Getting it right

A four-layer approach to natural resource-based structural transformation

Examples of how to turn a country’s resource wealth into good economic outcomes for all are to be found in all regions of the world and for every resource type. They show that resource production can i) create revenue, which can be invested strategically to promote growth and structural transformation; ii) stimulate growth in several sectors through linkages into and out of resource sectors; iii) support integration into the global economy through foreign investment. While the geological distribution of resources is given by nature, resource abundance in economic terms is largely determined by the exploration conditions faced by investors.

Natural resource-based structural transformation requires a four-layer policy approach that combines investment in fundamentals with a push for transformation. Figure 6.15 illustrates this. As the preceding sections have shown, irrespective of the sector, new activities with the potential for structural transformation need a favorable environment if they are to thrive. Providing the fundamentals such as high-quality public services, a favorable institutional and regulatory environment, capable government and access to finance and markets constitutes the first layer. Where this is provided, the entrepreneurial activity can bloom across the spectrum, in agriculture and extractives but also in manufacturing and services. The fundamentals also comprise transparent, accountable and inclusive governance systems which ensure that revenues are used for broad-based growth in the interest of society as a whole. The environment specific to the natural resource sectors constitutes the second layer for structural transformation based on natural resources. Extractive-resource exploration and exploitation need regulations that provide incentives for investment (see also Box 6.10), and all-natural resource-related activities require effective systems of land management and ownership as well as a supply of skills and research specific to the resource sectors. Agriculture is often held back by insufficient supplies of fertilizer, a crucial input. Managing the special opportunities and challenges of natural resources constitutes the third layer and applies mainly to extractive resources. Optimizing revenue from resource production in the form of a balanced tax system is paramount. The investment needs to provide the right conditions for structural transformation in Africa are immense and taking a fair share of resource revenues is crucial. Yet the past has shown that prudent management of revenues and spending is at least as important. Managing the impact of resource extraction on communities and the environment requires prudent management as well. The fourth and top layer is the realm of active government policies pushing for structural transformation. This push must differ from past attempts in two crucial aspects. First, it must focus on making agriculture more productive. Second, it must focus on viable linkages for which a business case exists. Most of these will be backward linkages, but forward linkages might be possible. In either case, the creation of capabilities must remain a core objective.

Evidently, one size does not fit all. Africa exhibits great diversity in natural-resource endowments and levels of development. Strategies for structural transformation must reflect this diversity. Despite recent new entrants such as Chad, Mauritania, and Ghana in oil and Cameroon, Congo Republic, Ghana and Tanzania in gas, energy resources remain the most concentrated type of natural resource. Only 19 African countries produce significant amounts and four countries ( Algeria, Angola, Libya, and Nigeria) accounted for 77% of oil production and 87% of reserves in Africa in 2010 (EIA, 2012). In contrast, all African countries produce food and non-food agricultural commodities and 44 countries produce metals or minerals. Nevertheless, concentration is present as well. Four countries ( DRC, Ghana, South Africa, and Zambia) accounted for 70% of all mining production in 2009 (BGR, n.d.) and 15 countries account for 75% of Africa’s agricultural production (FAOStat, 2012). The level of dependency on resources varies greatly too. Poor countries are always resource-dependent, middle-income ones maybe. Table 6.3 shows the level of resource dependence measured as the share of gross resource production in GDP. In the poorest countries, resource production accounts for the lion’s share of GDP (or even more than that, as gross production figures are used), reflecting the findings of this chapter’s analysis of structural transformation. At higher levels of GDP two groups emerge middle-income countries with a relatively high share of resources in GDP and middle-income countries with a low share of resources in GDP. Those with a high share of resources in GDP are exclusively oil exporters. The group with a low share of resources in GDP combines resource-poor countries such as Seychelles, Mauritius and Cape Verde (not counting the beauty of nature as a resource), but also Botswana and South Africa, which rank seventh and eighth respectively in terms of per capita resource production in Africa.

Botswana’s exceptional role as a major diamond provider enabled it to use its bargaining power to promote forward linkages. However, other attempts at creating manufacturing capacity failed. Through interaction with DeBeers, the lead diamond producer, the government acquired expertise in the organization of the industry and exploited it to make the interests of DeBeers coincide with its own. In the 1980s processing was promoted through the establishment of a cutting and polishing industry for diamonds in order to create employment, even though DeBeers strongly opposed the idea. Under government pressure, three factories for cutting and polishing were established. However, none of them has ever been profitable. Some observers assumed that these losses might have been created artificially through transfer pricing, in an attempt to prevent further pressures from the government to establish downstream activities. These assertions have, however, never been investigated (Morris, Kaplinsky and Kaplan, 2013). In 2005 the government used its bargaining power when renegotiating mining licenses with DeBeers. Under the new agreement, 16 factories for cutting and polishing were licensed for operation. The government and DeBeers set up a 50-50 joint venture, the Diamond Trading Company which controls diamond supply and is required to release a specified amount of diamonds to local manufacturing companies. It contributes to employment creation by setting targets for training domestic workers. Penalties for non-performance mean incentives for DeBeers correspond with national interests (Morris, Kaplinsky and Kaplan, 2013). As part of the sales agreement, DeBeers will further “transfer its London-based rough diamond aggregation and international sales activity to Botswana by the end of 2013. This has the potential to transform Botswana into a leading diamond trading and manufacturing hub.” (DeBeers, 2011). An attempt to diversify into car manufacturing in the 1990s, however, failed spectacularly after initial success, mainly because of previously underestimated competition (Good and Hughes, 2002).

In South Africa, the long experience of serving the domestic mining industry led to the development of local technological expertise and a network of local suppliers (Morris, Kaplinsky and Kaplan, 2013). The upstream industry, based on the South African platinum group metals (PGM) industry, illustrates market-driven linkage development backed by government interventions. PGM-related mining operations in South Africa are the largest consumers of PGM-related goods and services in the world. The presence of this core clientele in South Africa was a crucial stimulus for the establishment of local supplier networks. Its development was further facilitated by the existence of suppliers to other commodity producers in South Africa, whose expertise provided a strong foundation to build on. Increased competition in world markets maintained pressure for cost-effectiveness, which led to constant improvements in technology (Lydall, 2009). South Africa is now a net exporter of mining equipment and specialist services (Morris, Kaplinsky and Kaplan, 2013).

Tunisia, which lacks major resource endowments, applied a broad-based strategy promoting agriculture, manufacturing, and services for economic diversification and used its geographical proximity to Europe to integrate into its economy. To diversify its economy, Tunisia identified as priorities aeronautical and automotive components, information and telecommunications technology (ICT), and offshoring, textile, leather, and shoes as well as agri-processing. Even though the amount of its arable soil is limited, Tunisia has been able to develop a strong agricultural sector. While relying on a small number of goods, the country has been able to diversify into a variety of agri-business activities. Using its proximity to the EU Tunisia intensified economic integration by entering into a free-trade agreement (OECD and UN, 2011).