(E) AfricanBank 2007 Ch4 PDF

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CHAPTER 4
Africa’s Natural Resources:
The Paradox of Plenty
Introduction could be used to pursue this goal.
Africa is blessed with vast natural resources Unfortunately, in many African countries
and rich environments (see Chapters 2 and natural resource booms have only to a
3). It is generously endowed with pro- limited extent set off a dynamic growth
ductive land and with valuable natural process (see Box 4.1). This is largely due to
resources, which include renewable failure to implement the right growth-
resources (such as water, forestry, and promotion policies and to ensure that strong
fisheries) and non-renewable resources institutions are in place — suggesting that it
(minerals, coal, gas, and oil). Natural is very difficult to make the big push
resources dominate many national towards diversification and development of
economies and are central to the livelihoods manufacturing in the resource-rich parts of
of the poor rural majority. These resources Africa. The danger is that much of Africa is
are the basis of income and subsistence for not industrialized and is stagnating in a
large segments of Africa’s population and staple trap, dependent on exports of a few
constitute a principal source of public mineral resources.1 In particular, oil resour-
revenue and national wealth. ces and other point resource-dependency
Under the right circumstances, a natural could, with the wrong policies, lead to this
resource boom can be an important catalyst scenario.
for growth, development, and the transition The failure of natural resource wealth to
from cottage industry to factory production. lead to the expected economic growth and
Indeed, with the right approach natural development has been attributed to several
resources can be used to make the transfor- factors, including
mation from a low-value economy that relies • the so-called “Dutch Disease” — the
on exports of primary commodities to one syndrome of rising real exchange
with a substantial labor-intensive manu- rates and wages driving out pre-
facturing base. existing export and import-competing
It is commonly agreed that one of the industries;
avenues for getting many of the poorest • rent-seeking by elites and others that
African countries out of the low-income trap otherwise could put their energies
is to provide them with a big demand push into profit-making activities;
that will generate enough demand
complementarities to expand the size of
markets and recover the fixed costs of 1 See Auty (2001); Auty (2004); and Ploeg (2007)
industrialization. Natural resource wealth for detailed discussion of these aspects

Africa’s Natural Resources: The Paradox of Plenty 97
• volatility of prices and the “asymmetry central role of government behavior. The
of adjustment” (it is easier to ramp up key issue here is how governments
public expenditure than to wind it administer resource wealth and how they
down again); use natural resource revenues.
• inflexibility in labor, product, and Historical accounts indicate that natural
asset markets; and resource booms do not always worsen
• tensions between oil-producing and economic performance, and can indeed
non-oil producing regions within catalyze economic transformation. A resource
countries. boom can lead to growth expansion, as
demonstrated in the case of Europe (indus-
What is the Resource Curse? trialization), the “new economies” (Australia,
The resource curse refers to a situation Canada and the United States), and tropical
whereby a country has an export-driven subsistence agricultural economies without
natural resources sector that generates large manufacturing. Today, resource-rich coun-
revenues for government but leads tries like the United Arab Emirates, Kuwait,
paradoxically to economic stagnation and and Qatar are using revenues from their
political instability.2 It is commonly used resource wealth to construct mega-cities out
to describe the negative development of desert land, thereby also generating con-
outcomes associated with non-renewable siderable down- and side-stream economic
extractive resources (petroleum and other activities and additional incomes. These
minerals).3 Essentially, the resource curse countries have also undertaken large-scale
refers to the inverse association between foreign investments, which not only promote
development and natural resource economic development, but also foster inter-
abundance. It has often been asserted that generational equity. The key point is that the
petroleum, in particular, brings trouble–– often referred to “natural resource curse” can
waste, corruption, consumption, debt over- be avoided with the right knowledge,
hang, deterioration, falling apart of public institutions and policies.
services, wars, and other forms of conflicts,
among others. Thus, natural resource- Key Questions
abundant countries tend to grow slower Drawing on an appropriate theoretical
than expected — considering their resource framework, and on the logic presented in
wealth — and, in many cases, actually grow the previous section, this chapter examines
slower than resource-scarce countries. the African evidence of the paradox of
A common thread in explaining the plenty and the “resource curse” with a view
resource curse — along with the other broad to exploring the following issues and
explanations provided above — is the questions:
• Is natural resource abundance in
Africa a curse or a blessing?
2
Overseas Development Institute (ODI) (2006) • Has the management of natural
3
Catholic Relief Services (2003) resources really stunted the growth
98 African Development Report 2007
Box 4.1: Cross-Country Evidence of the Natural Resource Curse
There are, indeed, resource-rich countries that benefit from their natural wealth, but overall, the economies
of many resource-rich countries are in a surprisingly poor state. History clearly shows that natural resource
wealth may harm economic performance and make citizens worse off. There are well-known examples of
countries whose abundant natural resources have been accompanied by bad macroeconomic performance
and growing inequality among its citizens. A dramatic example is Nigeria.
Nigeria has been a major oil exporter since 1965. Its oil revenues per capita have increased tenfold in
35 years, but its income per capita has stagnated since independence in 1960, making Nigeria one of the
15 poorest countries in the world. During this period, the country’s poverty headcount ratios have almost
tripled, while the rich have grabbed a much larger part of income. Huge oil exports have not benefited the
average Nigerian. Despite the rapid accumulation of physical capital, Nigeria has suffered a declining
Total Factor Productivity (TFP), and capacity utilization of manufacturing hovers around a third. Successive
military dictatorships have plundered oil wealth and many suspect transfers of funds (of undisclosed
amounts) have occurred. Oil wealth has fundamentally altered politics and governance in Nigeria. Other oil
exporters such as Iran, Venezuela, Libya, Iraq, Kuwait, and Qatar have also experienced negative growth
during the last few decades and OPEC as a whole has seen a decline in Gross National Product (GNP) per
capita.
In contrast, Botswana has managed to beat the resource curse. Forty percent of Botswana’s Gross
Domestic Product (GDP) stems from diamonds. It has the second highest public expenditure on education
and has enjoyed the world’s highest growth rate since 1965. Its GDP per capita is ten times that of Nigeria.
The Botswana experience is noteworthy, since the country started its post-colonial experience with minimal
investments and substantial inequality.
The United Arab Emirates also seems to have turned the resource curse into a blessing, The UAE
accounts for close to 10 percent of the world’s crude oil and 4 percent of the world’s natural gas reserves.
The UAE’s government debt is very small, inflation is low, and hydrocarbon wealth has been used to
modernize infrastructure, create jobs, and establish a generous welfare system. Major strides in life
expectancy and literacy have been made through universal and free access to education and health care.
In anticipation of the depletion of its natural reserves, Dubai has diversified into light manufacturing,
telecommunications, finance, and tourism, and the other emirates have focused on small-scale
manufacturing, agriculture, quarrying, cement, and shipping services. By diversifying, the UAE is investing
in sustainable growth.
Sources: Sala-i-Martin and Subramanian (2003); van der Ploeg (2007)
and development prospects of many countries to utilize their natural

resource-rich African economies? resources to promote develop-
• How does the volatility in the export ment and prevent other resource-
value of resources contribute to abundant countries from doing the
volatility of growth in GDP per capita same?
and to growth and development in • How does access or non-access to the
general? coast (that is, being a landlocked
• What political and social factors country or not) affect development
enable some resource-abundant parameters?
• How, or why, has the potential High Export Dependence in Africa’s

resource curse been avoided in some Resource-Rich Countries
cases and how can it be overcome in Africa’s resource-rich countries continue to
the future? experience high dependence on natural
resource exports for both foreign exchange
Stylized Features of Africa’s and revenues (see Appendix Table 4B). For
Resource-Rich Economies example, of the total increase in export
In most of the analyses that follow, African values in African countries between 2000 and
countries are categorized as: 2005, fuels accounted for 65 percent;
(1) Resource-rich (oil and mineral manufactures, 24 percent; and food and raw
exporters); materials about 5 percent each. Since
(2) Resource-scarce; manufactures include processed natural
(3) Land-locked (resource-rich and resources, Africa’s export boom seems to be
resource-scarce); largely driven by natural resources. Since
(4) Coastal (resource-rich and resource- 1990, the share of fuels in the total exports of
scarce), and African oil-exporting countries has increased
(5) The SANE group (Africa’s four larg- by about 12 percentage points, to almost 90
est economies: South Africa, Algeria, percent. The dependence of African non-fuel
Nigeria and Egypt). exports on agricultural commodities has
declined, while exports of certain resource-
A complete listing is presented in Appendix linked manufacturing products have increa-
4A. Africa has 22 resource-rich countries, sed. In these countries, manufactured exports
defined in the analysis framework for this accounted for nearly 60 percent of all non-
Report as countries where fuel and mineral fuel exports in 2005, up from 37 percent in
exports contribute over 20 percent to the 1985. Within manufacturing, the major
GDP. These countries represented slightly categories are precious stones (the share of
more than two-thirds of Africa’s GDP and which has more than trebled since 1985); and
half of its population in 2006 (Table 4.1). silver and platinum (the share of which has
Half of these countries are oil exporters, nearly doubled). Iron and aluminum are the
while the other half are mineral exporters. It other major product categories.4
is worth noting that only four of the
resource-rich countries are landlocked and High Fiscal Dependence in Africa’s
that three of Africa’s four largest economies Resource-Rich Countries, but
that make up the SANE (South Africa, Improving Fiscal Performance
Algeria, and Nigeria) are both resource-rich Before the current resource boom, resource-
and coastal countries. In contrast, there are rich African countries had been challenged to
31 resource-scarce countries, accounting for reap the full benefits of their resource
30 percent and 48 percent of regional GDP endowments. Owing to boom-bust cycles,
and population, respectively. One-third of
these countries are land-locked. 4 IMF (2006)
Table 4.1: Macroeconomic Indicators
2006, or most recent year with available data
Population
Nominal GDP GDP($ billions FDI ($ millions)
PPP) Annual
Per GDP Share
Capita Area Million % % % growth of %
Income (Km2) of Pop share Billions share Billions share Rate Africa share
(US$) of US$ of US$ of 81– Export Millions of
Africa Africa Africa 2006 US$ Africa
Africa 838 30,323 924.3 100.0 1079.4 100.0 1886.5 100.0 3.0 100.0 30669 100.0
Resource-
rich countries 991 20,975 482.5 52.2 750.9 69.6 1137.8 60.3 2.4 80.5 19587 63.9
Oil-exporting
countries 935 11,537 278.2 30.1 431.0 39.9 519.6 27.5 2.4 55.1 10503 34.2
Mineral-
exporting
countries 1067 9,438 204.3 22.1 319.9 29.6 618.2 32.8 2.4 25.4 9084 29.6
Resource-
scarce,
countries 671 9,347 441.8 47.8 328.5 30.4 748.7 39.7 3.8 19.5 11082 36.1
Landlocked
countries 264 7,979 225.0 24.3 82.5 7.6 202.2 10.7 3.3 6.7 2330 7.6
Resource-rich,
landlocked
countries 588 3,241 27.7 3.0 29.0 2.7 46.6 2.5 4.5 3.9 1316 4.3
Resource-
scarce, land-
locked
countries 208 4,690 194.4 21.0 49.3 4.6 146.1 7.7 2.9 2.0 981 3.2
Coastal
countries 1023 22,344 699.3 75.7 996.9 92.4 1684.3 89.3 2.8 93.3 28339 92.4
Resource-rich
coastal
countries 1016 17,734 454.8 49.2 721.9 66.9 1091.2 57.8 2.3 76.7 18271 59.6
Resource-
scarce
coastal
countries 1132 4,017 209.4 22.7 251.9 23.3 561.2 29.7 4.1 15.6 10047 32.8
SANE 1482 5,528 290.8 31.5 593.7 55.0 1072.0 56.8 3.0 59.4 16239 52.9
Source: AfDB Statistics Department, Computed from AfDB Database, 2007.

