Credit: AfDB - Photo: 2014

Making Extractive Industries Truly Transformative For Africa

By Isabelle Ramdoo and San Bilal* | IDN-InDepth NewsEssay

MAASTRICHT (IDN) – The sustained commodity boom of the last decade provided a new impetus to a number of African countries, after decades of economic turmoil. High growth rates, recorded in recent years, uncovered new opportunities to finally address long-standing socio-economic challenges that had hindered the continent’s economic performance for decades. From an economic perspective, to be truly transformative, these opportunities will have to be translated into employment creation, improved productivity and industrialisation, and governments will increasingly be put under pressure to deliver on concrete results.

Among the priorities, two issues stand out as being very high on the agendas of many African countries. Firstly, the capacity to mobilise domestic revenue from extractive resources is viewed as essential to finance broader economic priorities, both within and outside the extractive sector. Secondly, it becomes imperative to define a clear strategy towards industrialisation to diversify away from the dependence on commodities and more broadly, to consolidate the economic base.

Many African countries have used export controls, in various forms, as a policy tool to mobilise revenue from the extractive sector and to foster industrial development. While the purpose is not to gauge whether export controls are good or bad policy measures, the reasons that drove governments to raise such measures have to be understood and it is important to examine to what extent it has worked (or not).

While in some economic sectors there have been positive impacts, the peculiar nature of the extractive sector soon showed the limits of export controls. In effect, contracts, special fiscal regimes and stabilisation agreements all contributed to create watertight business environments for industries, in such a way that the extractive industries were, in the end, insulated against such measures. For example, of 40 resource-rich African countries, 21 apply exports taxes and most of them are subject to other forms of export controls. Yet, most of them still have challenges to maximise fiscal revenues and are still highly dependent on commodities with little success in diversifying their export base.

To address the fiscal challenges, it is therefore important to go one step beyond, to improve the overall management of revenues from the extractive sector. Export taxes as a measure to fill in government coffers have their limits: stronger overall fiscal regimes have to be put in place and different fiscal instruments, adapted to the stage of mineral development, need to be clearly defined and implemented. Corruption, rent-seeking and patronage need to be addressed, as they distort the system. Capital flight and illicit capital flows – unsurprisingly largely present in resource-rich countries – have to be tackled as they drain currency reserves and squeeze revenue collection.

This requires strategic planning and bold and transparent mineral reforms. Beyond fixing the leakages, effective revenue collection needs to be managed prudently. This includes (i) managing government expenditures, to prevent the unwanted effects of the Dutch Disease; and (ii) managing excess revenues and foreign reserves in times of booms, with the possibility to save part of the revenue for future generations, through the creation of sovereign wealth funds.

As mentioned, industrialisation is no longer a choice in Africa, it is an imperative. While in some economic sectors (for instance the leather sector in Kenya) the use of export restrictions has indeed encouraged local processing, in the extractive sector however, there has been limited success. Zambia, for instance, moved one step up the value chain, from copper concentrates to refined copper. But successful cases are rare to find. Yet, potential to develop linkages, both with and outside the extractive sector, are quite significant.

With complementary industrial policies it is possible to develop smart productive linkages, which also need to be accompanied by spacial linkages, i.e. inclusive infrastructure corridors that can stimulate clusters and integrate local economic activities. It is equally important to  promote knowledge linkages to foster innovation, creativity, skills and capacity to maximise the economic and social potential and benefits associated with extractive resources.

Within the extractive sector, forward, backward and lateral linkages should be encouraged, if there are business cases to do so, and provided supply-side constraints such as infrastructure and energy deficits or skill mismatch or shortages are addressed. These can generate value-added activities and location-specific activities, notably for the local private sector.

A key consideration for African countries is to seek to develop activities where higher value is actually created. These are generally activities that create jobs and contribute significantly to the national output. The availability of cheap labour and relatively low costs of production confers a theoretical comparative advantage to a good number of African countries.

The manufacturing sector remains a key priority for most African countries, for obvious reasons that it is a big employer, in particular for lower-skilled  people and is relatively easy to set up (provided there is a business case to do so). More importantly, it serves as an incubator for new ideas. However, contrary to what one might think, it might not be where most value can be created. Experience has shown that much more value can be created in supportive services, at the concept phase, or during the distribution phase.

It is therefore important to rightly frame the policy objectives to be achieved. If the objective is to create value, then the focus must be on the development of services that surround manufacturing processes, such as research and development, branding and design in order to become competitive over concepts. Markets and logistics are the other types of activities that generate significant value added.

