African Tigers can reverse curse of wasted resources

Old model of developing riches is no longer fit for its purpose

By 2030, nearly half of the world's economies - many of them in Africa, and the majority in sub-Saharan Africa - could be driven by their resource riches. It is vital for the economic prospects of these countries that they do better than many have done in translating this sub-soil wealth into long-term prosperity.

Reverse the Curse: Maximizing the Potential of Resource Driven Economies, a report by the McKinsey Global Institute, estimates that between $11 trillion and $17 trillion of new investment in oil, gas and minerals will be needed to meet demand for natural resources and replace existing sources of supply by 2030. In the past, almost 90 percent of investment in these resources was in high-income and upper-middle-income countries, but the share attracted by low-income and lower-middle-income countries, many in Africa, could almost double, resulting in between $1.2 trillion to $3 trillion of investment by 2030. Such investment could transform lower-income economies, potentially lifting more than 500 million people out of poverty globally.

But resource-driven countries will miss this opportunity if they do not rethink the way they handle these sectors. Their record has been singularly unimpressive. Indeed, countries with large resource endowments have tended to underperform those without, the so-called resource curse. Almost 80 percent of them have per capita income below the global average. They have done an even worse job in translating economic growth into broader prosperity. In Zambia, for instance, poverty levels rose from 2002 to 2010 despite strong economic growth.

If resource-driven countries, particularly those with low average incomes, use their resources as a platform for broader economic development, this could transform their prospects. But the 20th century model of resource development is no longer fit for its purpose. Some resource-driven countries are keen to emulate the approach of the Asian Tigers by developing a strong manufacturing sector and moving up the value chain.

But we do no see this as the answer. We propose instead a "resource tiger" model, tailored to each country but always centered on three imperatives: effectively developing the resources sector; capturing value from it; and transforming that value into long-term development. The McKinsey Global Institute's report looks at six aspects within these imperatives: institutions and governance, infrastructure, competitiveness and fiscal policy, local content, spending a resources windfall, and economic development.

To attract investment, governments need to ensure that their resource sectors are as globally competitive as possible. High tax rates can deter spending on exploration. In Alberta, Canada, exploration investment fell by more than 40 percent after the provincial government increased its royalty charges. But production costs and the share of revenues taken by government are also important ingredients of competitiveness. Governments have to come to a judgment on the right level of revenue take, and this varies hugely. The Canadian government take is 8 percent of production costs; Iraq's is 74 percent.

The interests of extractive companies and governments where they are operating often coincide more than they may think. Infrastructure is an example. Globally, resource-driven countries could need annual investment in infrastructure of more than $1.3 trillion over the next 17 years to sustain growth. Extractive companies need infrastructure to go about their business effectively. So it can make enormous sense in many instances, with the right design and cost-benefit analysis, to share infrastructure.

Local content is another nuts-and-bolts issue that both need to get right. Between 40 and 80 percent of the revenue created in oil and gas and in mining is spent on procuring goods and services, exceeding the value of tax and royalty payments in some cases. Ninety percent of resource-driven countries have some form of local-content regulation, but a lot of it is badly designed. A vivid example is the Democratic Republic of the Congo, which requires 96 percent of jobs in mining and 98 percent of management positions to be filled by its own nationals, but simply does not have enough people with the skills and experience to meet these targets.

In all six aspects of the resource tiger approach, there are practical initiatives that can help both governments and extractive companies do an effective job. These are not radical ideas; somewhere in the world a resource-driven economy has done them well. But together they add up to a concerted program of action that African countries could use to make the most of their endowments of natural resources, reversing the curse of underperformance.

The author is a partner of McKinsey's Johannesburg office and one of the co-authors of Reverse the Curse: Maximizing the Potential of Resource-Driven Economies. The views do not necessarily reflect those of China Daily.