weak institutions, poor public financial The available data shows that in general
management, and weak oversight, many government expenditures have risen in
resource-rich African countries were saddled recent years, but not at nearly the same rate
with unsustainable amounts of external debt as natural resource revenues. Before the
as income declined, risks of violent conflicts current boom in 2002, non-oil deficits
increased, and social indicators worsened. exceeded oil revenues in many resource-
However, a new trend seems to have emer- rich African countries (such as in Angola,
ged with the onset of the current resource Congo, and Nigeria); since then, the ratio of
boom (especially with the meteoric rise of oil non-oil fiscal deficits to oil revenues has
prices since 2002). There are, indeed, improved noticeably (Table 4.2). This
encouraging signs that resource-rich African reflects both the rapid rise in oil revenues
exporters have become more prudent in the and the narrowing of non-oil fiscal balances.
use of natural resource revenues than in The relatively cautious fiscal policies in
previous booms. many resource-rich African countries are
In the past five years, buoyant oil, gas, helping these countries reduce their macro-
and mineral price increases have enabled economic vulnerabilities. In other words, a
resource-rich African countries to increase good number of countries have used natural
their natural resource exports and thus their resource revenues to strengthen their
revenues substantially. These increased external positions by reducing external debt
revenues are a significant source of fiscal (especially Gabon and Nigeria); accumu-
income for resource-rich African countries, lating external reserves (Angola, Congo,
demonstrating the importance of natural Equatorial Guinea, Gabon, and Nigeria); and
resources in output growth and capacity to reducing domestic and external arrears
generate export revenues. For example, oil (Angola, Equatorial Guinea, Gabon, and
revenues account for more than half of all Nigeria). Cameroon, Angola and Congo
revenues in Angola, Congo, Equatorial have also improved their non-oil primary
Guinea, Gabon, and Nigeria, and oil reven- fiscal balances.6
ues increased in USD terms about 31⁄2 times
between 2002 and 2006. In addition to rev- Concentration of Foreign Direct
enue upsurge, production also expanded Investment in Resource-Rich Countries
significantly, by 45 percent on average, One major concern about Foreign Direct
especially in Angola, Chad, and Equatorial Investment (FDI) inflows to Africa is that the
Guinea.5 Thus, oil-exporting countries, in overwhelming majority of these go into
particular, are highly fiscal dependent, natural resource exploitation. Among the
implying that if the current boom cycle dev- top recipient countries, most of the flows to
elops — like in the past — to a boom-bust Angola, Algeria, Sudan, Nigeria, and Gabon
cycle, prudent fiscal discipline will be went to oil and gas projects. Similarly, over
required. 50 percent of the flows to South Africa and
5 Ibid. 6 IMF (2007)

Table 4.2: Fiscal Balance, Investment Rates, and Terms of Trade Changes (in %)
1981–1985 2001–2005
FD INV TOT FD INV TOT
1- Resource-rich countries –3.6 22.6 1.6 –0.2 22.6 6.3

Oil-exporting countries –4.4 24.5 –0.4 3.3 24.8 8.7
Mineral-exporting countries –2.9 20.8 3.5 –3.6 20.3 3.9
2- Resource-scarce, countries –7.9 21.9 3.2 –4.8 20.0 –1.1
3- Landlocked countries –4.5 18.1 4.4 –3.2 20.2 1.1
Resource- rich landlocked countries 0.2 18.0 3.8 –2.7 27.5 6.1
Resource-scarce, landlocked
countries –6.1 14.6 5.9 –3.9 15.2 –1.3
4- Coastal countries –6.8 24.0 1.8 –2.7 21.5 2.3
Resource-rich coastal countries –4.5 23.6 1.0 0.4 21.4 6.3
Resource-scarce coastal countries –9.3 24.4 2.2 –6.0 21.9 –1.0
5- Africa –6.1 22.2 2.7 –2.8 21.1 2.1
SANE –7.3 27.7 –3.4 –0.8 22.1 7.3
FD= Fiscal Deficit-GDP Ratio; INV= Domestic Investment Rate; and TOT=Change in Terms of Trade.
Source: AfDB Statistical Department. Computed from IMF (2007), and World Bank (2007b) data.
Tanzania went into gold mining. Indeed, the favorable macroeconomic conditions: robust
primary sector was the largest recipient of economic growth, moderate inflation,
accumulated FDI flows to Africa, with a 55 manageable fiscal deficits and external debt,
percent share for the 1996–2000 period.7 As and external current account surpluses. The
shown in Table 4.1, by 2006, about 64 pro-cyclical policies they followed during the
percent of FDI was concentrated in oil booms of the 1970s and 1980s were
resource-rich countries in Africa. intended to use the oil bonanza for economic
Furthermore, of the total FDI that came into and social development and to encourage
the continent during that year, 92 percent economic diversification. Unfortunately,
went to coastal countries, with resource-rich these objectives were not achieved since the
countries dominating at about 60 percent. actual results were economic imbalances that
caused major distress when oil prices
Growth Performance of Africa’s plunged in the 1980s and stayed low for over
Resource-Rich Countries is Poor (com- a decade. The same was true of most other
pared to Resource-scarce Countries) mineral (metals and non-metals) exporters,
Before the first oil shock on the 1970s, the with exceptions like Botswana.8
average oil-rich African country enjoyed
7 See Anyanwu (2006) 8

IMF (2006)
Indeed, as Figure 4.1 shows, resource- per capita GDP of oil-rich African countries
scarce African countries out-performed has remained resolutely stuck below
resource-rich countries in terms of real per US$1000 for more than 20 years — first
capita GDP growth during the 1981 to 2001 dropping to US$800 in the mid 90’s before
period, with a reversal occurring thereafter, rising again. On the contrary, resource-
reflecting the current boom. It should also scarce countries were able to achieve real
be noted that there were three major growth during nearly the whole 1980–2005
collapses in real per capita GDP growth period, albeit at a modest rate, and have
during the period — in 1983, 1985, and 1993 thus significantly narrowed the gap with
— with the latter being the worst. resource-rich countries. Nevertheless, it is
The GDP per capita of oil- and mineral- important to stress that resource-rich
rich countries were considerably higher than countries in Africa — as measured by GDP
that of resource-scarce countries in 1980, per capita — are much better off than
and it still is today (Figure 4.2), but the real resource-scarce countries. Besides the better
Figure 4.1: Real GDP per Capita Growth — Resource-Rich vs. Resource-Scarce Countries
5
4.5
4
3.5
3
2.5
2
1.5
1
In percent (%)
0.5
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
–0.5
–1
–1.5
–2
–2.5
–3
–3.5
–4
–4.5
–5
–5.5
Africa
Resource-Scarce countries
Resource Rich countries

Figure 4.2: Natural Resource Abundance and Real GDP per Capita (at year 2000; US$)
1600
1500
1400
1300
1200
2000 US$ per capita
1100
1000
900
800
700
600
500
400
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Africa Resource Rich countries
Resource-Scarce countries SANE
growth experienced by resource-rich • Resource-rich African countries are

countries in the 1960s and 1970s, another richer than their resource-scarce
very significant factor, as outlined earlier, peers. The gap narrowed during the
is geography (many resource-scarce 1980–2000 period but is widening
countries are further disfavored by being again in conjunction with the recent
landlocked). resource boom.
• However, cumulatively, resource-rich
Analysis — Evidence of Stylized countries only experienced an aver-
Features age growth rate of 2.4 percent from
Based on the data, tables and figures 1981–2006, considerably lower than
presented, the following trends and conclu- the average of 3.8 percent for
sions can be drawn: resource-scarce countries.
• Resource-scarce coastal countries, in 23 diverse African countries reveal some

which have almost a quarter of marked differences (Figure 4.4). Countries
Africa’s population, have experienced such as Egypt, Tunisia and Mauritius have
an average growth rate of 4.1 percent, done very well — especially compared with
much higher than the 2.3 percent countries such as Madagascar, Zambia,
recorded by resource-rich coastal Ghana, Rwanda and Nigeria. It is thus noted
countries. These findings indicate that that the best performing countries are all
being resource-rich does not make a relatively resource-scarce.
significant difference for coastal coun-
tries. Indeed, resource-scarce coastal Resource-Rich African Countries Have
countries have a somewhat higher Negative Genuine Saving
GDP per capita. One of the features of many countries
• The four SANE countries are by far the endowed with abundant natural resources is
wealthiest in terms of GDP and have that they generally save less than what is
sustained a significant growth rate expected, considering the rents obtained
since 1995. from extracting and selling natural resour-
• Land-locked resource-scarce countries ces. Presumably, if the countries saved
are the poorest, by a significant factor. more, they would grow at a sustainable and
These countries are five times poorer faster rate. To gain a better understanding of
than resource-rich countries, and sustainable development, it is useful to
almost six times poorer than resource- examine the concept of genuine saving.
scarce coastal countries. Furthermore, Genuine saving is defined as public and
the growth rate in this group of private saving at home and abroad, net of
countries only averaged 2.5 percent depreciation, plus current spending on
from 1981–2006. In other words, the education to capture changes in intangible
most important of all factors is whether human capital, minus depletion of natural
a country is land-locked or not, — exhaustible and renewable resources,
more important than being resource- minus damage of stock pollutants (CO2 and
rich or not, or than any other aspect particulate matter). Genuine saving, thus
reviewed in this analysis. defined, corresponds to an increase in the
wealth of the nation. The so-called
Another feature that deserves attention is the Hartwick rule demands that any depletion
fact that over a long-term period, both of natural resources or damage done by
accumulation and factor productivity are stock pollutants must be compensated
significantly higher in resource-scarce for by increases in non-human and/or
countries than in resource-rich countries human capital. This rule of zero genuine
(see Figure 4.3). saving can be seen as a rule of thumb or
Further analysis of the pace of pro- motivated by max-min egalitarianism. It
ductivity expansion (rate of growth in labor requires that resource-rich countries adopt a
productivity versus rate of technical progress) strategy for transforming their natural
Figure 4.3: Sources of Growth in Output per Worker
1.0
0.9
SANE
0.8
0.5
non
0.6 Resource
Rich
0.4
Landlocked
countries 0.3
0.4 non 0.4
0.3 0.3 Resource SANE 0.2 0.2
Resource Resource Rich Landlocked non
Rich Rich countries Resource
Rich
0.2
0.0
0.0
Resource –0.1
Rich –0.1
SANE
Landlocked
–0.2 countries
Physical Capital Education Factor productivity
Source: Bosworth and Collins (2003)
resource wealth into other forms of head. They thus need to save more than their
productive capital.9 exhaustible resource rents — but only rarely
Resource-rich countries in Africa manage to. Figure 4.5 paints a gloomy
therefore need credible and transparent rules picture of resource-rich countries (worldwide
for sustainable consumption and investment analysis in this case). Countries with a large
to ensure that exhaustible natural resources percentage of mineral and energy rents (of
are gradually transformed into productive Gross National Income, GNI) typically have
assets at home or abroad. Furthermore, negative genuine saving rates. This means
countries with high population growth rates that many resource-rich countries become
need positive rather than zero genuine saving poorer each year despite their abundant
rates to maintain constant consumption per natural resources10. Figure 4.6 suggests that
9 Se i.e. World Bank (2006c) and Ploeg (2007) 10 Ibid.

