Leveraging Minerals for Domestic Development in Africa Lessons from Countries Experiences Harare, September 25, 2013

More minerals exports in Africa, but no structural transformation There hasn’t been much change in structure of the economies in Africa in the last ten years: Africa still remains a producer of raw materials and an importer of finished goods Some dynamics are changing Fostering structural transformation is to be understood as a long haul task, and a longer term vision AFRICA EXPORTS WORLD BANK, AFRICA PULSE, APRIL 2013

The link between resources and human development is weak Human development indicators are lower in resource rich countries LIFE EXPECTANCY 2011 (YEARS) WORLD BANK, AFRICA PULSE, APRIL 2013

.. illicit flows are a drain AFDB Study finds that between 1980 and 2009 cumulative illicit financial flows from Southern Africa reached 330 bn 2005US$ Illicit Financial Flows were the main driver of net drain of resources from Africa

… while overall domestic policies are weak weak fiscal frameworks to manage boom-busts cycles non optimal taxation regimes lack of strong overall business climates strong rent-captures poor linkages with the domestic economy

Countries experiences

Economic Transformation, Value addition and Extraction Wealth of a nation includes natural capital (rent value of proven reserves), tangible and intangible capital Wealth of a nation increases if resources are discovered, and extracted and their rent creates aboveground assets Inefficient extraction of natural resources and dissipation of rents does not create value addition, but reduces wealth Successful management of resources entails the ability to transform underground wealth into aboveground physical, intangible, financial) assets, and support economic transformation

The Mineral Rent TAX REVENUE CONTRIBUTES TO CENTRAL BUDGET FORWARD LOOKING MANAGEMENT OF TAX REVENUE POLICIES THAT FOSTER POSITIVE LINKAGES AND SPILLOVERS INTO ECONOMIC SECTORS (*) Costs include high sunk costs for exploration and development, and return on capital

Positive linkages and spillovers

Lessons from other countries l Linkages have been very successful in other countries where exploitation of resources was leveraged towards industrialization and structural transformation e.g. Chile, Indonesia, Peru, Malaysia l Financed the upgrading of the countries’ endowments (human and physical) from high level of savings l Helped to reduce production costs in new trade sectors, support efficiency while encouraging new entries. l Good macro-economic policies, fiscal discipline over resource cycles and overall policies supporting the business environment. l Supported development of economic linkages

Malaysia RUBBER AND TIN EXPORT EXPORT OF RICE AND PALM OIL FINANCING EXPORT DIVERSIFIC ATION SUPPORTED MEASURES TO REDUCE COSTS AND INCREASE PRODUCTIVI TY MANUFACTURING COMPETITIVENESS FDI INFLOWS, TECHNOLOGY SPILLOVERS, TARGET SUPPORT ZIONES

Indonesia OIL GAS SUPPORTED FINACING OF AGRICULTURE EDUCATION IRRIGATION/ INFR ASTRUCTURE FERTILIZERS FOOD SECURITY LABOR- INTENSICE INDUSTRY AND EXPORTS Source: Gelb (2012) Lower costs of business in the economy

Chile COPPER FORWARD LOOKING MANAGE MENT OF TAX REVENUE Export of engineering services Macro-balance management PENSION RESERVE FUND ECONOMIC AND SOCIAL STABILIZATION FUND LINKAGES and DEVELOPMENT OF MINING RELATED SECTORS FDI INFLOWS, TECHNOLOGY WELL DESIGNED TAXATION SYSTEM Human Capital Development WELL DESIGNED INSTITUTIONAL FRAMEWORK In the last 12 years mining providers exports rose to US$ 300 million Qualified workforce

Overall Lessons

Mineral Investment, Development, Poverty Reduction Optimize levels of investment and extraction (includes: developing a full understanding of mineral potential) Transform under-ground wealth in above ground assets : Forward looking management of Mineral Tax Revenues toward development expenditures (agriculture, infrastructure, human development and poverty reduction) Leverage on Mineral rent to support strengthening other industries comparative advantage: Leverage costs-side of extraction to foster positive linkages with industry and services Build a strong institutional, governance structure, and regulatory framework moving from short-term rent extraction, to long-term rent management

Stemming Illicit Flows in Africa Comprehensive measures to address corruption Improve transparency over the entire resource value chain Strengthen anti-money laundering Improve investment codes Require publication of annual reports Improve business climate

I. Overall lessons: approach Limited effectiveness of “one size fits all” approaches Essential question is: “which size fits what”? (e.g. Optimal taxation regime is not easy to determine – often sector specific or project specific)

II. Overall lessons: Efficiency “It does not matter whether it is a yellow cat or a black cat, as long as it catches mice” (Sichuan Proverb)