THE BLOG

Africa's Mineral Wealth Can Be a Springboard for Development

Africa is on the verge of a development breakthrough. Since the turn of the century, there has been rapid and sustained economic growth across the continent.

Extreme poverty has come down, child and maternal mortality have been sharply reduced, and most countries have made progress towards meeting the Millennium Development Goals (MDGs), the eight internationally-agreed targets to reduce poverty, hunger, and disease by 2015.

But it will take a different kind of growth - faster and more inclusive - to improve the lives of people in Africa on a much broader scale.

There is today a unique combination of high commodity prices and very large discoveries of oil, gas, minerals that has the potential to both accelerate growth and improve standards of living in Africa in the years to come - provided that African countries can do three things.

First, the proceeds from extracting resources have to be captured effectively and transparently. Mining, oil, and gas are usually capital intensive. International companies typically provide the technology, skills, and finance required. This means that much of the income generated from these industries goes to foreigners. Whether Africans benefit depends largely on how effective governments are in raising revenues from taxes and royalties.

Transparency and accountability are important in this regard. The Extractive Industries Transparency Initiative (EITI) sets concrete governance standards for managing revenues from natural resources. These include requirements for reporting corporate payments to the State and making disclosures on government returns from these sectors.

As of now, 13 countries in Africa are fully compliant with EITI, more than in any other region. Three are implementing EITI but not yet fully compliant and an additional three have had their EITI compliant or candidate status suspended.

African countries often lack the knowledge and experience needed to negotiate large contracts with international firms operating globally in mining, oil and gas. The United Nations Development Programme (UNDP) has been helping to better prepare African governments to negotiate contracts.

Second, even if the proceeds from oil and mining are adequately captured by governments, they have to be well managed. In the process, countries that are heavily reliant on extractives for public finance and access to foreign currency have to deal with volatile commodity prices. Sharp fluctuations in prices can disrupt public spending and affect their ability to import essential goods and services.

Managing revenues from oil, gas and mining also implies making decisions on how much to invest now, versus how much to save for later, given that these resources will eventually run out. When a country is rich, it can either save or distribute most of these resources directly to people.

But the calculus is not that simple for countries where a majority of the population is living in extreme poverty and physical and human capital are massively lacking. Saving some resources for later still makes sense for many African countries, in the form of "rainy day" funds to deal with fluctuations in commodity prices and preserve resources for the future. But improving the lives of current and future generations means also investing in infrastructure, health, education and building human capacity to deliver these services.

If these investment opportunities are missed, high levels of national per capital income can coexist with low living standards. This contrast can breed discontent, instability and even conflicts, fueled by domestic and foreign disputes over resources.

Third, because mineral, oil, and gas reserves are finite, the economy has to progressively expand into sectors not linked to extractives, such as manufacturing, high productivity agriculture and high value services.

Countries that have fulfilled conditions one and two but failed to diversify have often missed an opportunity for long term development. At the other end of the spectrum, many resource-rich countries have used their wealth as a springboard to prosperity.

Diversification is made more difficult when the currency appreciates as countries begin extracting resources - something known as "Dutch Disease." This makes imports much cheaper and domestic firms less able to compete internationally, constraining the growth of industry.

Avoiding the Dutch Disease is, therefore, necessary but far from sufficient. Investments are needed to allow for a structural transformation of the economy, including higher productivity and better paying jobs. This is particularly important in Africa, where up to 80 percent of the people at work - and 85 percent of women are trapped in low-productivity agriculture and low-value services that pay poorly or don't pay at all.

This year's African Economic Outlook, which UNDP co-authored with the African Development Bank, the Economic Commission for Africa and the Organization for Economic Development and Cooperation, offers policy options on how to use extractive resources to trigger structural transformation, in light of the three principles outlined above.

These issues will be discussed during this year's International Economic Forum on Africa, hosted by OECD in Paris.

Underpinning these options is the need to guarantee environmental sustainability, distribute the benefits from extraction effectively, create social safety nets, invest in skills and infrastructure and intensify agriculture to create jobs and bolster food security.

I have every reason to think Africa will embark on this much anticipated development breakthrough. UNDP is committed to supporting the region as it makes the delicate transition from growth to shared prosperity and increased well-being.

* Abdoulaye mar Dieye is Director of the Africa Bureau of the United Nations Development Programme

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