Fig 4.4: The Pace of Expansion in Productivity
3.00
Egypt Mauritius
5.30 Tunisia
5.24 4.97
Rate of Growth in Labour Productivity (Output per Worker, in %)
Malawi Morocco
1.50 4.09
3.84
Mozambique
Cameroon 3.40 4.31 3.24 Mali
Mauritius Kenya
Ethiopia 2.86 3.83 Zimbabwe
Uganda 3.69 3.76
Nigeria 3.34 Tanzania
3.05 3.57 South Africa
Algeria 3.18
3.82 2.07 Sierra Leone
Rwanda 2.80 Cote d’Ivoire
2.65 Senegal
0.00
–1.50 –1.00 2.59 0.00 0.50 1.00 1.50 2.00
Ghana
1.69
1.49
Zambia Bubble Size: Average rate of growth in Output
Madagascar (1960–2003)
–1.50
Rate of Technical Progress (Total Factor Productivity, in %)
Source: ADB Development Research Department Staff with data from Bosworth and Collins (2003).
this may explain why a country such as if the Hartwick rule were applied. Effectively,
Venezuela has negative economic growth for countries with negative genuine saving,
rates, while countries such as Botswana and the erosion of their natural resource wealth
Ghana, which have positive genuine saving exceeds their accumulation of other assets.
rates, enjoy substantial growth rates. Highly They effectively squander their natural
resource-dependent Nigeria and Angola have resources at the expense of future
genuine saving rates of minus 30 percent, generations without investing in other
thereby impoverishing future generations on forms of intangible or productive wealth.
a massive scale. This is an unfortunate feature of several
The results suggest that resource-rich resource-rich African economies (Figure
countries with negative genuine saving, such 4.7).
as Nigeria, would experience increases in
productive capital by a factor of five or four,
Figure 4.5: Negative Genuine Saving in Resource-Rich Countries
40
30
20
Genuine saving % GNI
10
–10
–20
–30
–40
–50
0 10 20 30 40 50 60 70
Mineral and energy rents % GNI
Source: World Bank (2006c), Where is the Wealth of Nations?
Low Human Capital Development and capital development would, in the medium-
Worsened Income Inequality long term at least, be reflected in a low basic
One of the dilemmas of natural resource human development status. The United
abundance is that it may pervasively cause a Nations Human Development Index (HDI),
country to neglect human capital develop- a comparative measure of life expectancy,
ment — the same basic causes and effects literacy, education, and standard of living in
outlined above in reference to negative countries worldwide, provides a standard
genuine saving. High levels of natural means of measuring human well-being and
resource revenues can thus divert attention country development status. As reported by
from diversification and wealth creation, the UNDP in its 2006 Human Development
including from institutional and human Report, Africa dominates the low end of the
development.11 The logical expression of HDI (29 of the 31 countries with a low
such a potential correlation between human development status). Only the Island
resource abundance and neglect of human States of Seychelles and Mauritius qualify as
having a high human development status.
11 Ibid. The remaining 22 countries, including all
Figure 4.6: Genuine Saving Rates versus Economic Growth, 2003
40
China
Botswana
30
Ghana
20
Central
African
10 Ethiopia
Genuine saving % GDP
Republic
–10
–20
Venezuela, R. B. de
Angola
Nigeria
–30
–40 Azerbaijan
Uzbekistan
–50
–10 –5 0 5 10 15
GDP growth % year
Source: World Bank (2006c), Where is the Wealth of Nations?
the North African Arab states, have a middle (average 0.42). There is no difference
level human development. It is also worth between resource-rich and resource-scarce
noting that oil-rich Norway has the highest countries (0.51), but it should be noted that
HDI among all countries in the world.12 oil-rich countries are doing considerably
A deeper analysis of the HDI data (Table better in this aspect than primarily mineral-
4.3) indicates that the primary factor of the rich countries (0.55 vs. 0.46).
human development status seems to be Another important aspect, frequently
geography and not resource abundance — highlighted as problematic in resource-rich
that is, whether a country is landlocked or countries, is increased income inequality.
not — as landlocked countries as a group Oil, gas, and mining industries are often
score very low in this index calculation characterized by their “enclave” nature, with
few forward and backward linkages into the
12
UNDP (2006) — http://hdr.undp.org/hdr2006/ economy. During exploitation and produc-
statistics/documents/hdi2004.pdf tion, such industries employ only a relatively
Figure 4.7: Counterfactual Exercise — Imposing the Hartwick Rule
400
Low High
Nigeria
% increase in produced capital if standard Hartwick rule followed
350 resource resource

dependence dependence
Zambia
300
Venezuela, R. B. de
250
200
Trinidad and Tobago
150 Guyana
Bolivia Mauritania
100 Ecuador
Gabon
South Africa
Jamaica Algeria Congo, Rep. of Low
50
Ghana Peru capital
Zimbabwe Mexico accum.
0
Chile High-
Egypt, Arab Rep. of Indonesia
India capital
–50
China accum.
Brazil Malaysia
Thailand
–100
Korea, Rep. of
–150
0 5 10 15 20 25 30 35
% share of resource rents in GDP (average 1970–2000)
Source: AfDB Development Research Department, with data from Bosworth and Collins (2003)
small number of highly-skilled, well-paid resources with the interests of the rich.13 As
workers, and generally import the majority shown in Table 4.3, income inequality in
of inputs. Furthermore, there is a consider- resource-rich African countries is, indeed,
able risk that public expenditure during a noticeably higher (Gini Coefficient of 31.1)
resource boom may exacerbate inequality, than in resource-scarce countries (Gini
for example, concentrating expenditure in Coefficient of 26.8). Furthermore, it is worth
the formal sector in towns and cities, noting that income inequality is compara-
skewing distribution (not benefiting rural tively higher in mineral-exporting countries,
households), and prioritizing the interests of in landlocked countries, and in the SANE
the elites and wealthier classes. Because of country group.
these tendencies, society tends to identify
the production and export of natural 13
Overseas Development Institute (2006)
Table 4.3: Resource Abundance and Social Performance
Human Development Index Income Inequality

(HDI) (Scale 0–1; Niger (GINI Coefficient Index;
lowest with 0.31; Seychelles scale 0–100)*
highest with 0.84)
1- Resource-rich countries 0.51 31.1

Oil-exporting countries 0.55 15.3
Mineral-exporting countries 0.46 46.8
2- Resource-scarce countries 0.51 26.8
3- Landlocked countries 0.42 45.0
Resource-rich landlocked countries 0.42 41.6
Resource-scarce landlocked countries 0.40 42.8
4- Coastal countries 0.55 22.1
Resource-rich coastal countries 0.52 28.7
Resource-scarce coastal countries 0.58 14.7
5- Africa 0.51 45.9
SANE 0.63 42.8
* For the GINI Co-efficient Index; 0 corresponds to perfect equality
Sources: UNDP (2006), Human Development Report 2006; World Bank (2006d)
Stylized Features for Africa — Summary and used for the future, especially now that
The features and issues described and a new boom has gained traction in Africa.
analyzed above further illustrate that The following sections further explore these
resource-rich African countries have not fully issues, taking into account relevant
exploited the true (potential) benefits of theoretical aspects and empirical data.
having significant natural resource wealth. Explaining the Resource Curse:
However, geographic factors — most import- Main Causes, Drivers, and
antly, whether a country is landlocked or not Sustainers
— also play a very significant role in the
present-day status as landlocked countries There is a large body of literature on the
perform worse in nearly all aspects analyzed. reasons why countries may suffer a “curse”
Overall, the 20-year period from rather than a “blessing” following large
1980–2000, in particular, was disappointing inflows of oil, gas, or mineral revenues.
for resource-rich countries in Africa. Hard Some authors14 cite three exogenous causes:
lessons have been learned from the past (1) structuralist policies, (2) Dutch Disease,
resource boom and bust cycles and from and (3) export-based theory; and three
two decades of very disappointing growth
rates. These lessons need to be reviewed 14 For example, Auty (2001)
endogenous causes: (1) policy failures, ments more risky, while public spending
(2) inefficient investment, and (3) rent decisions tend to become compromised,
seeking. This Report further examines these with extravagant commitments made during
causes, which, for analytical purposes, are booms that subsequently lead to drastic cuts
grouped as follows15: in vital expenditures during troughs.17
• revenue and macroeconomic volatility; Evidence from recent years shows that
• Dutch Disease and crowding out both oil and non-fuel commodity (including
effects; metals) prices have experienced extreme
• the role of the state; and volatility. Indeed, resource-rich African
• socio-cultural and political impacts. countries have experienced repeated boom-
bust cycles over the past decades (as
Revenue and Macroeconomic Volatility demonstrated in Figure 4.8). Despite recent
Commodity booms are typically not increases, the prices of most non-fuel
permanent and prices tend to show at least commodities remain below their historical
some degree of mean reversion over time. peaks in real terms. Over the past five
As a result, countries that have experienced decades, commodity prices have fallen
one or more commodity export price booms relative to consumer prices at the rate of
will typically also have faced high volatility about 1.6 percent a year18. This downward
of export prices. In many cases, resource trend is usually attributed to large productivity
booms have encouraged less prudent fiscal gains in the agricultural and metals sectors
policies with limited control and inflation, relative to other parts of the economy.
further hampering growth, equity, and the However, compared with the prices of
alleviation of poverty.16 The majority of manufactured goods, commodity prices
resource-rich countries tend to have limited stopped falling in the 1990s as the growing
transparency in the management of natural globalization of the manufacturing sector
resource revenues, leading to the creation of slowed producer price inflation. Indeed,
parallel budgets. As a result, price stability metal prices increased by over 75 percent
and budgetary discipline suffer. Thus, even during previous cyclical upturns, reflecting
as natural resource money is “pouring in”, long gestation lags for increasing capacity in
countries often have fiscal deficits, and, the industry and the low price elasticity of
sometimes, double-digit inflation. Such demand. Over the past five years, commodity
volatility can be detrimental to growth in prices have evolved very differently across
several respects: It is harmful to investment, various subgroups of the non-fuel index. For
income distribution, educational attainment example, the prices of some non-fuel
and poverty alleviation. It also hampers commodities have increased more than oil
exchange rate unification and trade prices — the metals index has risen by 180
liberalization. Furthermore, it makes invest- percent in real terms since 2002, while oil
17
15 See Stevens (2003) Ibid.
18
16 Ploeg (2007) See Stevens (2003)
Figure 4.8 Recent Volatility in Commodity Prices

(2002 = 100; monthly data prices deflated by U.S. CPI)
Metals 300
Oil 250
200
150
Food
100
Agricultural 50
Raw Materials
0
1986 88 90 92 94 96 98 2000 02 04 Jul.
2006
Source: AfDB Statistical Department — Computed from IMF (2007) data.
prices have increased by 157 percent. The — following a period of earlier price decli-
prices of food and agricultural raw materials nes. Some analysts have also suggested that
increased much less (by 20 and 4 percent, the intensity of the price upswing in this cycle
respectively). As a result, metals have contri- is amplified by new factors — the increasing
buted almost 90 percent to the cumulative 60 weight of rapidly growing emerging markets
percent real increase in the non-fuel (most notably China and India) in the world
commodity index since 2002.19 economy and the investment activity of
Part of the unusually strong run-up in financial investors in commodity markets.
metal prices experienced in recent years can
be attributed to the low investment in the Dutch Disease and Crowding Out
metals sector in the late 1990s and early 2000s Effects
Originally, Dutch Disease was used to refer
19 IMF (2006) to the appreciation of the real exchange rate:
the result of inflation arising from the first dimension of this detrimental develop-
spending of revenues, leading to an ment occurs when subsidies used to protect
overheated economy and an appreciation of non-resource tradable sectors — that are
the nominal exchange rate as the domestic weakened by the boom — aggravate the
currency attracted higher demand. This sector’s problems and eventually become
usually leads to a contraction in the non-oil, unsustainable. A second dimension is the
gas, or mineral traded sector. Some scholars “leap frog effect” which occurs when
use the “Dutch Disease concept” in a narrow governments miss the labor-intensive phase
sense to explain the failure of resource- of industrialization and move straight to a
abundant economies to promote a competi- heavy, capital intensive phase with negative
tive manufacturing sector. However, in most effects for the tradable sector. A third
cases, Dutch Disease has taken on a much dimension relates to the issue of learning by
wider meaning and is usually meant to doing in the context of Dutch Disease22,
encompass all of the negative macro- which assumes that because learning by
economic effects associated with “resource doing benefits only accrue from tradable
curses”.20 sectors, a contraction in these sectors
Two effects of the Dutch Disease have implies lower productivity. The fourth
evolved as key elements of the resource dimension of the extension of the Dutch
curse: the “resource movement effect” and Disease syndrome relates to the impact of
the “spending effect”. In the case of the natural resources on social capital, whereby
resource movement effect, a higher marginal it has been suggested that resource-scarce
product in the booming resource sector countries accumulate social capital faster
draws resources out of other sectors21, than resource-rich countries.23 The rationale
causing the latter to contract. The spending for this is that limited natural resources
effect occurs when, as a result of the rev- promote early industrialization and force
enue windfall, demand rises in both tradable earlier urbanization, which, in turn, stifles
and non-tradable sectors of the economy. entrepreneurship and allows people to
Since prices in tradable sectors are largely escape from villages into urban environ-
determined by the international market, ments with greater anonymity and better
greater demand is met by higher imports. functioning markets. At the same time, this
However, prices in non-tradables rise confers a saving dividend by reducing the
relative to tradables and, consequently, dependency ratio.
resources shift from tradables to non- Based on a series of international rank-
tradables. ings, it is evident that private investors in
Other dimensions of the Dutch Disease Africa face more hurdles than investors in
syndrome, conceptualized as the contrac- other economies. Infrastructure constraints
tion of the tradable sector, have emerged. A and unfavorable business environments
22
20 Sarraf and Jiwanji (2001) Gylfason et al. (1997)
23
21 Farmanesh (1991) Woollcock et al. (2001)
impose significant costs on the private sector

in terms of starting a business, the time it Fig 4.9: Diversification Index
takes to register property, and the rigidity of
labor markets, and so on. These are some of 2001
the factors that, among others, have led to 15
low business diversification in Africa, most 10
significantly, in oil-rich countries. As Table 5