However, if the objective is to create jobs and develop an industrial base, then policies will have to focus on competition over processes, bearing in mind that this will place the country at the lower level of the value chain, unless activities are integrated globally. Here, smart industrial policies will have to be well defined and clearly implemented.

Linking with other productive sectors

Linking the extractive sector with other productive sectors, such as agriculture is also crucial. In most African countries, agriculture is a major economic sector and therefore has significant potential to be transformative. For now, many countries continue to struggle to improve productivity. Resources from extractive sectors could be used to catalyse the agricultural sector, in particular in areas where the two sectors co-exist.

The next step is to ensure that domestic industries are efficiently linked to regional and global value chains (GVCs). Over the years, production structures have become more and more structured around GVCs, as a result of technological progress, of a more liberal international trade framework and of the increasing role of emerging economies as new drivers of production structures. This has to be factored in when defining policies to boost industrial development.

But ironically, while most resource-rich African countries are crucial providers of raw materials for industrial products, unfortunately, most of them have been operating at the lowest rung of the ladder in GVCs and have not been successful in developing their own niches. They remain locked as perpetual providers of unprocessed inputs and have failed to move up. Efforts are being done to change the state of affairs.

Amongst others, reforms include requirements to use local content and procurement as a catalyst to industrial development. National efforts alone are however not sufficient to embrace economic transformation in a sustainable manner. Most extractive industries operating in Africa are connected to regional and global networks, as their raw materials are essential inputs to the production of goods.

In this context, no country can reach its full potential unless its neighbours and economic partners are successful. The most effective approach to boost Africa’s industries is to explore the potential to combine industrial strengths, deepen interconnectedness and develop competitive and functioning markets, starting with the regional level. Boosting intra-Africa trade, simplifying and reducing the costs of cross-border trade, improving the business environment, improving cross-border infrastructure are all vital conditions of a functional regional market.

Role of development cooperation

What role for development cooperation? The role of development partners in supporting African initiatives can only be modest: key impetus and drive should come from Africans themselves, and resource-rich countries have potentially greater means (i.e. revenues) to reform their economies. Yet, the role of development partners should not be under-estimated. Despite the crisis, both the European Commission and the EU member states remain significant providers of development support, often in the form of financial support but also in the form of technical assistance and capacity building. But their relative role of development partners is likely to diminish, and so will their political weight, as economic conditions improve in many African countries.

This is not to say that they will no longer be relevant or may no longer have constructive experience to share with African countries. Increasingly, constructive support may take the form of capacity and institutional support. But this needs some adjustments in the form and the content of current development strategies.

For a large part, donors have focused their support on transparency and management of resources. However, support to development initiatives remains rather thin. When it exists, it remains largely focused within donors’ own interests. The shifting geopolitical landscape in Africa however calls for a different, innovative approach, based on partnership and mutual benefits between development partners and African countries. While it is well understood that national resource strategies are meant to address first and foremost the needs of resource-dependent countries, reconciling those with the interests of resource-rich countries is likely to yield far more constructive results.

To make a difference, development support needs to pay particular attention to the political economy dynamics at play in resource-rich countries. These include understanding who are the main drivers of change (or blockage) and what are their incentives, what are the power dynamics like and in what particular country-specific institutional settings donors are involved. Once that understood, support should aim at providing incentive-compatible interventions that are political feasible and acceptable. This is not easy but may ultimately prove to be more efficient.

A complementary venue is to alter the incentives of the ruling elite, whose vested interests and power dynamics may otherwise bolster the resource curse. Such strategies may include interventions that seek to extend the time horizon of policymakers or mobilising stakeholders to increase the ranges of interests involved. Interventions that seek to ‘enclave capacity and institutions’ related to natural resources have also been advocated as an additional mechanism to promote better governance.

Last, but not least, the international development community should better anchor their actions in domestic dynamics for change. Indeed, an increasing source of dynamics for shifting domestic incentives towards a pro-development path in resource-rich countries comes from collective action in Africa, at national, regional and the continental levels.

*This article is Executive Summary of Discussion Paper by Isabelle Ramdoo and San Bilal titled ‘Extractive Resources for Development: Trade, fiscal and industrial considerations’ published in January 2014 by the European Centre for Development Policy Management (ECDPM), based in Maastricht, the Netherlands. [IDN-InDepthNews – January 25, 2014]

Image credit: AfDB

2014 IDN-InDepthNews | Analysis That Matters

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