Can a Spell of Good Mining Governance Break the Resource Curse?
From the 13th to 19th century it was a not uncommon practice in Europe to hunt down witches, whose alleged curses were believed responsible for economic shocks and unfavorable conditions. Luckily, in 2014, no destitute widow needs to fear her life threatened by critical balance sheets, but the rhetoric of curses in economics remains alive and vital.
Economists who study why some countries have made it from rags to riches against the odds while others well equipped with an abundance of resources have succumbed to tenacious poverty have been struck by the observation that resource-rich countries have generally been worse off than resource-poor ones. This seemingly paradoxical phenomenon of richness in oil, gas and mineral reserves, on the one side, and inhibited growth and rising inequality, on the other, has been coined the resource curse. While a few examples, like oil-rich Norway, defy this phenomenon, the curse has prominently taken its toll in many African economies.
So do economists believe in black magic?
Even though some high profile economists seemed obsessed with an inevitably negative effect of natural resources, assumed evitable reasons include a stronger price volatility of commodities compared to manufactured goods, the comparatively low potential for job creation in resource extraction, and the appreciation of the country’s currency following increased commodity exports, which in turn makes other sectors of the economy less competitive. For the trivia lovers, it’s worth knowing that the latter phenomenon is widely also known as “dutch disease”.
That’s terrible; why haven’t I heard of this before?
In popular media the pitfalls of resource-richness have recently inspired Hollywood’s Blood Diamond, starring Leo DiCaprio, or the YouTube mega hit Kony 2012. Doubtlessly accurate in their dramatic tone, these examples fit well into dark picture of the African mining malady sketched in Western mass media: the resource curse—originally cast by European colonizers and later aggravated by blood thirsty dictators á la Kony (from oil-bearing Uganda), Zimbabwe’s Robert Mugabe or Liberia’s Charles Taylor—now needs a new perspective as resource-hungry China arguably poses the next “colonial” threat.
So does the media get it all wrong?
While it is absolutely correct that reckless warlords continue to finance their atrocities with illegally extracted minerals and that China’s new significance as trade partner deserves scrutiny, an updated and more holistic view on the mining industry in Africa is needed to get it right.
The main problem is two-fold. As laid out in detail in the Resource Governance Index 2013 (RGI), which measures transparency and accountability in resource management in 58 countries worldwide, most countries receive relatively small shares of the rent generated in the mining sector. Of those small shares, most are neither efficiently nor transparently utilized.
Ok, Ok. But how many African countries rely on mining? And, if the roots of the curse are known, why are they still cursed? And what resources are we talking about here?
The African continent is comprised of 55 countries that together account for 30% of the world’s mineral resource reserves. Among these reserves are more than 70% of the global platinum, chromium, and tantalum (one of the exotic metals in your smartphone); around 60% of diamond; 40% of cobalt, manganese, and phosphate; 10% of gold; and many more, adding up to around 60 different metal and mineral products currently produced. While two-thirds of all African countries have mining underway, 24 of them retrieve more than 75% of their export earnings from only a few mineral products and are thus heavily dependent on mining.
After unstable authoritarian governments in the 80s and 90s had allowed foreign companies to secure opaque friendship deals marked by absurdly low tax and royalty rates, the past two decades have seen major changes towards more accountable governments and pronounced legal frameworks. The RGI currently lists Ghana as the most successful African country, and much of this success can be attributed to the legislation introduced, after the discovery of oil in 2007, that ensures a transparent investment of oil profits into public projects.
Anyone searching for positive developments will also come across Botswana, a country that has managed to greatly invest its diamond wealth into infrastructure, education and health. The success story of landlocked Botswana impresses even more considering the dire conditions it faced: when the British left in 1964, there were 12 kilometers of paved road and 22 Batswana (citizens of Botswana) with a university degree. Despite the successful break of the curse, challenges remain: the country has not yet diversified from diamonds, leaving its industrialization hampered.
Good to know. But I’m not sure anymore what to think of the resource prospects for Africa.
Hosting 30% of the global mineral resources reserves but only accounting for 8% of current global production, there is still massive untapped potential in resource-rich, developing African countries.
With steadily growing demand from India and China, commodity prices will continue to rise. Therefore, improved economic policies and laws that direct resource gains into public development and diversification of the economy have the power to break the resource curse. It is certainly not an easy path, but, as more and more countries prove, it’s not about magic either.