2005 2002
4.4 clearly shows, the diversification index 0
of resource-rich countries as a whole is
much lower than that of resource-scarce
African countries (see also Figure 4.9). In
2005, for example, the diversification index 2004 2003
of resource-rich countries was only 4.1, Resource Rich countries
while that of resource-scarce countries was Resource-scarce countries
almost double this level, at 8.4. However, it Africa
is worth noting that low diversification is
primarily a problem in oil-exporting coun-
tries (with a score of only 1.9 in 2005),
whereas this issue is less problematic in
mineral-exporting countries (a score aver-
aging 6.3).
Table 4.4: Natural Resource Abundance and Diversification Index, 2001–2005
2001 2002 2003 2004 2005
1- Resource-rich countries 5.5 5.1 5.1 4.5 4.1

Oil-exporting countries 2.6 2.2 2.1 2.0 1.9
Mineral-exporting countries 8.4 7.9 8.2 7.1 6.3
2- Resource-scarce countries 10.1 9.4 9.5 8.6 8.4
3- Landlocked countries 4.7 4.6 4.5 4.4 4.6
Resource-rich landlocked countries 3.9 2.3 3.0 2.3 2.2
Resource-scarce landlocked countries 4.6 4.4 3.9 4.0 3.9
4- Coastal countries 9.6 8.8 8.9 7.9 7.4
Resource-rich coastal countries 5.8 5.7 5.6 5.0 4.5
Resource-scarce coastal countries 13.0 11.5 11.7 10.2 9.8
5- Africa 8.2 7.6 7.7 6.9 6.6
SANE 16.5 15.3 15.2 13.4 12.3
Source: OECD and AfDB (2007), African Economic Outlook 2007

Table 4.5: Natural Resource Abundance and Competitiveness Index, 2007
Overall Basic Efficiency Innovation

Index requirements enhancers enhancers
Score Score Score Score

1- Resource-rich countries 3.4 3.8 3.1 3.1
Oil-exporting countries 3.3 3.7 2.9 3.0
Mineral-exporting countries 3.5 3.9 3.3 3.2
2- Resource-scarce countries 3.4 3.7 3.2 3.3
3- Landlocked countries 3.1 3.3 2.9 2.9
Resource-rich landlocked countries 3.2 3.6 3.0 2.7
Resource-scarce Landlocked countries 3.0 3.2 2.9 3.0
4- Coastal countries 3.7 4.0 3.3 3.4
Resource-rich coastal countries 3.5 3.9 3.2 3.2
Resource-scarce Coastal countries 3.9 4.2 3.5 3.6
5- Africa 3.4 3.8 3.1 3.2
SANE 4.0 4.4 3.6 3.7
Source: World Bank and AfDB (2007), The African Competitiveness Report
In terms of competitiveness in African business support, and public investment in

countries, Table 4.5 shows that there is little physical infrastructure such as ports and
difference between the performance of roads — have an impact on the way in which
resource-rich and resource-scarce African the Dutch Disease affects the economy. At
countries. While landlocked countries under- least two features have a key impact here: the
perform, the performance of mineral- effect of resource booms (through
exporting and resource-rich coastal countries government investments and industrial
is marginally better than that of the resource- policy) on tradable versus non-tradable
rich group at large. sectors; and, the differential effect of this
impact depending on whether government
Economic Policy Failures policy is skewed towards sectors that are
The effect that natural resource revenues “close to”, or “far from”, the natural resource
have in exposing existing policy failures — market.24
including, on economic investment,
regulatory reform, and trade — are also Poor Industrial Policy
linked to the Dutch Disease. For example, In the 1970s and 1980s, in particular, many
policy decisions on economic diversification resource-rich countries adopted industrial
— choices governments make in supporting
regulatory reform, skills development, 24 Ploeg (2007)
policies that were based on import the revenues in the first instance accrue to
substitution characterized by the introduction the government, inevitably inviting govern-
of subsidies (based on the infant industry ment action in one way or the other to
argument) and growing protectionism. This spend some of the accrued revenues. There
was seen initially as the means to break out is a recurrent debate on how or why this
of the circle of underdevelopment — a very often results in policy failures and poor
variant of the “big-push” argument. However, governance. Several strands of arguments
these subsidies became unsustainable when are presented below.
revenues fell (the bust cycle). In addition,
with subsidies and protection in place, Bad Decision-Making
continuing resource revenues reduced the The first strand argues that large windfall
incentive to create competitive manu- revenues lead to poor general decision-
facturing industries. Given that many making by governments. This is attributable
development economists regard competitive to several factors26:
manufacturing as a key source of tech- • Resource booms raise expectations
nological progress this has had serious and increase appetite for spending.
implications on economic progress.25 The promise of natural resource
Thus, the relaxation of market discipline wealth dramatically expands the
and the associated accumulation of horizons of governments in natural
economic distortions retards competitive resource-exporting countries. A boom
diversification and lies at the heart of the mentality not only affects the way
general underperformance observed in governments behave — creating
many resource-rich African countries in the grandiose plans and ideas; it also
1980s and 1990s. However as described and shapes how people respond. Work
outlined through empirical evidence earlier ethics may be undermined resulting in
in this chapter, there are some indications a decline in productivity.
that (thanks to the lessons learned) the • The development of oil, gas, or min-
policies pursued today in exploiting the erals raises expectations among the
current resource boom are, indeed, more population. This pressures govern-
sustainable — or, at least, less damaging to ment to “do something”, thus encour-
resource-rich economies. However, any firm aging speedy responses. This often
conclusions in this regard will have to wait leads to quick, inappropriate, and
for a downtrend or the full completion of a poorly coordinated decisions.
resource boom-bust cycle. • Having more money to “play with”
tends to weaken prudence and normal
The Role of the State procedures of “due diligence”. In
In most countries and legal regimes, oil, gas, particular, governments may decide on
and minerals are the property of the state;
26 Also refer to Ploeg (2007); Auty (2001); Auty
25 Ibid. (2004); Stevens (2003)
capital spending without due thought when people pay taxes directly to the
to recurrent spending implications. government. Thus, natural resource export
• Governments often dramatically earnings actually sever important links
increase public spending based on between the people and their governments
unrealistic revenue projections. In that are related to popular interests and
resource-dependent countries, wind- control mechanisms.
falls increase both public spending The larger the public purse, the less
and the appetite for transfers by a noticeable the leakage to interest groups.
factor that is more than proportionate Rent-seeking is greater in resource-rich
to the size of the boom itself. This countries because wealth is concentrated in
means that spending quickly surpas- the public sector (or possibly in a small
ses revenues. Nonetheless, different number of companies). Therefore, the bulk
interests and groups continue to of the rents created in these economies are
demand even larger shares of national channeled by bureaucrats, the majority of
income when natural resource rev- whom are members of the politically domin-
enues go into a downtrend. ant groups. Such rent-seeking behavior
produces undesirable results for the eco-
Enhanced Corruption and Rent-Seeking nomy. First, rent-seeking behavior imposes
Natural resource booms often decrease the significant losses on many economies.
quality of public spending and encourage Second, it distracts attention away from long-
rent seeking.27 The centralization and, term development goals towards maximizing
hence, concentration of fiscal resources rent creation and capture. Third, rent seeking
from resource booms fosters excessive and creates extremely powerful lobby groups that
imprudent investment. It often also leads to are able to block needed economic reforms.
some level of mismanagement and misal- Fourth, societies face severe impediments to
location of resources and in the most severe innovation as a result of the behavior of
cases, massive corruption. special interest groups. Fifth, rent seeking
The key issue is that natural resource makes it more difficult for governments to
revenues tend to replace more stable and adjust spending when faced with revenue
sustainable revenue streams, exacerbating fluctuations. Finally, rent seeking is tanta-
problems related to development, transpar- mount to the creation of monopoly power in
ency and accountability. With sizeable an economy and the social costs of such
resource revenues, the reliance on non- monopolization are higher if the costs to
resource taxes and other government maintain that monopoly are added.28
incomes decreases. This tends to free natural Governance indicators such as govern-
resource-exporting governments from the ment effectiveness, voice and account-
types of citizen demands for fiscal ability, political instability and violence, the
transparency and accountability that arise rule of law, regulatory quality, and control
27 Ibid. 28 See Stevens (2003)

Table 4.6: Natural Resource Abundance and Governance Indicators
Voice and Political Government Regulatory Rule Control of

Accountability Stability Effectiveness Quality of Law Corruption
2006 2006 2006 2006 2006 2006
1- Resource- rich countries –0.8 –0.7 –0.8 –0.7 –0.9 –0.8

Oil-exporting countries –1.3 –1.0 –1.0 –1.0 –1.1 –1.0
Mineral-exporting countries –0.4 –0.3 –0.5 –0.5 –0.6 –0.5
2- Resource-scarce countries –0.5 –0.4 –0.7 –0.7 –0.6 –0.5
3- Landlocked countries –0.6 –0.6 –0.7 –0.7 –0.7 –0.6
Resource-rich landlocked countries –0.6 –0.5 –0.7 –0.6 –0.7 –0.6
Resource-scarce landlocked
countries –0.5 –0.6 –0.7 –0.6 –0.6 –0.7
4- Coastal countries –0.6 –0.4 –0.7 –0.7 –0.7 –0.6
Resource-rich coastal countries –0.9 –0.7 –0.8 –0.8 –0.9 –0.8
Resource-scarce coastal countries –0.4 –0.3 –0.6 –0.7 –0.5 –0.4
5- Africa –0.6 –0.5 –0.7 –0.7 –0.7 –0.6
SANE –0.5 –1.0 –0.2 –0.3 –0.4 –0.4
Source: Kaufmann, D., Kraay, A and Mastruzzi, M (2007)
of corruption are markedly weaker in oil- have adverse effects because they provide
rich African countries (see Table 4.6). incentives for politicians to engage in
Perhaps, surprisingly, mineral-rich countries inefficient redistribution of revenues and
actually perform much better and at the income in return for political support.
same level as resource-scarce countries, However, it is important to note that the
implying that this problem is by far most status of existing institutions (before the
common in relation to oil exploration and resource boom) is crucial, as they determine
revenue, at least at the present phase of the the extent to which politicians can respond
current resource boom. to these perverse incentives. Nevertheless,
regardless of the starting point, pressure
Revenue Misallocation and Poor from the public to raise public spending is
Investment Decisions likely to be significant — leading to
Relevant studies and literature emphasize inefficient redistribution in the form of
the role of governments in the misallocation public employment provisions, subsidies to
of resource revenues.29 Resource booms farmers, labor market regulations, and
protection of domestic industries from inter-
29 Ibid. national competition.
Socio-Cultural and Political economy, its own productivity growth is a

Impacts key component of overall growth. This in
As outlined above, countries that have turn requires that government aspires to
abundant point-source natural resources overall national goals and hence become
(such as minerals or oil) tend to have less accountable to citizens, regardless of its own
prudent policies and poor governance. They interests and aspirations.
also tend to have weaker institutional Poor economic performance during
capacities. In essence, natural resources are previous natural resource booms under-
often associated with weak institutions.30 scores the importance of sound macro-
Some of the reasons for this relationship and economic policies and strong institutions.
reflections on how it may be avoided are The large public investment projects of the
discussed in the following paragraphs. 1970s and 1980s, when governance and
Resource rents are an invitation to non- institutions were extremely weak in most of
productive lobbying and rent seeking. This Africa, were often undertaken with little
problem occurs mostly in countries with scrutiny and accountability. The return
“grabber-friendly” institutions, while coun- on public investment was correspondingly
tries with “producer-friendly” institutions low. Meanwhile, poor macroeconomic
generally do not suffer from the curse. In management of natural resource price
other words, countries that avoided the cycles in several African countries resulted in
resource curse in previous resource booms large exchange rate appreciation, erosion of
did so because they had transparent and the competitiveness of non-oil sectors, and
sound institutions and because they adopted high inflation. Given that many African
specific policies — including institutional countries leveraged their natural resource
strengthening — to minimize the impact of wealth to access credit from foreign suppliers
and damage caused by, the resource and governments, the early 1990s witnessed
windfalls. a sharp rise in external debt, well above 100
It has also been argued that countries in percent of GDP and, in most cases, resulting
which governance (hence transparency) is in unsustainable external debt levels. These
initially poor face a substantial risk of turning macroeconomic imbalances have eventually
resource windfalls into catastrophe (see Box called for very painful policy adjustments,
4.2). Indeed, there is evidence that gover- such as sharp fiscal contraction, trade
nance is likely to deteriorate further in a liberalization, exchange rate adjustment, and
resource-boom, even from a low-start status, debt rescheduling.31
because of the windfalls. Governance and In addition, with weak institutions and
effective public spending are thus critical for legal system dysfunctions, there is a higher
both living standards and private activity and, return on rent seeking, and a higher
since the public sector is a large part of the occurrence of crime, corruption, unfair
company take-overs, and other shady
30 31 Collier and Goderis (2007)

