Africa’s resource future — Harnessing natural resources for economic transformation during the Low carbon transition
Minerals, oil, and gas account for a third or more of exports from most countries in Sub-Saharan Africa, and can reach similar shares of government revenues.
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The majority of countries in Sub-Saharan Africa can be categorized as resource rich, with more on the path to reaching this status given two decades of major new discoveries.
Sub-Saharan Africa has large reserves of resources such as oil, gas, and minerals, but has struggled to convert this wealth into sustainable prosperity.
During the last commodity price boom, which lasted from 2004 to 2014, economic growth accelerated to record highs in the region’s resource-rich countries.
But this prosperity proved to be precarious and dependent on high commodity prices, and few African countries shifted away from being resource-driven economies during this period.
Since the decline in commodity prices in 2014, resource-rich Sub-Saharan Africa has grown more slowly than the region’s average growth rate, which is consistent with the “resource curse” hypothesis.
The previous boom and bust in commodity prices in Sub-Saharan Africa resulted in missed opportunities for the region’s resource-rich countries to convert their resource revenues into sustainable, diversified prosperity.
This has led to slower economic growth and disappointing progress on poverty reduction. By 2030, it is projected that more than 80 percent of the world’s poor will be in the Africa region, and almost 75 per cent of the world’s poor will live in resource-rich countries.
As a result, global poverty eradication is becoming disproportionately a challenge faced mostly by resource-rich countries in Sub Saharan Africa.
Africa’s natural resource wealth nonetheless harbors significant untapped economic potential. About one-third of the total stock of wealth in Sub-Saharan Africa is held in various forms of natural capital, including nonrenewable petroleum and mineral deposits (World Bank 2021).
Sub-Saharan Africa has seen more major petroleum discoveries since 2000 than any other region of the world, accounting for 50 per cent of all giant discoveries in the 2010s (Cust, Rivera-Ballesteros, and Mihalyi 2021).
Nevertheless, many mining and petroleum projects remain undeveloped. Buoyant commodity prices, if sustained, could be a major opportunity for new projects and thus for new sources of government revenues.
Harnessing natural resources to drive economic growth is critical to Africa’s future. Subsoil assets such as metals, minerals, oil, and gas remain important sources of government revenue, export earnings, and economic development potential in most African countries. Resource deposits could last decades, with new discoveries happening every year.
Resource revenues continue to be a major source of government financing, and in most of Sub-Saharan Africa, resources make up a significant portion of the economy.
To better mobilize these revenues for Africa’s economic transformation and achieve sustained growth, there are a series of policy choices that countries in the region should be considering for implementation.
Recommendations
Capture the full value of resource rents, subject to fiscal terms that attract investment and are robust to changing conditions. World Bank estimates put the rental value at 2.6 times the level of government revenues, on average, with wider variations in specific countries.
This implies that citizens are missing out on significant untapped revenues consistent with the same levels of investment, resulting in a substantial subsidy to production.
This failure to fully capture rents encourages more fossil fuel production, and therefore more emissions, than would otherwise occur.
Mining also results in environmental and social externalities not always fully borne by producers. Better taxation of extractives therefore offers a “double dividend,” for both people and the planet.
Much more could therefore be done to invest in fiscal administration and to capture a greater share of resource rents.
The international community could also play a supporting role to governments in the region as part of their efforts to mitigate climate change as well as improve development outcomes.
Manage structural challenges and prepare for the next boom-bust cycle. Policy makers in resource-rich countries may have more success working toward asset diversification rather than export diversification.
Asset portfolio diversification is an important step toward sustained growth and is more feasible for resource-rich countries to achieve than traditional export diversification because of pressure from Dutch disease (Cust and Rivera-Ballesteros 2021a).
The Changing Wealth of Nations 2021 report (World Bank 2021) suggests that targeting asset portfolio diversification—investing in the expansion of human and physical capital—instead of export diversification may be a successful policy for sustainable economic growth.
Countries need to be mindful of policies that are consistent with managing expectations and ensuring fiscal sustainability, tempering the pressure to borrow and spend ahead of revenues.
Discoveries can leave countries exposed if they are not prepared for declining prices.
