FREEING AFRICA FROM THE RESOURCE CURSE: SOME OPTIONS Ernest Aryeetey ISSER, University of Ghana

OUTLINE 1. Introduction 2. Growing Demand for Africa’s NRs 3. Should NR Abundance be a Curse? 4. Institutions, Development and the Natural Resource Curse? 5. Freeing Countries from the Curse

1. Introduction  “How can one understand that during the last three decades, the frequent start-up of oil wells, always important, has not been accompanied by any visible sign of economic transformation or rectification of the social situation of our population? Our oil must be an instrument for the life and not the death of our people.” Catholic Bishops of Rep. of Congo (1999)

Introduction (Contd) Economic growth in Africa, until recently, has been relatively slow and erratic But many African countries are far more endowed than other developing regions, leading to greater expectations of economic potential

Introduction (Contd) Poor income growth <2.5% in SSA for two decades often stood in contrast with positive experiences elsewhere Continued under-performance of resource rich countries led to suggestions of resource curse

Introduction (contd) The last 5 years have seen more positive growth figures, influenced largely by the oil producing economies The commodity booms and associated growth in some countries are leading to revisions of the resource curse literature

Top 10 and bottom 5 performers in Africa in 2006 (% annual growth) (ECA)

Introduction (Contd) The dominance of oil-exporting economies is obvious (5) So also is the significance of 2 mineral rich economies, (DRC and Mozambique) Is the curse being exorcized? Not really. There are manageable challenges with the commodity boom

2. Growing Demand for Africa’s NRs and Commodity Booms Demand for NRs on the global market continues to rise Expansion in the economies of China and India have significantly accounted for the expanded demand, but not solely African economies have become even more prominent sources of NRs and new searches for NRs have been intensified

Growing Demand for Africa’s NRs (contd) China National Petroleum Corporation (CNPC), owns a 40% stake in the Greater Nile Petroleum Operating Company.  Sinopec (China Petroleum and Chemical Corporation) constructing 1500 km pipeline to boost oil exports through Port Sudan. Prospecting work in Ethiopia, Mauritania, Equatorial Guinea, Nigeria ,etc.

3. Should NR Abundance be a Curse? Resource curse lit. suggests that NR-rich countries in general have grown slower than resource scarce countries; literature predicts negative effects from commodity booms. Recent work on commodity booms suggest positive growth effects (Raddatz 2007) Collier and Goderis (2007) suggest positive ST effects from commodity booms and negative LT effects

Should NR Abundance be a Curse? (contd) NRs also appear to impact negatively on equity and distribution of wealth The probability of civil conflicts has been higher in NR-rich countries Oil and mineral wealth≠economic and social well-being for the majority of the population

Should NR Abundance be a Curse? (contd) Six channels of resource curse: Dutch disease Governance Conflict Excessive borrowing Inequality Volatility

Should NR Abundance be a Curse? (contd) Collier and Goderis (2007) find strong evidence of Dutch disease in panel data investigations for long term growth effects High public and private consumption, low and inefficient investment are the main explanations for resource curse Curse is strongest where institutions are weakest

4. Institutions, Development and the Natural Resource Curse LT development requires major public and private investments; may require large public consumption also The development challenge is to make large investments and the necessary consumption without compromising macro stability

Institutions, Development and the NR Curse (Contd) It is often the search for diversification that leads to inefficient expenditure choices Weak institutions often lead to elite capture of the resource and its management

Institutions, Development and the NR Curse (Contd) Country Transparency and corruption (period average: 1998-2006) Political and civil rights (Period average: 1980-2007) Botswana 5.9 out of 10 5.9 out of 7 Cameroon 2.0 out of 10 2.0 out of 7 Cote d'Ivoire 2.4 out of 10 2.6 out of 7 Ghana 3.5 out of 10 3.8 out of 7 Namibia 4.9 out of 10 5.5 out of 7 Nigeria 1.7 out of 10 3.2 out of 7

Institutions, Development and the NR Curse (Contd) Comparing Corruption Perception in Botswana & Nigeria: 1998-2007

Institutions, Development and the NR Curse (Contd) Comparing the Average Index of Political Rights and Civil Liberties: 1980-2006

Institutions, Development and the NR Curse (Contd) In sum, NR dependence could lead to weak long term growth for the following reasons: The promise of oil/mineral wealth creates a ‘boom mentality’ Public spending increases dramatically The quality of public spending declines

Institutions, Development and the NR Curse (Contd) Price volatility hinders growth, distribution of wealth and poverty alleviation Booms encourage the loss of fiscal control Foreign debt rises as governments borrow to cover shortfalls in expected resource revenues Other sectors of the economy, such as manufacturing and agriculture, decline as a result of oil dependence

Institutions, Development and the NR Curse (Contd) Thus Africa’s problem is not the curse of NRs but rather the problems associated with institutional failure LT growth collapse is not inevitable just because of NR abundance Redesigning and focusing the institutions should reduce the challenge

5. Freeing Countries from the Curse Example of Best Practice, Botswana: On the average Botswana has grown at 7.3% between 1981 and 2006 (compared to 3.0% and 2.9% respectively by Namibia and Nigeria over the same period) consistently reinvested most of its mineral revenues

Freeing Countries from the Curse (contd) Botswana's success is attributed to: sound institutions and good governance

Freeing Countries from the Curse (contd)

Freeing Countries from the Curse: Challenges for Africa Countries require strategic plans for structural transformation/diversification Continuing macroeconomic stability is crucial but not pursued in a dogmatic way Diversification requires re-investment of natural resource wealth in new growth areas

Freeing Countries from the Curse: Challenges for Africa New growth areas may include modernized agriculture linked to industrial development and services Human capital development, bringing together education and skills development, health, and employment generation Strategic human settlements development through effective decentralization

Freeing Countries from the Curse: Challenges for Africa (contd) Strengthen public sector institutions and their links to the private sector: Enhanced public expenditure management is key for efficiency Greater transparency and accountability in use of public resources Competitive politics must be regulated/code of ethics Private participation in economy must be properly regulated

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