherwise)? Who does the World Bank itself serve with its projects in the long run? There are indeed MASSIVE benefits accruing from the export of African natural resources, but these benefits are exported as well - feeding the monster profits of foreign corporate interests and corrupt officials. Give people ownership and control of their resources and you won't have to worry about fixing 'their' problem. Too bad that after several centuries of exploitation, it's not that easy anymore, is it?

Submitted by Abiodun Adeloye on
Should Africa Export Natural Resources? Patrick Bond’s statement is quite correct “ that extraction has not been beneficial to Africa.” I wish he had explained further to indicate his disagreement. Infact Shanta Devarajan too is correct but the issue is more than what he said here. Taking a cue from Patrick, one needs to wonder the Dutch merchants that dominated RSA and subjugated the South African blacks. RSA has plenty of diamond and gold. The soil is fertile with good terrain. What did the South Africans do with the wealth from the ground?....of course develop RSA to the benefit of the white and the blacks were put to years of unjust treatment. The other. The developed countries are smart to locate where certain treasures lie in Africa. And what they do is to come to purport that they want to get the African country some help usually out of poverty, war or political crisis. The settlement for the “help” is the natural resources of the country. It will be removed in large quantities. Usually the leaders in such African country settle for the release of the natural resource without making the citizen know the arrangement. The luminaries in the country who have knowledgable may even not be aware of such an arrangement by the government. Added to this is that the big-shots in the country again would steal some of the revenue and add it to their wealth. In this situation, the citizen is not getting the benefit of the extraction of the natural resources. What the developed countries use as reason for offering such help are problems caused by the leadership in the African countries. This leads to Shanta Devarajan’s “many African governments have not have not used the revenues from these resources productively. Added to it is corruption of high order in high places, lack of foresight to establish processing industries to part-process and enhance the value of the mined commodity. Governments in Africa for a long time have been occupied by high school drop-outs who then join the military. Such that have little grey matter and would take genuine and realistic comments for opposition, and before you say “Jack Bobinson” the citizen that makes the comment is either killed or jailed or, by luck exiled. These days, educated, well-meaning leaders are surrounded by rogues looking to fill their pockets. The government has the responsibility to provide the amenity for the citizen regardless of status. These are good roads, effective transport system, uninterrupted electricity in the right voltage, portable water and policy that protects the right of the people. These are never provided. Apart from RSA the countries in Africa today donot have the Internet facility found in the developed countries. The IT that abound in Europe and America today is found in the Arab countries who do not produce this facility but buy it. Why can’t countries in Africa buy it also? Why can’t the countries by the technology? It is not that some of the countries cannot afford it, but the fund, is either misappropriated or the government purchases poor quality stuff from the developed countries. Such stuff is most of the time obsolete and there will be no parts to maintain the equipment. There is a lot that one can mention but the underlying problem of non-productive use of the wealth of the extracted resources is misappropriation by a government which head and executives are not faithful to the citizens. Africa can export its natural resources but it needs realistic planning for value addition through some processing before selling it out. There is need for planning to make the proceeds utilizable for the citizens. Good amenities like good roads, uninterrupted electricity, strong and reliable Internet connectivity and security are the needs. The low income earners and less priviledged should be cared for. Education should be guaranteed for everybody.

Submitted by BEN WASHIKA on
I disagree with sentiments of Nuvaga on Natural resources................They are basically that.God given but owned by someone thus not free.Take for example gold,diamonds,wild animal and such. Back to the topic. Many African countries follow the strategy of exporting as much as they can and, since they are uncompetitive in manufactures and services, they export raw materials, Mark Halle, director of the International Institute for Sustainable Development, said in an interview with IPS about the World Trade Report 2010 on trade in natural resources. The report, released by the World Trade Organisation (WTO) on Jul 23, showed that fish, forestry, fuels and mining products represented 24 percent of world trade in 2008. Fuels account for three-quarters of this trade and have experienced a rapid growth since 2000. Intra-regional trade among African states remains at exceedingly low levels – an average five percent – while most of Africa’s exports continue to consist of commodities and particularly energy commodities. Regions that are rich in natural resources mainly ship these to industrialised countries. In 2008, the natural resources exports of Africa amounted to 406 billion dollars, of which 86 percent was for fuels, which represents 73 percent of the total commodities export of the continent. According to the WTO report, domestic policies such as consumption taxes, technical regulations and subsidies are widely used by exporting countries. If we discourage the exports do we have ready markets for the Gold and diamonds within Africa at a competetive price........NO is the answer.Look at the Wildlife and tourism in Kenya where the locals are being persued to venture intop domestic tourism.unless this happens then export of tourism will continue. What of Value additions?The point is Africa needs to look at value addition on the natural resources prior to export.This will improve their BOT.I feel ashamed that cocoa is exported to USA only for a chocolate to be imported yet this can be done locally. I rest my case.

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