By Tanu Jalloh
In this edition of
Business and Economy, we have done a thorough research on natural
resources and what they mean for stability, economic growth and
wealth distribution and state of affairs where they have failed to
improve standards of living.
We have read and
compiled assertions, findings and conclusions contained in up to
fourteen different academic presentations, documents and publications
in the last five years and all of them around natural resource
management. Where their proper management was lacking, we measured
the effects they have on governance in countries across Africa.
Below are unedited
excerpts, but adequately referenced, from different communications
and authors. Read on.
Countries with
substantial revenues from renewable resources face a complex range of
revenue management issues. What is the optimal time profile of
consumption from the revenue, and how much should be saved? Should
saving be invested in foreign funds or in the domestic economy? How
does government policy influence the private sector, where
sustainable growth in the domestic economy must ultimately be
generated?
Natural resources
create income, supply foreign exchange, and provide government
revenue, yet their net impact on economic performance has often been
negative. Numerous researchers have studied this relationship.
Econometric studies tell us that the impact of resources depends
critically on the quality of governance, having a negative impact on
countries with governance indicators below a certain level. The
quality of governance itself can be eroded by resource wealth,
creating vicious circles of mis-management and, in the worst cases,
conflict. Resource induced volatility has a negative effect and
resource booms are short-lived with negative long run effects.
Underlying
these statistical relationships are two fundamental mechanisms. One
is that resources foster rent seeking behaviour of all sorts, so
there is no effective government will to use resources to improve
economic performance or to benefit the citizenry at large. The other
is that – even for a government seeking to bring lasting economic
benefit from a resource – it is a difficult task. How should a
government use a temporary resource windfall to bring about both
short run poverty reduction and a sustainable long run increase in
income? The objective of this paper is to bring economic analysis to
bear on this question (Venables, 2010. Resource
rents; when to spend and how to save,
Oxford).
Looting
The primary
feature of resources is that they produce rent and hence are a target
for rent-seeking, which can take the form of corruption, theft, or
wholesale conflict for control of the state. Theft can occur as the
resource comes from the ground, by individuals or by mafias; alluvial
diamonds (as in Sierra Leone) are hard to control compared to the
centralised production of diamonds in kimberlite pipes (Botswana and
South Africa), but even oil can be stolen at source, as indicated by
the ‘bunkering’ of Nigerian oil. It might occur through control
of trade, as with high value minerals such as coltan coming from the
DRC. And theft can occur as revenues enter or are spent by
government, in the form of large scale theft and petty corruption.
Control of these sources of rent can be achieved by corruption, by
organised mafias, or by insurgency and take-over of the state.
Conflict
Incentives to grab
a share of resource rents not only weaken government, but may lead to
its overthrow through insurgency at either a regional or national
level. Natural resources can provide both the motive and the means
for insurgency, although at the same time they provide funds for the
government (or those with access to government funds) to equip itself
to retain power. The links between natural resources and conflict
have been studied in theoretical and empirical literatures.
How
Natural Endowments Deepen the Political Problem
These
generic governance problems are compounded by valuable natural
assets. Potentially, governance might deteriorate in three distinct
ways. First, in a democracy resource rents might reduce the efficacy
of electoral accountability by, for example, allowing governments to
buy off opposition. Second, in an autocracy resource rents might
reduce scrutiny, so reducing the pressure on government to meet
citizens’ needs. Third, resource rents might alter the likelihood
of democracy relative to autocracy. There is some support for all
three of these possibilities (Collier, Venables, 2009, p.3, 4, 8 &9.
Natural
resources and state fragility,
University of Oxford).
Many
countries have failed to use natural resource wealth to promote
growth and development. They have been damaged by volatility of
revenues, have failed to save a sufficiently high proportion of their
resource revenues and failed to make high return investments to
support diversification of their economies.
