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Will Africa’s Natural Resources Lead to Prosperity?

Following three decades of meager performance, African economic growth strengthened as of the 2000s, buoyed by rising prices of natural resources and exports. Whether this abundance of raw materials will turn out to be a blessing will, however, depend on more than global factors such as commodity prices and demand. Domestic conditions such as political stability, fiscal management and industrial policy are of equal, if not greater importance.

There is no doubt that African countries retain large shares of the world’s natural resources. Known reserves include more than 40 percent of minerals such as chromium and cobalt as well as more than 50 percent of the global diamond reserves. In addition, a major part of the world’s precious metals is located in Africa: at least 15 percent of the global gold reserves and almost all global platinum and palladium reserves. Numerous other natural resources also abound. Around 60 percent of the world’s uncultivated arable land is found in Africa, and the continent holds large reserves of fuels – approximately 8 percent of the global oil and gas reserves. However, these numbers need to be treated with some caution given the continuous discovery of additional resources, not only in Africa, but also in other parts of the world (such as shale gas discoveries in the US), and due to some uncertainty regarding the estimates. Nevertheless, there still appears to be significant room for further expansion, as Africa’s share of global production is below its share of global reserves. In addition, new reserves are regularly discovered, as vast parts of the African continent remain practically unexplored.
Recent Gas Discoveries in East Africa Attract
Foreign Investors’ Attention

How quickly the reserve landscape can change is currently prominently demonstrated by the recent “gas bonanza” in East Africa. Despite the “shale gas revolution,” which should make the US independent from both foreign gas and oil imports in the long term, the significant growth in emerging markets means that the demand for oil and gas is likely to remain solid in the coming years. Numerous international companies are competing to secure investment opportunities in East Africa with some exploration contracts already settled. The largest beneficiaries will most likely be Mozambique and Tanzania, to a lesser extent. Mozambique, which is a low-income country, could become the world’s sixth-largest producer of gas (after the US, Canada, Russia, Iran and Qatar), if its reserves are confirmed.
Increasing Commodity Export Dependence a Reality
for Most African Countries

As such, it is not surprising that primary commodities are African countries’ major export category (with an average share of about 70 percent of their total exports and 80 percent of their goods exports). Africa’s natural resource exports have tripled in size in US dollar terms since the 2000s. With their commodity sectors expanding at a faster pace than other sectors, dependency on and vulnerability to changes in global demand and commodity prices have increased. Another direct consequence of their commodity wealth is that resource-rich African countries have attracted substantial inflows of foreign direct investment (FDI). While South Africa and Nigeria remained the major recipients in 2011, several other West and East African economies (Ghana, Niger, Mozambique …) also saw increasing inflows of FDI on the back of new oil and gas discoveries. Overall, FDI inflows to Africa grew faster than those to Emerging Asia and South America during the pre-crisis period, reaching about 60 billion US dollars in 2008, with somewhat lower levels recorded in the aftermath of the crisis.
Resource Richness Does Not Always Translate Into Stronger Growth
The relationship between resource potential and growth in gross domestic product (GDP) as well as social development is not clear-cut. Some of the largest African fuel exporters in absolute US dollar terms – Nigeria, Angola, Libya, Equatorial Guinea and Chad – have posted annual growth rates above 8 percent since 2000, contributing 40 percent to Africa’s overall real GDP growth. However, weak and particularly volatile performance in preceding decades suggests that this growth was mainly helped by a favorable global environment (high commodity prices and strong demand). Besides external factors, domestic factors are important determinants as well – which is why several commodity exporters including Zimbabwe, Gabon and the Ivory Coast only registered growth rates below 3 percent over the past decade. Other African countries such as Ethiopia, Sierra Leone, Uganda and Rwanda, which were less dependent on natural resources during that period, grew at rates similar to or above their fuel-exporting African peers. These differences suggest that higher resource wealth does not automatically translate into stronger GDP growth, but that other external and domestic factors have to be assessed on a country-by-country basis.
Natural Resources Potentially a Driver for Growth Take-Off
Obviously, natural resources have the potential to support exports, investment and savings, and can drive a GDP growth take-off as observed in Nigeria, Angola, Chad, Ghana and Zambia. According to the International Monetary Fund (IMF) several resource-rich low income countries have seen particularly strong GDP-per-capita growth and seem to be on track to escape the “poverty trap”. Compared to previous generations of resource-rich country take-offs, the current generation seems to benefit from a broader diversification of export destinations (orienting themselves toward emerging markets such as China and India, rather than concentrating on developed countries) and stronger FDI inflows. Also, equality in income, political institutions, business environments and the general state of health of the population, as well as education seem to be improving. By contrast, academic literature often emphasizes the risks related to commodity-dependency, arguing that it reinforces the poverty trap due to commodity price volatility and deindustrialization.
Commodity Price Volatility and “Dutch Disease”
Are Still Major Challenges