See Stevens (2003)
Box 4.2: Governance and Transparency
Governance remains the overarching and most critical challenge for natural resource exploitation and
management. Although African governments bear prime responsibility for managing natural-resource wealth
in a transparent, fair, and accountable way, they are only one part of an intricate web of interests and
relationships, which include multinational extractive companies foreign governments, and regional actors.
The main governance-related challenges facing resource-rich countries can be summarized as follows:
Transparency
Transparency is the key issue in establishing accountable governance structures and fighting corruption.
However, this has to start with the concession contract itself, as well as with revenues accruing from the sale
of the resources:
(1) Corruption in the allocation of resource concessions not only undermines governance in resource-rich
countries and also entails a poor deal for their citizens. There is overwhelming evidence that concession
allocation is obscure and involves a lot of corruption;
(2) Concession contracts often contain confidentiality clauses and are therefore not open to public scrutiny.
Without knowing the details of the deals signed by their government, the citizens of a given country have
no way of holding their politicians’ accountable; and,
(3) Transparency is equally important for the revenue flows of natural-resource rents between extractive
industry companies and host governments. If the companies publish what they pay and the governments
publish what they earn, the revenue flows can be traced and governments can be held accountable for
sustainable management of these revenues and fair distribution of the wealth.
Sources: Heinrich Boll Foundation (2007); Alley et al. (2007)
dealings. A resource bonanza thus elicits The general recognition that many
more rent seekers and reduces the number African countries have relatively weak
of productive entrepreneurs. In the long institutions, low human development status,
run, profits fall and, as a result, the economy and poor governance raises great concern
is worse off. Weak institutions may explain about how the current resource boom will
the poor performance of oil-rich countries affect development in the resource-rich
such as Angola, Nigeria, and Sudan; parts of Africa. Current data is not all
diamond-rich Sierra Leone, Liberia and discouraging — as pointed out earlier, there
Congo; and drug states like Columbia or are indeed resource-rich countries in Africa
Afghanistan. Thus, if institutions are weak that have put in place strong institutions and
and conditions are not favorable, enjoy consistent high economic and human
dependency on oil and on other natural development growth.
resources effectively hinders democracy and
the quality of governance.32
32 Ross (1999); Ploeg (2007)

Civil Wars and Other Forms of

Conflict Table 4.7: Civil Wars Linked to Resource
There is strong evidence that resource Wealth, 1990–2002
abundance increases the incidence of civil
Country Duration Resources
conflicts and wars and stimulates violence,
theft, looting, and fighting between rival Afghanistan 1978–2001 Gems, opium
groups.33 Over half of the conflicts listed in Angola 1975–2002 Oil, diamonds
Table 4.7 (see also Figure 4.10) are in Africa. Angola (Cabinda) 1975– Oil
Burma 1949– Timber, tin,
Since many African states are highly gems, opium
dependent on oil, gas, and mineral exports, Cambodia 1978–97 Timber, gems
they are unusually prone to resource-related Colombia 1984– Oil, gold, coca
conflicts (Table 4.8). Conversely, the Congo, Rep. 1997 Oil
region’s mineral abundance helps explain Congo, Dem. Rep. 1996–97 Copper, coltan,
diamonds, gold,
why a significant share of the world’s civil cobalt
wars has taken place in Africa. Furthermore, Congo, Dem. Rep. 1998– Copper, coltan,
while mineral wealth is linked to the onset diamonds,
of non-separatist conflicts, evidence shows gold, cobalt
Indonesia (Aceh) 1975– Natural gas,
that booty futures have been used to marijuana
prolong conflicts and wars. Booty futures Indonesia
refers to advance rights granted by a rebel (W Papua) 1969– Copper, gold
group (and sometimes by governments) to Liberia 1989–96 Timber, dia-
companies to extract natural resources in monds, iron,
palm oil, cocoa,
areas that the rebels hope to capture during coffee, marijuana,
a civil conflict. However, it should be noted rubber, gold
that another important reason for this trend Morocco 1975– Phosphates, oil
is the persistence of poverty in Africa — Papua New
Guinea 1988– Copper, gold
poverty significantly raises the risk of civil Peru 1980–1995 Coca
war. A downtrend has been observed in Sierra Leone 1991–2000 Diamonds
recent years, but this should not mask the Sudan 1983– Oil
fact that Africa experienced seven civil wars
Source: Ross (2004), What do we know about natural
in the 1970s, eight in the 1980s, and fourteen resources and civil war?
in the 1990s.34
Altogether, between the 1960s, when
most African countries became independ-
violent changes of government in the
ent, and the 1990s, there were more than 80
continent. Country after country has been
engaged in internal strife, conflict, or civil
33 E.g. Collier and Hoeffler (2004); (2005); war.35
Anyanwu (2002); Hodler (2006)
34 Ross (2003); Collier and Hoeffler (2004); (2005);
35 Adedeji (1999)
Hodler (2006)
environmental scarcities (land). In

Table 4.8: Countries Ranked by Mineral some countries, like Sudan, conflict is
Dependence, 2000 related to both types of resources, oil
in the South and land in Darfur; and,
Rank Country Mineral Conflict 2) These conflicts involve local non-state
Dependence 1990–2000 actors, non-professional fighters, or
1 Bahrain 63.44 0 combatants often challenging the
2 Qatar 53.37 0 authority and legitimacy of fragile
3 Turkmenistan 49.91 0 states, regional actors, and neighbor-
4 Gabon 48.83 0 ing states, and trans-global forces and
5 Nigeria 48.75 3
6 Saudi Arabia 44.74 0 networks.
7 Papua New Guinea 41.52 0
8 Trinidad and Tobago 41.16 0 Nature-based conflicts, including violent
9 Congo, Rep. 41.07 9 conflict, civil wars and secessionist move-
10 Brunei 37.65 0
ments, have thus been commonplace in
11 Kazakhstan 36.11 0
12 Libya 35.91 3 Africa. The “blood diamonds” in Sierra
13 Algeria 35.75 27 Leone and Angola, timber conflicts in
14 Botswana 35.10 0 Liberia, oil conflicts in Nigeria and Sudan,
15 Kuwait 32.41 3 and mineral wars in the Democratic
16 Azerbaijan 28.83 9
17 Angola 27.88 74
Republic of Congo are popular examples.36
18 Zambia 27.12 0 Even so, local disputes over land, water,
19 Liberia 26.76 14 wildlife and forests are, in fact, far more
20 Norway 25.97 0 common. In many places, such conflicts
21 Oman 25.65 0
overwhelm rural courts and traditional
22 Iran, Islamic Rep. 25.55 42
23 Mongolia 25.45 0 mediation platforms.37
24 Russian Federation 25.38 15 The root causes of civil wars in Africa are
25 Venezuela, RB 23.54 0 complex and lie in a combination of factors,
26 Yemen, Rep. 22.32 2 whether in resource-rich or resource-scarce
27 United Arab Emirates 22.13 0
countries. However, there is a growing body
Source: Ross (2004), What do we know about natural of empirical evidence that rents on natural
resources and civil war? resources and primary commodities,
especially oil and other point-source natural
resources, increase chances of civil conflicts
A couple of salient characteristics dis-
tinguish the post-Cold War civil conflicts in
36 Bannon and Collier (2003); Lind and Sturman
Africa:
(2002); Cilliers and Dietrich (2000); Reno (2000);
1) Natural resources figure as a
Lipschutz (1987)
prominent feature in the conflicts, 37 Wolf et al. (2005); Veit and Benson (2004); LHRC
both in situations of natural resource (2003); Newmann (1998); Shivji (1998); Shivji and
abundance (oil and minerals) and Kapinga (1998); Lane (1996)
and wars — especially in sub-Saharan Africa of natural resources in conflict-prone

— by weakening the state or financing countries can most commonly be traced to
rebels. Sometimes this can even be related government policy failures. Government
to engagements by multinational corpora- officials sometimes induce and engage in
tions. It is important to investigate whether unsound natural-resource exploitation in
civil strife and wars are the result of order to pursue economic and political
grievance, a sense of injustice about how a objectives that are, in principle, unrelated to
social group is treated (for example, the natural-resource sector. Even rebel
systematic economic discrimination), or groups depending on the strength or
greed possibly induced by massive rents of weakness of their organizational structures,
point-source resources, as commonly high- often pursue various broader programmatic
lighted in the cases of Angola, Congo, and and political objectives.40
Sierra Leone.38 As mentioned earlier, empirical evidence
Other studies show39 that the largest also strongly suggests that conflict is more
single influence on the risk of conflict is the likely to erupt in countries with a low level
extent to which a country depends on of GDP per capita and low rate of economic
primary commodity exports, and the effect growth. The three factors that determine the
is nonlinear. For instance, the probability of onset of armed conflict — natural resources,
civil conflict in a country with no natural low income per capita, and low growth —
resources is only 0.5 percent, but it is more are prevalent in large parts of the African
than 23 percent in a country with a share of continent. The literature41 highlights other
natural resources (oil and minerals) of more factors that may be significant, such as
than 25 percent in the GDP. This suggests vertical and horizontal inequality and
that many conflicts are driven by greed religion. The conflicts in Rwanda and
rather than by grievance. Based on these Burundi, for instance, were not primarily
results, the different variants of the “resource driven by economic factors.
curse” theory attribute the poor resource The effect of natural resources on the
exploitation record in resource-dependent incidence and duration of civil wars also
states, either to the “predatory” inclinations features strongly in the political science
of the state or to the “greed” of rebels. Apart literature.42 In fractionalized countries,
from other empirical results pointing to the many rival groups fighting for natural
contrary, such conceptualization suggests resources may well harm the quality of the
irrational behavior by the main actors legal system and thus undermine property
involved in the control and management of rights. The resulting destruction of output
natural resources. outweighs the increase in output due to the
However, the above explanation misses resource boom. Fractionalization and
the crucial point that waste and degradation
40
Weinstein (2005)
38 41
Murshed (2002); Olsson and Fors (2004) E.g. Stewart (2000; 2002)
39 42
Collier and Hoeffler (2004); (2005) E.g. Ross (2004); Fearon and Laitin (2003)
Figure 4.10: Natural Resources and Conflict
Source: DFID (2006b)
fighting for natural resource bounties can severe in countries that have many ethnic or
thus lead to dissipation of natural resource religious fractions and many languages.
rents. Erosion of property rights, when there Easily lootable resources such as gem-
are many natural resources, can easily lead stones tend to prolong conflicts — that is,
to the resource curse, especially if there are when rebel groups and rulers and their
many rival fractions.43 The “idea” is that cronies fight each other over the control of
each group manages to appropriate more point-based resources. For example, with the
natural resources if it fights more and the exception of Botswana, Namibia, and South
quality of the legal system is poor, but Africa, diamond abundance on the African
fighting also undermines effective property Continent has been shown to generally lead
rights. There is some cross-country empirical to depressed growth, mostly so in countries
evidence that the resource curse is more with weak institutions.44
43 Hodler (2006) 44 Ollson (2007)

