Mining could spur Africa’s industrialisation, but resource-curse risks persist

20th July 2012 By: Terence Creamer - Creamer Media Editor

An industrial development strategy could be built on the back of Africa’s natural resources, demand for which is being underpinned by developing Asia’s current resource-intensive growth path. But a group of leading development economists have cautioned that success will depend on the implementation of policies that support both domestic value addition and domestic enterprises able to create and produce equipment, consumables and services for supply into the mining sector’s value chain.

The high-level group, which met in Pretoria this month under the aegis of South Africa’s Economic Development Department, also acknowledged that the commodity boom still posed so-called ‘resource curse’, or ‘Dutch Disease’, risks for the continent – a phenomenon that develops when surpluses associated with favourable commodity prices are squandered and lead to economic and currency imbalances that result in accelerated deindustrialisation.

However, both Economic Development Minister Ebrahim Patel and Trade and Industry Minister Dr Rob Davies remain convinced that the opportunities for resources-linked industrial development outweigh the threats, particularly if African governments move to integrate their industrial, infrastructure and regional integration policies with their mining policies.

In addition, Nobel Prize-winning economist Professor Joseph Stiglitz, who currently teaches at Columbia University, added that resource-rich countries would need to align their macroecono- mic and industrial policies to deal with the risk of currency overvaluation, which would undermine the ability of domestic manufacturers to compete with exports and reduce their export competitiveness.

The African National Congress-commissioned State Intervention in the Minerals Sector (Sims) document also emphasises such linkages, asserting that mining would be more effective in meeting South Africa’s growth and development objectives if the fiscal, knowledge, backward, forward and spatial linkages were prioritised and enhanced.

To counter the resources curse, Sims proposes a resource rent tax that ensures a 50% sharing between miners and the State in any super profits that might arise during periods of commodity boom. But it also argues that these windfalls should be ringfenced for use on a sovereign wealth fund (SWF), which supported regional infrastructure development, helped with fiscal stabilisation and also stimulated additional minerals development.

Stiglitz stressed that taking advantage of Africa’s resources should not be limited to bene- ficiation alone and should also seek to exploit the value chains associated with resource extraction.

The World Bank’s Célestin Monga cautioned, though, that there was no single formula for avoiding the resource curse and that much more strategic thought should be given to natural resource management, which could emphasise value addition, or harnessing the rents for social programmes, or a combination of the two.

Countries, Monga added, should also give far more thought to the way they contract with mining entities to ensure that there is greater alignment with national objectives.

But not everyone was convinced that the commodity boom was conducive to Africa’s reindustrialisation.

Singapore Ministry of Trade and Industry economic division director Dr Thia Jang Ping argued that high commodity prices might shift the terms of trade in favour of Africa, but they also made African manufacturing “very uncompetitive”.

“Ironically, the rise of the commodity prices may actually accelerate the deindustrialisation of the African production base – more so than it helps,” Thia warned, explaining that currency appreciation “destroys the terms of trade for manufacturing”.

However, he said the SWF could help countries lock away commodity-price-derived sur- pluses and recycle the capital away from the domestic economy to prevent the “full transmission of the Dutch Disease”. “But this requires quite a lot of political will . . . not to use the surpluses for consumption purposes, which destroys industry.”

Similarly, the South African Communist Party’s Jeremy Cronin, who is also Public Works Deputy Minister, warned that, while the resource-intensive growth under way in countries such as India and China could have positive spinoffs for Africa, and even stimulate industrialisation, “there is another potential path . . . [which could] result in a recolonisation process”.

But he said that was not an argument against industrial policy, but rather a warning Africa would have to be active and vigilant in designing policies to ensure that past pit-to-port-type infrastructure patterns were not repeated. “Yes, there is potential in this resource-intensive devel- opment . . . but there are also warning signs.”