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How to De-Enclave the African Resource Sector for More Inclusive Growth and Development

Ken Opalo's picture
Oil drums in Ethiopia. Source - 10b travelling

The recent acceleration in growth rates across much of sub-Saharan Africa may not be purely commodity-driven, but for many of the region’s economies macro-economic stability is still dependent on prudent management of natural resources. For this reason, a strategic shift is required to shield African economies from commodity boom-burst cycles.
 
For much of the last half century, the dominant political economy model of natural resource management in Africa was this: states received royalties from mostly private mining companies and then were supposed to invest in public goods such as roads, hospitals, and schools. Private mining companies, for their part, would pick up the slack whenever states failed. Most of the time this happened through corporate social responsibility (CSR) initiatives, as a way of buying the social license needed to operate in specific communities.
 
This model has proven to be a complete failure in nearly all resource-rich African states, for a number of reasons.
 

Can “Resource Financed Infrastructure” Fix the Natural Resource Curse?

Håvard Halland's picture
Resource Financed Infrastructure
Source: Getty Images/Sam Edwards.
 

In Africa, estimates indicate that an annual investment of $93 billion is required to address the continent’s basic infrastructure needs – more than double the current level of investment.

The lack of productive investment of resource revenues, with spending of these revenues often heavily tilted towards consumption, is a critical component of the so-called resource curse, the observation that countries rich in natural resources frequently have slow long-term growth. Following oil or mineral discoveries, as the expectation of increased wealth spreads, pressures to spend typically become hard for politicians to resist, public sector salaries go through the roof, wasteful spending increases, corruption may flourish, hidden foreign bank accounts may be established, and the number of unproductive “white elephant” projects grows.

How can resource-rich countries ensure that a large share of oil, gas, and mining revenues are used for productive investment rather than excessive or wasteful consumption?

Who benefits from fuel price subsidies?

Punam Chuhan-Pole's picture

Over half the countries in Sub-Saharan Africa subsidize fuel to protect consumers from high and volatile prices. But fuel subsidies are neither cheap nor likely to be sustainable (see the full analysis in the new Africa's Pulse). 

Data for 2010-11 show that fuel price subsidies consumed, on average, 1.4 percent of GDP in public resources: The fiscal cost in oil exporters was almost two-and-a-half times that in oil importers. In the face of high (and rising) world fuel prices, a number of countries have raised domestic prices to stem fiscal costs.  

For example, Ghana raised fuel prices by about 30 percent in January 2011. The Nigerian government removed the subsidy on gasoline this January, although a portion of the subsidy was subsequently reinstated.  With oil prices likely to remain elevated, fuel subsidies will continue to weigh on government budgets in Africa.

But who benefits from fuel price subsidies?  

Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich.  Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%. 

Transfer mineral revenues directly to citizens—and avoid the resource curse

Shanta Devarajan's picture

My colleague Marcelo Giugale and I have an Op-Ed in today’s Guardian online advocating the direct transfer of mineral revenues to citizens. 

Mineral revenues typically go from the extracting company to the government without passing through the hands of citizens.  As a result, citizens do not scrutinize the expenditure out of these revenues as much as they would if it were financed by tax revenues.  The net result is misallocation of public spending, slower growth and even slower poverty reduction in many of these mineral-rich countries, such as Cameroon or Nigeria. 

Is Africa more vulnerable to oil price increases?

Shanta Devarajan's picture

As world oil prices rise to near the levels of 2008, and growth on the continent resumes to pre-crisis levels (as reported on Africa’s Pulse), a natural question to ask is whether Africa’s oil importers are becoming more vulnerable to oil price increases. 

A partial answer is given by a recent briefing note by my colleague Masami Kojima.

Vulnerability is determined by how much of a country's income is spent on oil imports. Looking at the period 2003-2008 (the latest for which comparable data are available), the study found that vulnerability rose in all oil importers (except Mauritania) and even in some oil exporters such as Equatorial Guinea and Republic of Congo. Also, 15% of the income of Seychelles, Liberia and Sierra Leone is used to import oil. This is among the highest in the world.

Interestingly, despite a significant increase in the price of oil during that period, the rise in vulnerability happened because energy became more oil-driven in 24 out of 42 countries.