Advocates of the “resource curse” frequently argue that global commodity price swings have negative effects on the stability of investment and consumption growth. In addition, as export demand and related foreign investment increases, exchange rates tend to appreciate. The negative consequence is a loss of price competitiveness of other non-commodity sectors known as the “Dutch Disease”. The result can be deindustrialization, a declining share of the manufacturing industry in overall GDP, which can be observed in several commodity-exporting African countries. The United Nations’ Economic Commission for Africa argues that higher GDP growth over the past decade did not reduce poverty at an adequate pace and failed to create commensurate employment opportunities since the mining and energy sectors are less labor-intense than the manufacturing and agricultural sectors.
Sustainable Fiscal Management and Improved Governance Are Key
Better fiscal management could help to stabilize investment growth and savings amid volatility in exports. More importantly, governments play a crucial role in improving education, investment growth and debt sustainability, which the IMF considers as the most important factors associated with growth take-offs. Following debt-relief, public debt-to-GDP ratios are generally low in Africa, especially in low-income countries. However, improvements in fiscal management have been limited, particularly in many fuel-exporting countries public spending is still pro-cyclical and the taxation base is not well diversified. If public spending is mostly financed by resource rents rather than by citizens, they might be less likely to control government action. This can in turn facilitate corruption and lead to inefficient allocation of government resources. A promising remedy consists of enhancing transparency and thereby accountability.
Active Industrial Policy May Be the Way Forward
The lack of spillovers from the commodity sector to non-commodity sectors has kept some African countries from using the full potential of their abundant natural resources to raise employment levels and to reduce poverty. The United Nations’ Economic Commission has suggested that an active industrial policy and development strategy, the design of investment plans for infrastructure, education and health care could be useful. The Commission stresses the need for a commodity-based industrialization as a basis for long-term diversification, whereby the design of the strategy depends on the respective type of commodity and local conditions (infrastructure, education and trade integration). The most successful diversification strategies to date are found in Asia (Malaysia, Vietnam, Korea and Indonesia), rather than in Africa. However, some African countries such as South Africa and Kenya have managed to pursue successful diversification strategies based on their natural resources as well.
Spreading Democracy and Abating Conflicts
as a Base for Future Development

A key factor behind the promising future use of the continent's natural resources is the greater political stability achieved over the past decade. The governance of African countries has greatly improved, driven by a better education of its leaders and voters, the access to modern media and the returning diaspora. The number of democracies (of varying shades) increased from 3 to 25 within two decades, while armed conflicts declined to 8 in 2008, down from a peak of 18 in 1992.
A Source of Prosperity if Managed Well
Ultimately, the endowment of natural resource has the potential to be a blessing or a curse. As mentioned, natural resources can act as a “prime mover” for development, by promoting exports and investment. Africa’s resource potential remains vast in the view of its relatively large shares of global natural resource reserves and continuous new discoveries. With the right policies, challenges such as the volatility in demand and prices, as well as deindustrialization can be better managed. Achievements in terms of governance, macroeconomic management, reduction in civil conflict, as well as improved infrastructure and education raise hopes that commodities will contribute to paving the way toward prosperity in Africa.
Source – «Credit Suisse»

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