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Is There a Blueprint for Diversification?

Francisco G. Carneiro's picture

Many resource-rich countries are looking to diversify their economies, in anticipation of the day their natural wealth runs out.  Resource extraction is extremely costly and employs only a fraction of the workforce. After the recent turmoil in the Middle East, policy makers have begun focusing more on the need to create jobs, provide for inclusion, and increase public participation in government decision-making. There are several examples of countries that have used their resource wealth to share prosperity, including the United States, Norway, and Australia.

But is there a blueprint for diversification and economic prosperity?

Is Resource Dependence Really a Curse?

There are challenges that are common to resource-rich countries, but they can be overcome. The existence of a resource curse is refuted by history, as several of the current high-income economies relied largely on natural resource exploitation. One example is the United States, which in the years leading up to World War I, was the world’s dominant producer of virtually every major industrial mineral. Similarly, in the late 19th century, coal and iron ore deposits were the basis for industrial development in Germany and the United Kingdom. Other countries, like Canada and Australia, have highly diversified economies but remain dependent on natural resources for a large share of their exports.

But how did these countries manage to avoid the more deleterious aspects of resource dependence like macroeconomic volatility, an overvalued exchange rate that raises costs to businesses, and problems tied to governance and accountability in rent management?

Possible to Diversify by Decree?

Successful resource-rich countries have pursued diversification not as an end in itself or a policy objective, but as a way to accelerate their economic development. They have developed and strengthened institutions that have helped create the right incentives to developing their non-resource sectors based on market principles. Industrial policies have been used, but they have succeeded only in very special circumstances. For example, if a country is already building ships, as Norway was when the construction of oil platforms started there, then moving to constructing offshore platforms becomes a much smaller step.  

Local content policies have also been tried in many countries, but they also tend to work only when there is enough capacity to make the national industry internationally competitive, as in Norway’s case.

Indonesia and Malaysia moved successfully from economies dominated by commodities, to manufacturing. Both countries used the right macroeconomic policies, in Indonesia’s case by slowing the absorption rate of oil rents, thereby controlling Dutch disease effects. Chile has been able to generate high growth rates by developing a highly dynamic and diversified commodity export sector. It has greatly emphasized improving its business environment, becoming the highest rated Latin American country on the “Doing Business” indicators.

Is There a Blueprint for Diversification?

So, no -- there isn’t a single blueprint for economic diversification. Each experience is unique.

However, there are many factors tied to success. The importance of getting the macroeconomics and business environment right cannot be emphasized more. It is also essential to build up capital that is complementary to natural resources, like highly skilled human and institutional capital. Finally, resource wealth will not be successfully used to promote wealth and shared prosperity if institutional quality is neglected. Remember that the extractive industries, due to their enclave characteristics, can be operated in weak institutional environments. This is not the case for most other industries that require an adequate investment climate to thrive. In these cases, achieving success will depend not only on human capital development, but to a greater extent, on strong enforcement of contracts, laws, and a generally strong business environment.

Comments

Submitted by Sendwe on
First let me agree with Mr. Carneiro in his assessment, there isn't a simple blueprint for diversification of many sub-saharan African countries, however there are numerous best practices that we know of which are not being implemented. We know that African countries can not be sustainable long term simply depending upon 3% export taxes for mineral while all the high income jobs to fabricate the mineral are in Europe, USA and China. Too often I wonder is there a general goal to help or handicap Africa? Sure it appears the intentions of international communities is on helping, after-all they are sending money aren't they? But upon examination I think we must look at what the money is sent to do.... 1) Build roads, which one could say is simply a way to make it cheaper for the huge mining companies and importers of finished goods to move their freight to and from port. Yes better transportation networks are needed in Africa, however the selection of the roads that are built are suspect. Seems they always focus on passing through small villages to get to mining and resource centers..... 2) Electric projects. For sure we know Africa needs electricity; but again, its a great way to dump the overall debt on the country as you subsidize the needs of foreign owned hotel, mining and beer manufacturing companies, who are the primary beneficiaries of the electricity that is created. Yes I could continue to talk about things like health care, a topic most in the West really feel proud to say they are helping; but really I challenge them to spend time on the ground as opposed to just sending a check to "Big Foundation" Yes Malaria is a problem;but spending billions on an experimental vaccine and forcing it on people isn't the solution. Just think in the Southeastern USA Malaria was a big problem; but vaccines didn't cure it. How about the same approach in Africa. Fixing water problems such as the draining systems on the streets which are dangerous beyond being mosquito pits. Why not educate people to not store standing water outside and also do massive spraying as was done in USA? As as for AIDS, surely no educated person thinks 40% of a population could really have AIDS as many reports indicate. Long and the short...Yes money is being spent; but this money is not being directed in the manner which is best to achieve success in Africa. Giving money to government in Africa is like giving money to government in America...it becomes money that is wasted on paperwork, forms and government employees. As for what would work, how about we develop industry? After all capitalism created the United States ecomony and after WWII, we surely found ways to help Asian economies with low skill industries that created lots of jobs, which gave people hope and something to look forward too...People who have jobs and something to lose are less likely to join terrorist groups or go for Communism, we knew that all along, just as we knew the high number of jobs in textile and farming could be vital for Vietnam and give them a sustainable economy. Why not Africa? Why are not real jobs or industry created? Since there was no risk of communism near Africa and no real terrorist threat, we simply could care less to help them stand on there own! Weak like they are now and have been since the 1960's it has been easy for the west to take advantage of most African countries. Not to sound anti-USA; but killing the Libyan leader was certainly a blow against Africa as the leader of Libya was doing positive things to help many African countries unite and find strength in that unity. How hard would it be to introduce farming of rice on a large scale in Sierra Leone, a region where the people taught the people in the USA how to farm rice? To build a rice mill and allow people in West Africa to stop importing rice; but consume local rice and much lower costs. Just think to import the food involves not only a tariff; but also the transportation cost of getting rice from Asia to West Africa. Grow the rice at home and it would save over 30% of the cost of food to the average person, plus you have created local jobs!!! Question is why isn't this being done. Same goes with fruit juice that is imported from Europe, who doesn't grow mangoes, pineapples, bananas or oranges, yet there are all those fruit juices being imported to Africa from Europe? The fruit juice could be made locally with investments. The list of items go on and on..... Now the world bank figured out how to make loans that were convenient to its purposes after WWII to restore communities; but simply misses the mark when it comes to Africa....My question is when will it stop? We all know the solutions and no there is not just one magic bean; but we know the things that need to be done to make a change in Africa, so the question is when will we begin to act? Clearly the USA, the world bank and others have already spoken in unison...They will only do something when it is their best interest! The goal has never been to truly help diversify economies in Africa; but rather just to pacify. To prove me wrong of course the worldbank and IFC could make loans to invest in agriculture, which serves many purposes for Africa as it creates jobs, gives and export and lowers food costs; but this will not happen, the West would rather go there with its industry and do 99 year land leases and control crop production for export to the world on the commodities market and leave the growers with pennies about like the coffee farmer in Columbia. Its an exclusive party, with many people invited to make the event seem fair; but the reality is some of us are invited but we do not realize the real meeting took place the day before we came. We never get to participate with high level investments, we do not even know who to contact to purchase the MTN's they worldbank issues. What takes place is global policy and we are asked to voice in; but none of our ideas are exercised. It is as they say, what it is! All that said, if there are those of you reading who want to bring change in the world. Please start by finding other like minded people and forming investment pools. Goto these countries and make small investments that creates jobs. Start a polutry farm, start a goat farm, start various small farming projects. You will profit and the people in the community will profit. Don't wait on the WorldBank!

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