Monday, August 31, 2009

The Resource Curse


Africa is blessed with untold wealth in the form of its huge reserves of natural resources. Anything and everything is available throughout the continent, from oil to diamonds, and some of the worlds most productive bauxite, gold and copper mines. And yet Africa suffers from an almost complete lack of wealth. As P.J. O'Rourke once remarked, Africa is exceptionally wealthy in "other ways".

But none of those ways involve actual money. Many many commentators have sought to explore the reasons for this, but the proverbial elephant in the room is what we might call "African culture". Before I start African-bashing once again it's important to lay out exactly what the issues are, and also to reply to an anonymous commentator on a previous post about Botswana's economy, one of the most persistently successful in sub-Saharan Africa (relatively speaking of course).

One of the main issues is the so-called Dutch Disease, named after the Netherland's experience of discovering huge gasfields in the early 1960s. It is directly relevant to Africa in that Africa is fabulously wealthy in natural resources.

Discovering natural resources in an undeveloped economy is comparable to a, er, person of low income and education, who suddenly wins the lottery. Evidence has shown that such people are frequently bankrupt within three years, through a combination of binge spending and ill-advised investments. Ironically, only someone who is already quite well established is likely to make a success of a decent-sized windfall.

Similarly with countries, the only countries that have made a success of their natural resources are countries that were already doing quite well. Norway instantly springs to mind. Poor countries frequently end up worse off than before, the best example of which being oil-rich Nigeria, the most indebted nation in Africa.

How the Dutch Disease works is that mining resources employs relatively few workers and is highly dependent on technology, which has to be imported. The country exports its mineral, driving up the value of the currency, thus affecting other exports particularly in the manufacturing and farming industries. Wealth tends to accrue to the very few, while the many are driven out of what little employment they have.

There is no real antidote for this. The law of Comparative Advantage theoretically suggests that the country in question should specialise in exporting its minerals and live off the profits. That is the kind of thinking that most African nations seem to have adopted. Most processing of the resources happens abroad in any case, as the instability of African nations has encouraged investors to keep these operations in Europe and America.

Africa is uncompetitive in everything it does. That's almost a universal law. Its workers are the world's least efficient, and even when it comes to basic products, Latin America is more efficient at almost everything. That's one of the reasons Africa is losing out to Latin America with international aid agencies and Western governments. Africa is also losing out to the Far East, and mineral wealth is one of the only things Africa has to trade with the world.

Nationalisation is often mentioned as a natural solution to this problem, but this has never worked. Without the experience and technology required to run the industry, mining quickly becomes inefficient and dangerous. Corruption and theft destroy what's left of the economy, which has already been ruined by the Dutch Disease.

Even if an operation could be made profitable, the wealth earned will be spread too thinly to alleviate poverty. African government have proven they're not too good at maths. Many seem to believe they can sell their resources and then redistribute their profits and there'll be enough to go around. In socialist fairyland, maybe, but in the real world many other factors come into play to keep this in the realm of fantasy.

Botswana has found the best answer for Africa. They were able to strike a deal with diamond producer De Beers, some details of which can be found here, here and here. It allows the government to extract a fair rent for its resources, and allows the company to reinvest profits without fear of government interference, keeping shareholders happy. This situation provides maximum stability and efficiency, and is a template for the rest of Africa.

Botswana has crucially managed to fend off the worst effects of the Dutch Disease. For now. But it is a stable country with a small population, an exception by African standards. South Africa, in contrast, has a large population and a dwindling manufacturing sector. Its small businesses are being plundered by government, while its public sector employees are being awarded huge pay increases during a recession. This is a recipe for disaster, and nationalisation of the mines may occur in the not too distant future if present demands for it continue.

South Africa has all the right resources, natural and human, to keep at bay the worst effects of the Dutch Disease, and even to diminish it completely. But a government that refuses to learn from history, and from one of its neighbouring economies, is doomed to failure. Determined to strangle the golden goose, and the belief that it can always falls back on its mining industry, has all the hallmarks of impending disaster that is the signature of many African countries.

8 Opinion(s):

Anonymous said...

Thanks Viking, good post.

I notice that the "deals" between the Botswana Gov. and the Rothschilds are limited to certain BEE type companies like Debswana. Still don't see them paying taxes like any regular person would have to. Geuss old Lord Roth wasn't winding me up then when he told me "Rothschilds don't pay taxes"!

Love that one by-product of their created recession is far fewer of the global pop. buying their diamonds. Also love the term "diamond producers", as if they are God, Mother Nature and Science all in one "creating diamonds far below the Earth's surface!

Anonymous said...

The fact that the overflow population from Botswana was able to move to South Africa over the last hundred and fifty years (since Rhodes began using Tswana miners at the Kimberley Koppie), means that there has been practically no population growth within Botswana thus requiring no economic growth!
Botswana is an example of a Nationalist Socialist State!
The leaders of the people of Botswana do NOT tax the Anglo-American mining companies and are therefore allowed to remain independent. If the government of the RSA had agreed to the same deal, RSA would still be independent today! Unfortunately the NP Government was too busy trying to carry the Zulu, Xhosa, North Sotho Populations AS WELL AS the overflow Tswana Population who had been given their own country in South Africa!

If you want to tie an ideology to Botswana, at least label it correctly: Botswana is a Nationalist Socialist Country!
The only ethnic minority are a mixed race people (Bushmen/Bantu) who the Tswanas incorrectly call "Bushmen" or "San", and they are, for the most part,kept in concentration camps. The number of concentration camps grows every time a new mining concession is given to an Anglo-American Mining House, and obviously the people of the area (Tswanas only occupy about 10% of the territory of Botswana) are rounded up into concentation camps!

It's Common Sense really!

Doberman said...

Very good read Viking.

Vanilla Ice said...

Michael Porter didn't seem to address the Law of Comparative Advantage sufficiently well to accommodate Africa. My thinking is that endowment alone is insufficient to create a sustainable comparative advantage.

Viking said...

Dobes,
thanks for the encouraging words as always.

VI,
No, it doesn't seem to apply here! Africa only has two exports really, minerals and tourism, just like Australia when you think about it. Australia shouldn't actually prosper, as it exports raw materials and imports finished goods with the value added elsewhere, usually Japan.
But it does, thanks to the ingenuity of its people -
Africa doesn't have that same kind of thinking, it seems.

Vanilla Ice said...

@Viking .... which is what I was going to say, but didn't want to beat the usual drum.

Viking said...

VI,
It can't be beaten often enough... ANC still don't get it

Vanilla Ice said...

@Viking. Back in the days when I had justed completed an MBA, I was asked to be a part of a project to develop a marketing plan for South Africa. Needless to say I declined because I claimed that South Africa had no comparative advantages.