The
fundamental economic problem faced by resource rich economies is how
to transform sub-soil assets into a portfolio of other assets –
human capital, domestic physical capital (both private and public),
and perhaps also foreign financial assets – that yield a continuing
flow of income to citizens. The World Bank’s (2006) estimates of
adjusted
net saving
or genuine
saving
provide a measure of the extent to which many countries have failed
to do this. These add to the usual definition of saving a measure of
education spending to reflect investment in human capital and
subtract depreciation of physical and human capital, the use of
natural resources and the deterioration in environmental quality
(mainly arising from CO2 and fine particles pollution). A resource
rich country which was successfully transforming its sub-soil natural
assets into physical, human or financial capital would not be running
down its genuine natural wealth. However, the estimates calculated by
the World Bank indicate that countries with a large percentage of
mineral and energy rents of GNI have lower and, typically, negative
genuine saving rates and are thus running down their wealth (Ploeg
and Venables, 2011. Natural
resource wealth: the challenge of managing a windfall,
University of Oxford).
This
paper addresses two broad issues. What are the economic principles
underlying efficient use of a flow of resource revenue? And how do
these principles map into options that policy-makers face? The
commodity boom that began in 2003 and is now faltering has already
provided Africa with unprecedented resource revenues which account
for substantial fractions of export earnings and government revenues.
Well used, these revenues are the best opportunity that the region
has had for transformative development, but the experiences of many
resource rich countries has been poor and the challenge for Africa is
to make more of the present commodity windfall. The price declines
during the third quarter of 2008 are a salutary reminder that
commodity prices have a long history of volatility. Both this
volatility and the stark fact that revenue is being generated by the
depletion of an asset make the intertemporal choices addressed in
this paper critical.
There
is also evidence that democracy and resource rents interact badly
(Collier and Hoeffler 2008). Whereas in the absence of resource rents
democracies tend to grow more rapidly than autocracies, resource rich
democracies grow more slowly. Two forces appear to be at work; the
degree of electoral competition and the number of checks and
balances. The degree of electoral competition determines the process
by which a government acquires power, whereas the number of checks
and balances determine the limits on how it can use power. Electoral
competition is distinctively damaging, whereas checks and balances
are distinctively beneficial. Furthermore, there is evidence that
resource rents gradually weaken checks and balances. Once resource
rents become substantial over the ensuing thirty years checks and
balances are dismantled. Hence, on this evidence it might appear that
the governance challenge for resource-rich Africa is to strengthen
checks and balances in the face of pressures to weaken them (Collier
and Venables, 2008. Managing
resource revenues: lessons for low income countries, University
of Oxford).
How
should international rules be set to govern this sector? It is an
area to which the GATT and WTO have previously paid little attention,
but where there are a number of inefficiencies arising in the course
of international trade and investment. Countries (and firms and
individuals) seek to increase their share of resource rents through a
variety of measures. These lead to inefficiencies in the market for
resources and also in the market for long run rights to develop and
extract resources. In the resource market there is a wide
international dispersion of prices (up to a 10:1 in fuel prices). In
the allocation of exploration and production rights there are
inefficient allocation processes, excessive risks, and likely
sub-optimal levels of exploration and development. The objective of
this paper is to develop the economics of these issues and draw out a
series of policy proposals. The starting point is an overview of the
particular features of the economics of natural resources.
Discovery
and development
Natural
resource projects are also distinctive as investors enter a long term
relationship with the host country government. The relationship is
based on contracts signed when the licenses to explore and extract
are granted, and on the accompanying fiscal regime under which
investors operate. This relationship means that trade policy is not
just about the market for the resource, but is also about the market
for licenses – their terms and their allocation. These arrangements
determine the distribution of rent between parties6 and also shape
the incentives for depletion and for future exploration and
development. We argue that it is likely that the most import
inefficiencies in the resource sector arise in this area, rather than
in the market for the resource itself.
The
design of contractual and fiscal regimes and the allocation of
licenses is complex because they have to meet multiple objectives.
One is to capture rent for the government, and another is to leave
incentives for efficient extraction and for investment in exploration
and the development of new fields. This is an environment of very
long term projects with high initial costs; a mine may easily last
for 50 years or more, and up front capital costs are truly sunk,
having little or no alternative use value. Furthermore, it is an
environment of great uncertainty about future price paths and about
geology, and also asymmetric information, with the investor better
informed about geology and technology than is government. Contracts
typically take the form of an initial payment for the license and
then operation subject to a royalty (or production sharing agreement)
and corporate profits taxation, possibly at a sector specific premium
rate (Collier and Venables, 2009, p7. International
rules for trade in natural resources,
University of Oxford).
(c)
Politico 11/09/12
