What Africa’s Resource Rich Countries Really Need To Focus On

By Anna B. Wroblewska AFKI Original Published: July 22, 2014, 4:45 am
More than half of South Africa's children live in poverty (courtesy: telegraph.co.uk)

“Taken as a group,” the Africa Progress Panel’s 2013 progress report states, “The resource-rich countries have some of the world’s highest child mortality rates: 12 have in excess of 100 child deaths for every 1,000 live births.”  That’s a 10 percent mortality rate.

The report goes on to list the woes that citizens of resource-wealthy nations endure, including above-average maternal mortality rates, high levels of child malnutrition, and of course the inevitable environmental (and thus societal) impact of mining and extraction, including the loss of other natural resources. 

“Africa is one of the few regions that is not using its natural resources for development,” says John Mbaku, professor of economics at Weber State University and a specialist in African development. 

Examples of failures are easy to come by. One is Angola, which since 2002 has enjoyed annual oil revenues of $3 billion to $6 billion and an average economic growth rate of 7 percent. 

It also has one of the world’s highest maternal mortality rates and the eighth-highest under-five mortality rate in the world. “While the country’s elite use oil wealth to buy up overseas assets,” the Africa Progress Panel (APP) report notes, referring to the immense foreign property holdings of the upper class, “Angola’s children go hungry at home: poor nutrition is implicated in one-third of child deaths.”

This is far from an isolated case, but why?  

“There is an enormous amount of money coming from oil royalties. Governments don’t have the capacity to adequately absorb them, so in a corrupt government most of that money will be squandered,” Mbaku says.

Countries that have been exporting oil for decades still have extreme poverty “because they haven’t been able to provide themselves with institutions that prevent government officials from squandering the money obtained from selling those natural resources.” 

The APP report tends to support the notion. “What counts is well-designed public policy, backed up by government commitment.” 

The question of how this is supposed to look on the ground doesn’t seem so simple, however. 

“You know, solutions can be as complex as problems,” says Dr. Achieng Ojwang, program manager for the UN Global Compact Network in South Africa. She’s speaking about the South African mining sector, which with numerous strikes and the looming memory of Marikana faces a whole set of its own issues.

But indeed, it seems there are no simple answers, especially considering the diversity of climates, problems, and economic situations across the continent. But the keys perhaps lie in some combination of transparency, investment in value-added manufacturing, and an attention to, well, sharing the spoils. 

Transparency in institutions 

“You need to force the government to be held accountable. If you allow somebody, they will do the wrong thing — especially if it’s personally beneficial,” says Mbaku. 

Nigeria is an interesting case study. The APP notes that the nation is moving towards greater transparency in its oil industry reporting, but that these changes have been far from comprehensive. “Many of the gaps can be traced back to the Nigerian National Petroleum Corporation (NNPC). The NNPC dominates the oil sector, yet it issues no annual reports… [which] has a profoundly malign effect on public financing.” 

In other words, transparency is a work in progress.

But transparency is not just a government problem, though that’s an obvious starting point in understanding the level and movements of extraction revenues. There is also the issue of corporate complexity: “Petroleum and mining companies channel their financial and trade activity in Africa through local subsidiaries, affiliates, and a web of offshore companies,” says the APP. 

Thus the size and complexity of these companies, combined with weak regulatory structures, facilitates strategies around tax planning, tax evasion, and corruption. Notably, “It also leads in many cases to the undervaluation of Africa’s natural resources — a practice that drains some of Africa’s poorest nations of desperately needed revenues.” 

So, just as governments can hide behind opaque reporting, companies can hide behind weak regulatory regimes — to the benefit of companies and individuals in government, and to the detriment of everyone else.  

One possible route might be through greater investment in local refining and processing. 

The APP says that “A study by the Southern African Development Community… found that the value of processed products was typically 400 times greater than the equivalent unit value (by weight) of the raw material.”

In other words, selling processed natural resources is much more lucrative per pound than selling the raw material itself. The value-added sector could thus be a great additional source of income and employment to the extraction industries. 

Investment in such activities could also add a layer of reporting and structure to extraction. After all, one would think that a manufacturer is rather likely to know how much raw material it is processing. It won’t eliminate corruption, but perhaps it could act as a brake. 

Local manufacturing could also help boost real, sustainable growth. The APP notes that “African exporters typically capture only a small share of the final value of mineral exports… without processing industries that add value, mining creates fewer jobs, produces less revenue, and contributes less to GDP growth.” 

While external investors like private equity funds tend to avoid the extraction industries, Graham Stokoe, Africa private equity leader at Ernst & Young, sees an immense need. “We don’t have enough manufacturing and value-adding, which is a problem for Africa as a whole.”

Perhaps by making such investments, African governments can not just encourage growth and revenue enhancement, but take advantage of a chance to improve transparency and move wealth into the private sector. 

It would surely be far from a simple road with a one-size-fits all solution, but perhaps there could be enormous benefits when combined with the right policies and institutions. 

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