African mining resource rush – boon or curse?

According to Jan Duvenhage of Standard Bank’s Africa Desk, the “paradox of plenty” and “resource curse thesis” outline the reasons why earnings from resources should be channelled into improving the competitiveness of non-mining tradeables.

“Rents on natural resources divert attention from the process of wealth creation and into rent seeking activity,” says Duvenhage. He adds that rents tend to distract governments from the need to develop human resources. Added to this, according to Duvenhage, is the fact that economic growth per capita is higher in resource poor countries compared to resource abundant countries.

The discovery of natural gas in the 1950s in the Netherlands gave rise to the term Dutch disease, which Duvenhage says can lead to a crowding out factor. “Generally the model describes the de-industrialisation of an economy as the manufacturing sector contracts, which follows the discovery and exploitation of a natural resource.”

Duvenhage believes that the Dutch disease creates an overvaluation of the real exchange rate, resulting in balance of payments deficits, subdued export growth, lower economic growth, higher foreign debt and increasing dependence on aid.

Commodity prices in the long run are another debilitating factor in resource dependent countries, says Duvenhage. Citing the Economist’s industrial commodity price index, he says that real prices have declined in the long term and that sharp rises in commodity prices have always been met by subsequent sharp declines.

“Commodities have a tendency to trend down in the long run,” says Duvenhage, “but the downward trend is, however, is dominated by the volatility of commodity prices.”

Duvenhage also believes that resources are more conducive to being exploited through corruption. He says the politics of the “Big Man” persists whereby those international companies that extract the resources, may pay money to the high ranking officials in the countries where the resources are abundant.

Human capital development is yet another factor that is inversely related to resource abundance. Duvenhage says that natural capital crowds out human capital and that primary production, in the form of resource-based activity, requires low skills.

Overcoming the resource curse can be achieved, according to Duvenhage, through sound economic policy and good governance. He says openness in an economy, central government saving and institutional quality are the soft issues that are critical in avoiding the resources curse.

To quote Duvenhage’s presentation, “Of all the self-mutilating theories adopted by governments, none has lasted as long as the idea that countries grow rich by exploiting what lies under their soil, rather than through the hard work of adding value to goods and services.” ‘ Mineweb.

December 2006
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