Leveraging Minerals for Domestic Development in Africa

Lessons from Countries Experiences

Harare, September 25, 2013

More minerals exports in Africa, but no structural transformation  There hasn’t been much change in structure of the economies in Africa in the last ten years: Africa still remains a producer of raw materials and an importer of finished goods  Some dynamics are changing  Fostering structural transformation is to be understood as a long haul task, and a longer term vision

AFRICA EXPORTS 2000-2011

WORLD BANK, AFRICA PULSE, APRIL 2013

The link between resources and human development is weak Human development indicators are lower in resource rich countries

LIFE EXPECTANCY 2011 (YEARS)

WORLD BANK, AFRICA PULSE, APRIL 2013

.. illicit flows are a drain  AFDB Study finds that between 1980 and 2009 cumulative illicit financial flows from Southern Africa reached 330 bn 2005US$  Illicit Financial Flows were the main driver of net drain of resources from Africa

… while overall domestic policies are weak  weak fiscal frameworks to manage boom-busts cycles  non optimal taxation regimes  lack of strong overall business climates  strong rent-captures  poor linkages with the domestic economy

Countries experiences

Economic Transformation, Value addition and Extraction • Wealth of a nation includes natural capital (rent value of proven reserves), tangible and intangible capital  Wealth of a nation increases if resources are discovered, and extracted and their rent creates aboveground assets  Inefficient extraction of natural resources and dissipation of rents does not create value addition, but reduces wealth 

Successful management of resources entails the ability to transform underground wealth into aboveground physical, intangible, financial) assets, and support economic transformation

The Mineral Rent TAX REVENUE CONTRIBUTES TO CENTRAL BUDGET FORWARD LOOKING MANAGEMENT OF TAX REVENUE POLICIES THAT FOSTER POSITIVE LINKAGES AND SPILLOVERS INTO ECONOMIC SECTORS (*) Costs include high sunk costs for exploration and development, and return on capital

Positive linkages and spillovers

Lessons from other countries l Linkages have been very successful in other countries where exploitation of resources was leveraged towards industrialization and structural transformation e.g. Chile, Indonesia, Peru, Malaysia l Financed the upgrading of the countries ’ physical) from high level of savings endowments (human and l Helped to reduce production costs in new trade sectors, support efficiency while encouraging new entries.

l Good macro-economic policies, fiscal discipline over resource cycles and overall policies supporting the business environment.

l Supported development of economic linkages

Malaysia

RUBBER AND TIN EXPORT

FINANCING EXPORT DIVERSIFIC ATION SUPPORTED MEASURES TO REDUCE COSTS AND INCREASE PRODUCTIVI TY

EXPORT OF RICE AND PALM OIL MANUFACTURING COMPETITIVENESS

FDI INFLOWS, TECHNOLOGY SPILLOVERS, TARGET SUPPORT ZIONES

Indonesia

OIL GAS

SUPPORTED FINACING OF

EDUCATION IRRIGATION/ INFR ASTRUCTURE FERTILIZERS FOOD SECURITY AGRICULTURE LABOR INTENSICE INDUSTRY AND EXPORTS

Source: Gelb (2012)

Chile WELL DESIGNED TAXATION SYSTEM

COPPER

FDI INFLOWS, TECHNOLOGY FORWARD LOOKING MANAGE MENT OF TAX REVENUE WELL DESIGNED INSTITUTIONAL FRAMEWORK

PENSION RESERVE FUND ECONOMIC AND SOCIAL STABILIZATION FUND Macro-balance management Human Capital Development

Qualified workforce

LINKAGES and DEVELOPMENT OF MINING RELATED SECTORS Export of engineering services

In the last 12 years mining providers exports rose to US$ 300 million

Overall Lessons

Mineral Investment, Development, Poverty Reduction 

Optimize levels of investment and extraction

(includes: developing a full understanding of mineral potential) 

Transform under-ground wealth in above ground assets

: Forward looking management of Mineral Tax Revenues toward development expenditures (agriculture, infrastructure, human development and poverty reduction)  Leverage on Mineral rent to support strengthening other industries comparative

advantage: Leverage costs-side of extraction to foster positive linkages

with industry and services 

Build a strong institutional, governance structure, and regulatory framework

moving from short-term rent extraction, to long-term rent management

Stemming Illicit Flows in Africa  Comprehensive measures to address corruption  Improve transparency over the entire resource value chain  Strengthen anti-money laundering  Improve investment codes  Require publication of annual reports  Improve business climate

I. Overall lessons: approach  Limited effectiveness of “one size fits all” approaches  Essential question is: “which size fits what”?

(e.g. Optimal taxation regime is not easy to determine – often sector specific or project specific)

II. Overall lessons: Efficiency

“It does not matter whether it is a yellow cat or a black cat, as long as it catches mice” (Sichuan Proverb)