10. PASCHALINE ONWUKA

INTRODUCTION

Many  African  countries  are  rich  in  mineral  resources.  This  has  not  always  been  a  blessing.  The huge  revenues  from  commodity  exports  have  been  very  volatile.  Furthermore,  these  revenues are  often  temporary  and  thus  sound  fiscal  policies  are  required  to  ensure  that  sufficient investment  takes  place  in  productive  and  human  capital  for  when  resources  run  out.  This  is  a difficult  task,  since  the  volatility  of  commodity  export  revenues  invites  excessive  public spending  without  proper  scrutiny.  The  huge  volatility  of  resource  prices  also  harms  both domestic  and  foreign  direct  investment  and  depresses  economic  growth  by  a  large  amount, especially  if  domestic  financial  institutions  are  poorly  developed.  Many  resource-rich  African countries  also  suffer  from  real  appreciation  of  their  exchange  rates  induced  by  the  huge resource  export  revenues  and  aid  flows.  This  really  hampers  prospects  for  non-resource exports  in  those  countries.  The  sheer  volume  of  resource  revenues  diverts  attention  away  from the  task  of  diversifying  exports  away  from  commodities  to  labour-intensive  manufacturing exports. 

THE DUTCH DISEASE PARADOX- THE PROBLEM

The term  Dutch Disease refers to the fears of de-industrialization that gripped the Netherlands as a result  of the appreciation of the Dutch currency  that  followed the discovery of natural gas deposits. The appreciation of the Dutch currency that followed the  gas export boom  reduced  the profitability of manufacturing and  service exports. Total exports decreased markedly to GDP during the 1960s. Sachs and Warner (1995, 1997  and 1999) found a detrimental impact of natural resource exports on growth, which they attributed to  Dutch Disease. Acemoglu et al. (2001, 2002 and 2004) found that the nature of  institutions is more important than resources. Lederman and Mahoney (2007) query both results and argue that natural resource rents boost economic growth. 

The Dutch Disease can be a real disease and a source of persistent slow growth, if there is something special about the sources  of growth in manufacturing (decline in leading technological-knowledge  sector) with production externalities or the learning-bydoing stressed by Matsuyama (2006) where he  assumed that there are increasing returns to scale in manufacturing, but  not in the resource sector. In principle the Dutch Disease  can be seen as a matter of one sector benefiting partly at the expense of others, therefore it is not an impediment  per se; however  the disease is potentially harmful if there is  something special about  the reallocation of resources between sectors, for example from  high-tech service industries to low primary production (Gylfason 2005). 

The paradox effect of natural resource abundance on the economy is commonly described as an economy experiencing an export boom, and divided into three sectors:   (a) the booming export sector; (b) the lagging export sector – traditional exports - as the two traded good sectors; and (c) the non-traded goods sector, which essentially supplies domestic residents and might include retail  trade, services and construction. In the presence of the Dutch Disease,  the traditional export sector gets crowded out by the other two sectors (Bevan et.al, 2009).


The Case of Nigeria- The Oil booming Nation

 The growth decomposition of Nigeria’s performance since 1965, provided in Sala-i-Martin and Subramanian (2003), presents  two notable characteristics which are: the rapid accumulation of physical capital,  averaging 6.7 percent per year; and negative TFP growth, averaging 1.2 per year. Oil was responsible for the physical capital accumulation, suggested  by the timing of the surge in investment. Between 1973 and 1980, the years of the two majors  oil prices shocks, the capital stock grew at an average rate of 14 percent per year, which represented a three-fold increase in the country’s capital stock in 8 years. A substantial part  of the increase was public capital spending financed by the surging oil revenues. Public investment as a  share of GDP rose by over 7 percentage points during the period of the oil shocks. Between the 1960s and the end of the second oil shock the share of  public sector in capital formation increased from  20 percent to 55 percent; and the  real GDP growth (Fig.1) rate  has been erratic compared to Indonesia for the same  period. 





(Fig. 1)  Nigeria: Real GDP  Growth  from  the early 1970s  -  2006


 Source:  World Development  Indicator  database,  World  Bank.   


THE WAY FORWARD: RECOMMENDATIONS

There should be a review of all mechanisms and management arrangements related to mineral revenues in every stage of the resource chain. There should also be a focus on assessing the overall mineral wealth governance and management arrangements in place from  the collection of  taxes and royalties to sound and sustainable projects, including possibly project monitoring, hence addressing the resource paradox.

In a bid to reduce poverty and foster broad-based economic growth in Africa, a well formulated and prioritized budget is critical in this regard. With substantial mineral wealth, mineral-rich countries should  be able to make rapid progress toward a sustained-growth-path and poverty reduction. The budget is both an instrument  of economic management and an  implicit policy statement, as it sets relative  levels of  spending and priorities for different  programs  and activities. 

There should be enforcement of property rights for  a broad cross-section of  society, so that a variety of individuals have incentives to invest and take  part in economic life; There should be Constraints on the actions of elites,  politicians, and other powerful groups so that these people cannot expropriate the incomes and  investment of others in the  society  or create a highly uneven playing field; There should also be Provision of some  degree of  equal opportunity for broad segments of the society,  so that they  can make investments, especially in  human capital, and participate in productive economic activities.

CONCLUSION

The purpose of this essay has been to  put together  a comprehensive approach that could contribute  to address the resource paradox issue in mineral sector in Africa, while suggesting the strengthening of windfall management  mechanisms and institutions, and the implementation of good economic policies toward a sustained growth-path and hence, job creation and durable poverty reduction in Africa.

REFERENCES

Acemoglu, Daron, Simon Johnson, and James  A. Robinson. 2001a. “An African Success Story: Botswana.” Working Paper 01–37, Department of Economics, Massachusetts Institute of Technology (MIT), Cambridge, MA. 

Bevan, D; P Collier, J.W Gunning, 2009, The Political Economy of Poverty, Equity, and Growth: Nigeria and Indonesia,  Oxford University Press. 

Gylfason, (2005).  Context Matters – Rethinking the Resource Curse in Sub-Saharan Africa. Working Papers No1. Mathias Basedau

Lederman, W; and R. Mahoney, 2007, Tropics, Germs and Crops: How Endowments influence Economic Development, mimeo, Center for Global Development and Institute for International Economics.   

Matsuyama, (2006). Meeting the Challenge of the Resource Curse  – International Experiences in Managing the Risks and Realizing the Opportunities of Non-Renewable Natural Resource Revenues – United Nations Development Programme – January 2006. 

Sachs, Jeffrey D; and Warner, Andrew M.  (1999) the Big push, Natural Resource Booms and Growth. Journal of Development Economics, Vol59, 43-76. ------ 1995. Natural Resource Abundance and  Economic Growth. Working paper 5398 (Cambridge, Massachusetts: National  Bureau of Economic Research). ------1997. Natural Resource Abundance and Economic Growth. Harvard University, Cambridge MA.(November, 1997.


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