Natural Resource Wealth out, in broad terms, strategic avenues

Management in Fragile African through which governments and donors
States might address development in a fragile state.
Africa has a considerable number of fragile Needless to say, for natural resource-rich
states, by far the highest number of any countries, the natural resource sector is an
continent. While there are several defini- extremely important focal point, consider-
tions of what a fragile state is, what is most ing the whole spectrum of opportunities and
important in the context of this Report is the challenges natural resource wealth implies
strong overlap between underperforming, (as outlined in earlier sections).
resource-rich countries and countries widely In reality, movement along this
accepted as being fragile in one form or continuum (Figure 4.11) is neither automatic
another. It is worth noting that fragile nor unidirectional, as countries may move
circumstances take different forms in back and forth between various fragile
different countries and even within the same situations. The goal is to help prevent
country at different times. There are major countries at risk from slippage and to help
differences in terms of political and public countries in post-conflict and post-crisis
security environments, institutional capacity situations move towards more stable political
and performance, government account- and economic development. Helping coun-
ability, and commitment to progress along a tries (resource-rich as well as resource-scarce)
credible reform path. These differences progress along the continuum requires an
have major implications for the scope and internationally coordinated strategic effort
nature of engagement by development that covers a country’s political, security, and
partners. Indeed, experience has shown that socio-economic domains. The key, in this
a uniform approach to widely differing regard, is a differentiated and flexible
circumstances on the ground often fails to response.
produce desired results and, in many Analyzing the management of mineral
circumstances, has precluded forms of (and oil) resources in fragile states further
selective engagement that could be both reveals that it has largely been molded by
justified and effective.45 four interrelated conditions that are defined
A stylized categorization of these by the interplay of state power, contest, and
different circumstances illustrates a conflict over the control of mineral
simplified continuum along which fragile resources. These are (1) public policy
circumstances typically fall — ranging from failures; (2) state predation or “shadow
marked deterioration to active conflict or state”, where rent-seeking substitutes rent
prolonged crisis, to post-crisis and trans- creation; (3) rebel-dominated war (shadow)
ition, and, finally, to gradual improvement economies; and, (4) vested interests of
(Figure 4.11). The categorization also sets regional and international actors. Two of
these conditions have been discussed in
the earlier sections of this chapter. The
45
AfDB (2007c) following analysis thus focuses primarily on
Figure 4.11: Continuum of Fragile States’ Concept
Marked deterioration Active conflict and/or Post-crisis/transition Gradual improvement

prolonged crisis
• Failing economic and • Absence of legitimate • Post-conflict situation after • Broadly stabilized situation
financial management government peace agreement, • Improving government
• Significant corruption and • Breakdown of effective reconstruction phase functions
poor governance administration • Post-crisis/political transition • Presence of macro-economic
• No consensus between • Civil conflict and/or domestic after reconciliation-agreement reforms, increased donor
partners and government on political impasse support
development priorities • IFI and/or international • Restoration of positive trends
• Deteriorating economic and sanctions in key income and social
social indicators • Marked reversals in economic indicators, albeit slowly and
and social indicators perhaps with reversals
• Improved access to external
finance
Strategic approach
Focus on Prevention — Build knowledge base Post conflict/crisis- Stabilization — policy
policy dialogue Stay engaged — policy reconstruction dialogue
Focus on improving dialogue Focus on turnaround and Graduation, reform and
governance-support graduation normalization
Source: AfDB (2007c), Enhanced Engagement in Fragile States, Discussion Paper
state predation and on regional and inter- using the enormous authoritarian structures
national actors. of the state to appropriate economic gains
for private ends. In response to the forces of
State Predation globalization, epitomized by the end of the
The attainment of political independence Cold War, growing pressures for both
did not transform the structure of a good economic and political liberalization, as
number of African states, which remained well as increasing internal resistance and
forceful and authoritarian. Thus, instead of demands for democratization, many state
transforming the state and making it relevant regimes have resorted to repression and
for the satisfaction of the needs and predation. A predatory state is characterized
aspirations of the people, some emerging by the concentration of power at the top
post-colonial leaders were content with and the personalization of networks for
delegation of this power, which is enforced expenses. In the case of African oil
by ruthless repression. In this context, producers, this proportion, even in the best-
economic inducements for government case scenario, falls in the range of 55 percent
officials and generalized corruption are the to 70 percent. The difference represents
government way of life.46 supplementary profits shared by the oil
Predatory rule has two major con- companies and African elites. Similar
sequences on natural resource wealth and practices have been identified in the
revenue management in most fragile African management of uranium mines in Niger,
states. First, access to state power is phosphates in Togo, and bauxite and
equivalent to access to wealth and to the aluminum in Guinea. Only meager revenues
sources of future wealth. Second, political reach the state treasury, if at all, while the
support is built around clientele networks, real royalties are paid directly into the
which link power-holders with segments of foreign bank accounts of politicians.48
the population. The concern of the various
elites, ultimately connected to the top of The Vested Interests of Regional and
state power, is how to gain support and International Actors
consolidate clienteles while maximizing the The plundering of natural resources is not
amount of resources needed to obtain this always confined to the warring factions
support. These networks are formed along within the boundaries of a given fragile
ethnic, regional, territorial, religious, and state, but sometimes involves neighboring
economic lines.47 countries. Regional actors become involved
Predatory states use different violent and in the exploitation of a neighboring state’s
non-violent strategies to manage mineral natural resources through (1) the inter-
and oil resources and to appropriate the related processes of proliferation of “war
proceeds accruing from their exploitation economies” and regional conflict forma-
and sale. Since minerals are extracted in tions; and, (2) direct military intervention in
enclave production centers, sometimes support of either the incumbent government
located off-shore, the common strategy is to or of armed insurgents.
negotiate royalties and other agreements State fragility or failure produces a
directly with foreign companies. These deals number of economic ripple effects that are
are often shrouded in mystery, making it felt by other states in the region, with war or
difficult, if not impossible, to track how “shadow” economies as direct consequen-
much money is generated or how these ces. The interlinked conflict processes in
revenues are spent. According to oil industry Liberia and Sierra Leone, for example, have
experts, OPEC countries on average retain allowed huge amounts of timber and
some 75 percent of their oil revenues for the diamonds to be smuggled out by miners and
state budget, allowing for operating shadow economic entrepreneurs.49 An
46 48
Castells (2000) Hibou (1999)
47 49
Ibid. Humphreys (2005)
important aspect of resources and conflict is MECs are not deterred by unpredictable or
the role of third-party governments seeking dangerous situations. Although some MECs
to profit from resource-rich neighbors. Of all have been known to divest in situations of
the post-Cold War civil conflicts in Africa, instability and violence, the typical pattern
none reflects the complexities of the of these companies is to factor in the costs
connection between natural resources and of extra risks and stay on course. The
conflict more than the civil war in the DRC business practices of MECs in African fragile
— referred to as “Africa’s world war”. states have, in various ways, contributed to
The corporate business practices of conflict promotion.50
international actors are another issue. Since
the end of the Cold War, foreign involve- Transboundary Natural Resource
ment in African conflicts has changed, Management
giving way to the more subtle activities of Africa faces numerous transboundary
non-state actors, especially private security challenges, ranging from the continent’s
firms, multinational corporations (MNCs), shaky political and economic spectra, to
and non-governmental organizations. This sectoral issues related to health, agriculture,
foreign involvement falls into two main natural resources management, and the
categories. The first, and perhaps the most environment. Regional cooperation has a
controversial, is by foreign mercenary firms, fairly long history in virtually all parts of
euphemistically described as private security Africa, although the focus had, for a long
organizations (PSOs). Economic globaliza- time, been on regional economic integration
tion has led to greater profits from invest- schemes. While some progress has been
ments in natural resource extraction, made in this direction, new challenges
particularly in fragile African states, where related to water scarcity, deforestation,
there are impressive opportunities for desertification, droughts, floods, and other
profits. This has spurred increased invest- environmental and natural resource issues
ment by MNCs. have emerged in recent years.
The second, and perhaps most These challenges have focused attention
important, type of external involvement in on regional cooperation in addressing
African conflicts, is by foreign multinational transboundary issues to an extent that is far
extractive companies (MECs), many of beyond conventional political and trade-
which have exploited situations of conflict related dimensions. Global warming, among
to maximize their own profits. Unlike others, requires response strategies that go far
manufacturing or other secondary or tertiary beyond national borders. In the water sector,
industries, extractive industries do not divest the Nile River Basin is a very good example
or relocate when conflicts erupt. Given the of a common pool of resources, which can
nature and strategic importance of natural only be harnessed through effective coopera-
resources (especially oil and gas), the tion across countries. Another example is the
potential profits, and the capital-intensive
and long-term nature of the investment, 50
Ballentine (2004)
observed coastal erosion in West Africa, and costs spill over national borders — are
which poses a transboundary challenge, as it effectively managed through shared com-
is closely associated with deforestation in the mitment and collective action, or collective
tropical rainforests and in mangroves. Similar efforts from all individuals or groups that
issues have emerged in East African coastal benefit directly or indirectly from the goods
areas. Numerous examples can be provided or services. In the absence of cooperation
on current and potential severe environ- and collective action, problems of extern-
mental and social impacts in Africa that are alities (positive or negative) arise.51
transboundary in nature (cause or effect).
Some of the most important are related to Addressing the Challenges
renewable natural resources, such as While sovereignty remains crucial in dealing
water and land (described in Chapter 2). with Africa’s transboundary challenges, the
Others are related to non-renewable resour- political will of countries to perceive
ces, for instance extraction of hydrocarbons common challenges and to conclude
(Box 4.3). binding agreements is the key determining
Sound “Transboundary Natural Resource factor. Joint strategies, policies, frameworks
Management” is essentially concerned with and subsequent commitments to address
ensuring that goods, resources, and services transboundary issues only yield meaningful
of a transboundary nature — whose benefits results if the commitments are honored, or
the common rules mutually respected.
While mechanisms for sanctioning violators
Box 4.3: Transboundary Cooperation may sometimes become incentives for
in Extraction of Hydrocarbons cooperation on transboundary issues, lack
of cooperation, in most cases in Africa, is
Hydrocarbon reserves in East Africa have been related to lack of means for honoring the
the focus of considerable attention and commitments. This is particularly the case
speculation in recent years. If not managed
for many of Africa’s small countries, which
carefully, the potentially rich reserves in the
Great Lakes region risk becoming a most often lack the technical, financial, and
destabilizing factor among the nations, rather human resource capacity to honor trans-
than an opportunity for joint development. In boundary commitments such as those
March 2007, a summit of 22 of the region’s related to river basin management, cross
energy ministers was convened in Mozambique
to discuss related issues. The hydrocarbons border trade in forest resources, conflict
resources in the region have the potential to resources, international wildlife, and deserti-
ameliorate the energy crisis significantly. fication. There is a clear need to strengthen
However, successful exploitation of the African countries’ capacity to implement
resources will depend on security and stability,
transboundary commitments.
as well as on regional cooperation
Source: Oxford Analytica (2007), Africa: Middle East

