Africa can break the “resource curse”

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Rumbidzayi Zinyuke ---
Commodities have shaped Africa’s economic growth for decades as more natural resources continue to be discovered on the continent, increasing the risk for countries to fall victim to the “resource curse”.

The continent is home to a third of the planet’s mineral reserves, a tenth of the oil and it produces two-thirds of the diamonds; among the top ten countries in the world with largest diamond reserves, six of them are African countries.

It follows then that when prices for natural resources have been high, growth has been good; when they have dipped, so has the continent’s economy.

But despite its riches in resources, reports by the World Bank show that African mineral riches have done little to improve the lives of the poverty-stricken population.

The theory of a ‘curse of natural resources’ refers to the paradox that countries with an abundance of natural resources, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources.

While this phenomenon has not been universal or inevitable to all resource rich countries, many African countries have failed to make good use of the wealth amassed from natural resources.

Analysts suggest Africa’s rich mineral and oil endowment has become a curse as it has fuelled corruption and bad governance in countries reaping revenues from it and those that are yet to exploit their deposits are likely to suffer the same fate unless there is a change in the way the revenues are used.

Despite their abundance of oil, diamonds and other precious minerals, African countries endure low average income and poor health indicators.

Most countries have caught the infamous Dutch Disease, whereby the country's manufacturing, agriculture, and other exports become less competitive due to an appreciation in the value of the local currency that comes as a result of a sharp increase in foreign currency inflows from large export revenues from such things as oil.

Often, countries with weak governance and abundant natural resources are prone to armed conflict.

The top eight oil producers in 2011 were Nigeria, Algeria, Angola, Egypt, Libya, Sudan, the Republic of Congo and Equatorial Guinea and violent conflict have plagued these countries in the last decade.

Nigeria has Africa’s second-largest oil reserves, it is the fifth-largest exporter and, according to the IMF, oil accounts for 95 percent of all exports.

In southern Africa, Angola is similar. It is Africa’s second-largest oil producer which makes up the vast majority of exports.

With all these reserves, the majority of people in Angola are still living in abject poverty. The situation has been made worse by the fall in oil prices by more than 50 percent since 2014 which has cut government revenues significantly and pushed the countries into debt.

With the discovery of gas reserves in Mozambique, the country’s economy was expected to take off as the world’s third-biggest natural gas producer, but the country is actually hovering on the brink of a major sovereign debt default.

Following the disclosure of previously hidden government-guaranteed loans exceeding $1 billion in April, Mozambique has lost the support of IMF and numerous donors and financial agencies who used to give direct support to the country’s budget.

In May, Mozambique defaulted on a repayment of US$178 million to Russian bank, VTB for the Mozambique Asset Management (MAM) loan. The government had already restructured the other loans in March and is frantically negotiating to re-structure the MAM loan too.

In light of the expanding debt crisis, some of the biggest potential investors in Mozambique’s huge gas reserves are reportedly re-considering their investments.

The Democratic Republic of Congo is potentially one of the richest countries on earth with huge deposits of almost all minerals. But violent conflict and high levels of corruption have turned it into one of the poorest.

Zimbabwe has also not reaped much from its huge mineral wealth. The southern African country has one of the largest diamond reserves but despite this huge potential, the country did not benefit much from the gems due to serious leakages and illicit flows of revenues from diamonds since the discovery of the gems. Communities living in the area got very little from the companies that displaced them to pave way for their operations or even from the revenues that came from the sale of the diamonds.

Although the government has taken over extraction of the gems in Marange, it just might be too little too late.

Zambia, with its copper deposits has also been a victim of this ‘curse’ as the country has been slowly slipping back into economic hardships with the decline in copper prices.

Despite all the challenges facing the countries endowed with natural resources, it is not all doom and gloom as there are measures that governments can take to avoid the ‘curse’.

Which is what Botswana has done.

Since the 1970s, Botswana has been the world’s largest producer of diamonds and has avoided conflict and corruption despite the fact that minerals account for three-quarters of its exports and over 40 percent of its GDP.

Botswana is one of the least corrupt countries in the world and has managed to diversify its economy by putting in place policies that encourage business growth, regional investment and FDI.

The country also managed to divest its revenues to make the economy less susceptible to global markets and invested surplus revenues.

For years, African governments have been urged to diversify their economies as this is paramount in ensuring a long term sustainability of the economy. More countries have actually begun to work on economic diversification, helped by an increase in investment as governments work on policies that make life easier for investors. The World Bank’s annual “Doing Business” report shows that sub-Saharan Africa has been doing more to improve regulation than any other region.

And after two decades of poor performance, Africa’s total investment as a percentage of GDP has actually been increasing.

Tightening of government spending in many countries has also helped to save money and avoid the debt trap as well as boost investor confidence.

Analysts also say Africa could be prosperous if it practised good governance and encouraged transparency in its dealings with mining, oil and gas companies.

Transparency alone, however, is not sufficient as countries have to move a step further from transparency to actual accountability as a way of fighting corruption.

The problem however has been that governments lack the capacity to equip their people with the required skills to educate citizens in auditing, accounting and tracking of revenues and expenditures to improve the level of accountability within the economy.

While Africa still has a long way to go, there is still hope that the continent will beat the “curse” despite its dependence on commodity exports.

Africa remains one of the world’ fastest-growing regions and with better resource management policies, education systems, investment in infrastructure and practical regulatory reforms, the continent could completely break the ‘curse’ that has held it back for so long.

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Africa can break the “resource curse”

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