and Africa Executive Summary
51
Bromley (1992)
Box 4.4: The African Development Bank and Transboundary Issues
As the leading development institution on the continent, the African Development Bank has long recognized
its important role in helping Africa to overcome its transboundary challenges. In this regard, the Bank is
actively providing support in critical areas of transboundary cooperation, which include river basin
management, regional economic integration, regional cooperation on health, collaborative research
(especially in agriculture), cooperation on infrastructure, and conflicts and conflict resolution. The Bank
Group continues to deepen its focus on programs that provide opportunities for overcoming these
challenges to improve the access of the poor to productive resources (notably water and land), technology
and knowledge, and social services.
In the area of transboundary river basin management, the Bank is actively supporting river basin
authorities and institutions. Examples include the Volta Basin Authority (West Africa), the Nile Basin Initiative
(NBI) in Eastern and Northern Africa, and the Okavango and Limpopo Basins in Southern Africa, among
others. The Bank’s support is provided in the form of grants for project operations, as well as support
extended through the African Water Facility.
With its current structure, which includes a “Knowledge Centre” (The Office of the Chief Economist), the
Bank has further boosted its efforts in knowledge generation and dissemination, including research and
training, and the provision of research and knowledge-related support to its RMCs. A key focus is
transboundary issues.
Source: AfDB (2007b), Regional Cooperation: Addressing Trans-Boundary Challenges
Another important issue relates to the The New Scramble for Africa’s
negotiation power of small and larger Natural Resources
countries in Africa, with huge divergence in
The last decade has seen a rapid increase in
their technical, human, and financial
trade and investment flows between Africa
capacities. In the case of river basin manage-
and Asia, especially with China and India.
ment, up-to-date technical knowledge of the
India has a long history of trade and foreign
short- and long-term dynamics of the water
direct investment in East Africa, in particular,
situation is required by all parties for equal
given the many expatriate Indian
bargaining power at negotiations. Thus,
communities in the sub-region. China’s trade
capacity building and technical assistance —
and investment in Africa date back decades,
to level the playing field — are crucial ele-
with heavy early investments in infra-
ments that should not be neglected in
structure such as railway systems. The basic
addressing transboundary issues. By its very
facts about trade relations between Asia and
nature, transboundary cooperation requires
Africa are as follows:52
a lot of coordination and synchronization of
• The volume of African exports to Asia
activities, since everyone’s participation and
is accelerating. It grew by 15 percent
contribution are critical to minimizing
externalities (positive and negative) and
avoiding free riding on the efforts of others. 52
Broadman (2007)
between 1990 and 1995; and it has tions for facilitating competition for
grown by 20 percent during the last African domestic firms, thus enhanc-
five years (2000–2005). ing productivity.
• Since 2005, Asia’s share of African • Asian firms provide capital goods and
exports (27 percent) has been on par intermediate inputs, which enable
with EU (32 percent) and the US (29 African firms to manufacture products
percent) shares. potentially for exports, particularly to
• Asian exports to Africa are also other developing countries, thereby
growing rapidly. In the last five years, boosting trade.
they have grown 18 percent more • Evidence suggests that Asian firms in
than exports from any other region, Africa interact with Africa’s informal
including from the European Union. business sector, thereby affecting
• Eighty-six (86) percent of Africa’s demand and supply in the informal
exports to China and India are oil, sector.
metals, and agricultural raw materials.
• Five oil- and mineral-exporting The discussion on the role of China and
African countries account for 85 India in Africa has often highlighted the
percent of exports to China, while potential negative aspects of the growing
South Africa alone accounts for 68 demand for, and control of, natural resources
percent of exports to India. by these emerging Asian powers. China and
India have grown fast and have rapidly
As illustrated in Figure 4.12, one of the modernized their industries. As they develop
most significant developments for Africa is and continue to grow, together with other
the growing importance of capital flows rapidly expanding nations, the demand for
from Asian countries such as China, India, natural resources, especially for oil and
South Korea, and Malaysia. metals, is likely to increase even further.
Foreign direct investment (FDI) from The new interest in Africa, in particular, in
Asia to Africa has increased significantly in the continent’s resources, has certainly not
recent years. In 2005, Asian countries bypassed the Western World. Systematic new
accounted for about 15 percent of the USD efforts to tap further into this natural wealth
31 billion FDI flows to Africa. Such invest- became visible with the adoption of the
ment contributes directly to the country’s African Growth and Opportunities Act by
gross domestic product, generates employ- the out-going Clinton administration in the
ment, and reduces poverty. Africa is likely to United States. Simultaneously, the European
benefit from Asian investments in a number Union has sought to renegotiate its relations
of other ways: with the Africa, Caribbean, and Pacific
• Asian investments facilitate the countries under economic partnership
transfer of skills and technology to agreements. These negotiations have since
Africa. With their low-cost, low techn- entered critical stages and provoked ongoing
ology, Asian firms could create condi- controversies, including the criticism that the
Figure 4.12: Development in Trade Relationship between Africa and Asia
70 Africa Trade Balance with Asia Main African Exporters to Asia, 2005
(Billions of US Dollars) (Billions of US Dollars)
60 SUDAN; 4.9
CONGO; 3.6
Exports
ANGOLA; 7.8 NIGERIA; 3.3
50 Imports
Trade Balance EGYPT; 3.2
40
LIBYA; 3.1
30 ALGERIA; 2.6
20 EQ.GUINEA; 2.2
SOUTH MOROCCO; 2.0

10 AFRICA; 17.8
Others; 9.2
0
–10
–20
2001 2002 2003 2004 2005
Main African Importers from Asia, 2005

(Billions of US Dollars)
LIBERIA; 4.1
ALGERIA; 3.8
NIGERIA; 5.9
MOROCCO; 2.6
SUDAN; 2.6
ANGOLA; 2.4
EGYPT; 6.7
KENYA; 1.9
LIBYA; 1.6
SOUTH
AFRICA; 14.8 Others; 14.0
Source: ADB (2007a), Africa and Asia: Partners in Development.

EU’s trade department is trying to bully interests of China and of other foreign
through its own interests.53 The positive investors in Africa have to be the creation of
news in this new scenario is that the days a calculable and “investor-friendly
when Africa was considered a less important environment”. Ultimately, this must include
or forgotten continent — to some extent — the rule of law (in contrast with the
are gone. Still, Africa remains on the law of the ruler) and other business-
“commodity supplying end”, with others on like practices.54
the receiving end in this scramble for the A recent World Bank study55 uses a
continent’s minerals and fossil resources. wealth of survey data on businesses in
The new offensive pursued by China, Africa to underline how China and India’s
India, and others (in particular, Russia and growing trade with, and investment in,
Brazil) seeking access to fossil energy Africa presents an excellent opportunity for
resources and other minerals and metals to growth and international integration of
fuel their own rapid industrialization Africa into the global economy. Although at
processes, is likely to add further pressure to present Africa mainly exports natural
the scramble for access to limited and often resources to China and India, it is becoming
non-renewable resources. This new stage of increasingly attractive with respect to labor-
competing forces on the African continent intensive manufacturing. There is growing
has resulted in a plethora of recent analyses Asian demand for processed commodities,
dealing mainly, if not exclusively, with the light manufactured products, and tourism,
Chinese impact and practices. In general, and Africa has a great unused potential to
the analyses criticize China for being yet fulfill this demand. The diagnosis cautions
another example of predatory capitalism, that the opportunities engendered by China
and also for being non-transparent and and India’s trade and investment in Africa
supportive of autocratic regimes. However, will not necessarily be converted into
many tend to ignore the effects that the growth and poverty reduction in the region.
existing socio-economic imbalances and A critical finding of the study is that it is not
power structures (in Africa) have long just the quantity of these trades and
created and consolidated. The criticism of investment flows that matters — but also the
China seems to be more a reflection of fear quality of the overall commercial relation-
of losing one’s own interests than of a ships underlying as well as shaping these
genuine concern for African people. Of flows. Thus, both African and Asian policy
course, this does not whitewash the current makers need to devise appropriate policy
Chinese offensive and its potentially responses to make the quality of these
damaging impact. The emerging Chinese relationships even better. The World Bank
track record does not suggest that the study points to the following principles for
majority of African people will benefit. reform (among others):
Nevertheless, the medium- to long-term
54
Ibid.
55
53 Development Today (2007) Broadman (2007)
At-the-Border Policy Reforms which include: (primarily for African countries); and
— lowering the overall level of tariffs (all — reducing poverty impacts from
countries); domestic price/production changes
— eliminating the escalating tariffs that by trade flows through promotion of
limit Africa’s leading exports (China labor mobility, including enhancing
and India); flexibility of labor markets and
— eliminating anti-export bias in import improving the effectiveness of social
tariff policies, bias in investment safety nets (all African countries).
decisions and disincentives for
Between-the-Border Reforms which include:
product diversification (for most
— further developing trade facilitation
African countries);
infrastructure for integration into the
— eliminating trade barriers, including
global market as well as regional
technical standards as protectionist
integration within Africa, including
measures (most countries);
improvement and modernization of
— rationalizing and harmonizing exist-
ports, roads, and rail transport, and
ing “spaghetti bowl” bilateral and
modernization of telecommunications/
regional agreements (primarily for
IT (primarily for African countries);
African countries);
— implementing customs reform by
— strengthening the role of investment
improving coordination among border-
promotion agencies and public-
related agencies, simplifying customs
private investors’ councils (African
procedures and making customs
countries); and
codes rule-based, transparent, and
— tailoring export and investment
commercially-oriented and introducing
incentives to country-specific circum-
the use of IT into the customs system
stances and in concert with World
(primarily for African countries);
Trade Organization rules (African
— addressing imperfections in the
countries).
information market for trade and
investment opportunities, including
Behind-the-Border Reforms which include:
technical standards (most African
— enhancing domestic inter-enterprise
countries); and
competition by eliminating funda-
— reviewing measures that restrict the
mental economic and policy barriers
movement of professionals (primarily
to entry and eliminating exit barriers
for African countries).
(primarily for African countries);
— improving governance through The dramatic new trend in South-South
greater transparency and account- economic relations is transforming tradi-
ability of public officials and tional patterns of economic development.
establishing and securing efficient As outlined above, this is nowhere more
institutions that facilitate effective evident than in African-Asian trade and
resolution of commercial disputes investment flows. Thus, while China and
India are emerging as economic giants in of 4.1 percent, much higher than the
Asia, Africa is coming into its own, finding a 2.3 percent recorded by resource-rich
vital role in this transformation. These new coastal countries. Indeed, being
South-South economic relations present real resource-rich does not seem to make
opportunities — as well as challenges — to a significant difference for coastal
African countries. It is important to countries.
emphasize that Africa does not need any • Land-locked resource-scarce countries
one-size-fits-all policy reforms or are the poorest, by a significant factor.
approaches, since the available natural They are five times poorer than
resources and the economies in Africa are resource-rich countries, and almost six
highly heterogeneous. Reforms and policies times poorer than resource-scarce
should thus take into account country- coastal countries. Furthermore, the
specific circumstances. growth rate in this group of countries
only averaged 2.5 percent from 1981 to
Summary 2006. In other words, the most
This chapter presented and analyzed some important factor is whether a country is
stylized features of Africa’s resource-rich land-locked or not — this is even
economies, offering explanations on why more important than being resource-
natural resource wealth may stunt growth rich or resource poor, or than any
and development prospects. However, other aspect reviewed in this analysis.
actual analysis of the data, tables and figures • Available evidence also strongly
presented reveals the following trends and suggests that the three factors that
conclusions: determine the onset of armed conflict
• Resource-rich African countries are — natural resources, low income per
richer (in terms of revenues, GDP and capita and low growth — are preva-
per capita GDP) than their resource- lent in large parts of the African
scarce peers. The gap narrowed continent. The literature also high-
during the 1980–2000 period, but it is lights other significant factors such as
widening again in conjunction with vertical and horizontal inequality,
the recent resource boom. religion, and policy failures.
• However, cumulatively, resource-rich • The management of mineral (and oil)
countries only experienced an resources in fragile states has largely
average growth rate of 2.4 percent been molded by four interrelated
from 1981–2006, considerably lower conditions defined by the interplay of
than the average 3.8 percent for state power, contest, and conflict over
resource-scarce countries. the control of mineral resources.
• The group of resource-scarce coastal These conditions are public policy
countries, which have almost a failures; state predation or ‘shadow
quarter of Africa’s population, has state’, where rent-seeking substitutes
experienced an average growth rate rent creation; rebel-dominated war
(shadow) economies; and, vested management, and (2) the new scramble for
interests of regional and international Africa’s resources. The former calls for
actors. cooperation especially at the regional level,
while the latter calls for a number of key
The analysis further illustrates that the true reforms if Africa is to benefit from the
potential benefits of having significant scramble.
natural resource wealth has not been fully In conclusion, despite the challenges
exploited by resource-rich African countries. and issues involved, a natural resource
Overall, the performance of resource-rich boom can, under the right circumstances, be
countries in Africa has been disappointing, an important catalyst for growth and
especially from 1980 to 2000. Hard lessons development. The often referred to “natural
learned from past resource boom and bust resource curse” can be avoided with the
cycles and from the disappointing growth right knowledge, institutions, and policies.
rates of the two-decade period need to be Several countries in Africa have dem-
reviewed and lessons drawn for future use, onstrated this, and there is some reason for
especially now that a new boom has gained cautious optimism that more countries have
traction in Africa. learned hard lessons from the past resource
The last part of this chapter reviewed booms, and, in future, will pursue strategies
two key aspects of future development in and policies that will allow them to fully
Africa: (1) transboundary natural resource reap the benefits of natural resource wealth.
138
Appendix Table 4A: List of Country Classifications
Resource-Scarce Landlocked
Resource-Rich Countries Coastal Countries SANE
Countries Countries
(E) AfricanBank 2007 Ch4
Oil-Exporting Countries Benin Resource-Rich Resource-Rich Resource-Scarce South Africa

Algeria Burkina Faso Botswana Algeria Benin Algeria
Angola Burundi Central African Republic Angola Cape Verde Nigeria
Cameroon Cape Verde Chad Cameroon Comoros Egypt
11/10/07
Chad Comoros Congo Djibouti

Congo Djibouti Resource-Scarce Congo, Dem. Rep. Egypt
Côte d’Ivoire Egypt Burkina Faso Côte d’Ivoire Eritrea
Equatorial Guinea Eritrea Burundi Equatorial Guinea Gambia
13:54
Gabon Ethiopia Ethiopia Gabon Ghana

Libya Gambia Lesotho Guinea Guinea Bissau
Nigeria Ghana Malawi Libya Liberia
African Development Report 2007
Sudan Guinea Bissau Mali Mauritania Madagascar

Page 138
Kenya Niger Mozambique Mauritius

Mineral-Exporting Countries Lesotho Rwanda Namibia Morocco
Botswana Liberia Swaziland Nigeria Sao Tome &
Central African Republic Madagascar Uganda Sierra Leone Principe
Congo, Democratic Republic Malawi Zimbabwe South Africa Senegal
Guinea Mali Zambia Sudan Seychelles
Mauritania Mauritius Tanzania Somalia
Mozambique Morocco Togo
Namibia Niger Tunisia
Sierra Leone Rwanda
South Africa Sao Tome & Principe
Tanzania Senegal
Seychelles
Somalia
Swaziland
Togo
Tunisia
Zimbabwe
Zambia
Appendix Table 4B: African Exports, 2005
Three main exports, with their share in total exports* No of products

(in %) accounting for more than
75 percent of exports
Product I Product II Product III
Algeria Crude petroleum (67.2) Natural gas, liquefied (13.2) Natural gas, gaseous (5.6) 2
Angola Crude petroleum (95.8) 1
11/10/07
Benin Cotton, not carded, Edible nuts fresh, dried Oth. non-ferr. metal waste (6.4) 3
combed (55.3) (16.5)
Botswana Diamonds. excl. industrial Nickel mattes, sintrs. etc 1
13:54
(88.2) (8.1)
Burkina Faso Cotton, not carded, combed 1
(84.5)
Burundi Coffee, not roasted (88) 1
Page 139
Cameroon Crude petroleum (48.8) Wood, non-conifer, sawn Bananas, fresh or dried 4
(14.1) (8.7)
Cape Verde Fish, frozen ex. f illets Trousers, breeches, etc. Gas turbines, nes (4) 4
(61.4) (6.3)
Central Diamonds. excl. industrial Wood, non-conif, rough, unt Cotton, not carded, combed 3
African (40) (33.8) (8.9)
Republic
Chad Crude petroleum (94.9) 1
Comoros Spices, ex. pepper, pimento Essential oils (14.2) Fish, frozen ex.f illets (12.7) 3
(57.9)
Congo Crude petroleum (88.7) 1
Congo Diamonds. excl. industrial Oth. non-ferr. ore, concntr Crude petroleum (16.7) 3
Democratic (42.6) (17.2)
Republic
Cote d’Ivoire Cocoa beans (38.2) Crude petroleum (12) Cocoa paste (7.7) 7
Djibouti Bovine animals, live (20) Trousers, breeches, etc. Othr. ferrous waste, scrap 17
(7.2) (7)
Egypt Natural gas, liquefied (15.8) Crude petroleum. (10.3) Portland cement, etc. (4.7) 46
Africa’s Natural Resources: The Paradox of Plenty
Equatorial Crude petroleum (92.6) 1

Guinea
Eritrea Natural gums, resins, etc Sesame (sesamum) seeds Molluscs (7.6) 14
139
(17.3) (8.7)
140
Appendix Table 4B (continued)
Three main exports, with their share in total exports* No of products
(in %) accounting for more than
Product I Product II Product III 75 per cent of exports
Ethiopia Coffee, not roasted (47.8) Sesame (sesamum) seeds

(20.2) 5
Gabon Crude petroleum (76.7) Wood, non-conif, rough, unt Manganese ores, concentrs 1
(10.6) (6.9)
11/10/07
Gambia Edible nuts fresh, dried Mech.shovel etc.s-propld Groundnuts (peanuts) (7.7) 6
(43.5) (9.9)
Ghana Cocoa beans (46.1) Manganese ores, concentrs Wood, non-conifer, sawn 8
13:54
(7.2) (6.7)
Guinea Aluminum ore, concentrat Alumina (aluminum oxide) Copper ores, concentrates 3
(50.9) (17.2) (7.8)
Guinea Edible nuts fresh, dried 1
African Development Report 2007
Bissau (93.5)
Page 140
Kenya Tea (16.8) Cut flowers and foliage (14.2) Oth. frsh, chll. vegetables (8.1) 27
Lesotho Jersys, pullovrs, etc. knit Trousers, breeches, etc. Diamonds. excl. industrial 4
(29.2) (22) (15)
Liberia Ships, boats, other. vessels Spec. purpose vessels etc Natural rubber latex (8) 2
(73.9) (8.9)
Libya Crude petroleum (95.3) 1
Madagascar Jersys, pullovrs, etc. knit Crustaceans, frozen (13.2) Spices, ex. pepper, pimento 14
(19.4) (9)
Malawi Tobacco, stemmed, Tea (7.6) Sugars, beet or cane, raw (5.3) 4
stripped (59.2)
Mali Cotton, not carded ,combed 1
(81.8)
Mauritania Iron ore, concntr. not agg Molluscs (24) Fish, frozen ex. fillets (13.5) 2
(51.3)
Mauritius Sugars, beet or cane, raw T-shirts, other. vests knit Shirts (7.6) 10
(21.4) (18.7)
Morocco Inorganic acid, oxide etc Insultd wire, etc. condctr. Natural calc. phosphates (5.6) 32
(7.2) (6.8)
Mozambique Alum., alum. alloy, unwrght Crustaceans, frozen (4.7) 2
(73.4)
Appendix Table 4B (continued)
Namibia Diamonds. excl .industrial Radio-active chemicals Zinc, zinc alloy, unwrght. (9.7) 5
(39.1) (11.4)
Niger Radio-active chemicals 1
(79.5)
Nigeria Crude petroleum (92.2) 1

Rwanda Coffee, not roasted (51.9) Ore etc. molybdn. niob. etc Tin ores, concentrates (9.8) 3
(19)
Sao Tome Cocoa beans (55.2) Vessels, oth. float. struct Drawing, measurg. instrmnt (7.6) 4
11/10/07
and Principe (10.9)

Senegal Inorganic acid, oxide etc Molluscs (9.8) Fish, fresh, chilled, whole (6.4) 8
(38.8)
13:54
Seychelles Fish, prepard, presrvd, nes Fish, frozen ex.f illets (27.5) Ships, boats, othr. vessels (11) 3
(44.1)
Sierra Leone Diamonds. excl. industrial Cocoa beans (7.2) Cultivating machinery. etc (4.1) 4
(62.7)
Page 141
Somalia Sheep and goats, live Bovine animals, live (19.7) Fish, frozen ex. fillets (7.8) 5
(34.6)
South Africa Platinum (12.5) Oth. coal, not agglomeratd (8) Gold, nonmontry excl ores (7.9) 39
Sudan Crude petroleum (89.2) 1
Swaziland Sugars, beet or cane, raw Food preparations, nes (9.3) Flavours, Industrial use (9) 20
(14.1)
Tanzania Gold, nonmontry excl ores Fish fillets, frsh, chilld (9.7) Copper ores, concentrates (8.6) 15
(10.9)
Togo Cocoa beans (22.4) Natural calc. phosphates Cotton, not carded, combed (18.6) 8
(19.8)
Tunisia Crude petroleum (9) Trousers, breeches, etc. Insultd wire, etc. condctr (6.7) 36
(8.7)
Uganda Coffee, not roasted (31.1) Fish fillets, frsh, chilld (24.3) Tobacco, stemmed, stripped (7.5) 5
Zambia Copper; anodes; alloys Cobalt, cadmium, etc. unwrt Cotton, not carded, combed (5.7) 5
(55.8) (7)
Zimbabwe Tobacco, stemmed, stripped Nickel, nckl. alloy, unwrgt Nickel ores, concentrates (12.3) 16
(13.9) (12.6)
Africa Crude petroleum (49.2) Diamonds. excl. industrial Nickel ores, concentrates 26
[18] (3.7) [12.6] (2.8) [17.5]
Africa’s Natural Resources: The Paradox of Plenty
Notes: * Products are reported when accounting for more than 4 percent of total exports.
** Figures in [ ] represent the share of Africa in the World export for each product.
141
ADB Statistics Department; PC-TAS 2001–2005 International Trade Center UNCTAD/WTO–UN Statistics Division

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(E) AfricanBank 2007 Ch4 11/10/07 13:54 Page 96

industrialization. Natural resource wealth for detailed discussion of these aspects

Africa’s Natural Resources: The Paradox of Plenty 97

98 African Development Report 2007

Box 4.1: Cross-Country Evidence of the Natural Resource Curse

Sources: Sala-i-Martin and Subramanian (2003); van der Ploeg (2007)

and development prospects of many countries to utilize their natural

Africa’s Natural Resources: The Paradox of Plenty 99

• How, or why, has the potential High Export Dependence in Africa’s

100 African Development Report 2007

Table 4.1: Macroeconomic Indicators

2006, or most recent year with available data

Source: AfDB Statistics Department, Computed from AfDB Database, 2007.

Africa’s Natural Resources: The Paradox of Plenty 101

5 Ibid. 6 IMF (2007)

102 African Development Report 2007

1- Resource-rich countries –3.6 22.6 1.6 –0.2 22.6 6.3

7 See Anyanwu (2006) 8

Africa’s Natural Resources: The Paradox of Plenty 103

Source: AfDB Statistics Department, Computed from AfDB Database, 2007.

104 African Development Report 2007

Africa Resource Rich countries

Resource-Scarce countries SANE

Source: AfDB Statistics Department, Computed from AfDB Database, 2007.

growth experienced by resource-rich • Resource-rich African countries are

Africa’s Natural Resources: The Paradox of Plenty 105

• Resource-scarce coastal countries, in 23 diverse African countries reveal some

106 African Development Report 2007

Figure 4.3: Sources of Growth in Output per Worker

Source: Bosworth and Collins (2003)

9 Se i.e. World Bank (2006c) and Ploeg (2007) 10 Ibid.

Africa’s Natural Resources: The Paradox of Plenty 107

Fig 4.4: The Pace of Expansion in Productivity

108 African Development Report 2007

Figure 4.5: Negative Genuine Saving in Resource-Rich Countries

Source: World Bank (2006c), Where is the Wealth of Nations?

Africa’s Natural Resources: The Paradox of Plenty 109

Figure 4.6: Genuine Saving Rates versus Economic Growth, 2003

Source: World Bank (2006c), Where is the Wealth of Nations?

110 African Development Report 2007

Figure 4.7: Counterfactual Exercise — Imposing the Hartwick Rule

350 resource resource

Africa’s Natural Resources: The Paradox of Plenty 111

Table 4.3: Resource Abundance and Social Performance

Human Development Index Income Inequality

1- Resource-rich countries 0.51 31.1

* For the GINI Co-efficient Index; 0 corresponds to perfect equality

112 African Development Report 2007

Africa’s Natural Resources: The Paradox of Plenty 113

Figure 4.8 Recent Volatility in Commodity Prices

Source: AfDB Statistical Department — Computed from IMF (2007) data.

114 African Development Report 2007

Africa’s Natural Resources: The Paradox of Plenty 115

impose significant costs on the private sector

low business diversification in Africa, most 10

significantly, in oil-rich countries. As Table 5

Table 4.4: Natural Resource Abundance and Diversification Index, 2001–2005

2001 2002 2003 2004 2005

1- Resource-rich countries 5.5 5.1 5.1 4.5 4.1

Source: OECD and AfDB (2007), African Economic Outlook 2007

116 African Development Report 2007

Table 4.5: Natural Resource Abundance and Competitiveness Index, 2007

Overall Basic Efficiency Innovation