This is especially true where global decarbonization may imply both declining fossil fuel prices in the future and higher variation of natural resource prices due to mismatched supply and demand.
Support the transition to automation and mechanization. Given the expected decline in mining jobs resulting from mechanization, identifying new ways to increase employment opportunities is critical.
The demographic dividend will translate into a sharp increase in the size of the workforce, and harnessing this workforce within the mining sector will require strengthening the foundation of basic education.
Undertake regional harmonization of mining taxes and royalties. Tax harmonization has three components: an equalization of tax rates, a common definition of national tax bases, and uniform application of agreed-on rules (Mansour and Rota-Graziosi 2013).
The lack of harmonized tax policy can undermine regional integration, even with the establishment of a customs union, a common market, and a monetary union (IMF 2015). Harmonized tax rates remove tax distortions and prevent competition for capital.
Tax competition can foment a race to the bottom, which does not benefit any country given the reduction in tax revenue. Harmonizing tariffs and royalties requires rigid implementation, including coordination and surveillance.
A powerful first step would be the creation of a common floor rate.
Main findings
Sub-Saharan Africa has experienced increasing, not declining, resource abundance. Today there are markedly more resource-rich countries in Sub-Saharan Africa than there were at the turn of the twenty-first century, and the number is trending even higher because of new discoveries every year.
By one definition (IMF 2012), the number of resource-rich countries rose from 18 out of 48 before the boom to 26 out of 48 countries by the end of the boom.
This trend was caused by a combination of new discoveries, new production, and rising resource prices that pushed up levels of resource abundance and resource dependence and pulled more countries into this resource-rich grouping.
Multiple discoveries in the past four decades have more than doubled the existing oil and gas reserves in the region.
In the opposite direction, limited success in diversifying their economies away from resource dependence resulted in few countries exiting this grouping.
Climate change will shift the resource paradigm. Estimates suggest that 80 per cent of proven fossil fuel reserves must remain under the ground to meet carbon-reduction targets (Bos and Gupta 2019).
The transition from fossil fuels to clean energy is likely to create demand for 3 billion tons of minerals and metals needed to deploy solar, wind, and geothermal energy by 2050 (World Bank 2020a).
This low-carbon energy transition will increase demand for many of the resources found in abundance across the region.
Lithium, cobalt, and vanadium, for example, are critical for energy storage, and copper, indium, selenium, and neodymium are essential for the production of wind and solar power generators.
About one-third of Sub-Saharan Africa’s stock of wealth is held in various forms of natural capital, including nonrenewable petroleum and mineral deposits, which reached more than US$5 trillion during the boom years (World Bank 2021).
Furthermore, resource rents are estimated to account for 9 percent of resource-rich Sub- Saharan Africa’s GDP (World Bank 2021).
However, this figure far exceeds revenues captured by governments, with rents on average 2.6 times higher that revenues. This finding implies that countries may be failing to capture their full share of rents.
Although still relatively underexplored, the African continent already hosts a large proportion of the world’s mineral resources.
These endowments place Africa at the center of the clean energy transition, given that resources such as cobalt, manganese, graphite, and lithium are central to clean energy technology.
The legacy from Africa’s commodity price boom and bust was one of missed opportunity.
Countries squandered the opportunity available during the boom years, and therefore were poorly prepared for the drop in commodity prices.
Many had failed to save and invest a sufficient proportion of resource revenues to grow national wealth via the accumulation of offsetting assets during the boom.
As a consequence, the bust period saw collapsing growth and a reversal of economic gains made during the boom. Several resource-rich countries even entered debt crises after 2014.
During this bust period (2015–20), there was also a more general pattern of resource-rich countries experiencing slumps in GDP growth, with rates falling below those of the rest of Africa
Poverty concentration in resource-rich Sub-Saharan Africa has substantially increased, a trend likely to continue; meanwhile, inequality remains persistent.
Despite the increase in revenue that resulted from the boom, extreme poverty is increasingly concentrated among resource-rich Sub-Saharan African countries.
Because of the backsliding since the fall in commodity prices beginning in 2015, poverty has been rising again in resource-rich countries.
By 2030, more than 80 per cent of the world’s poor are forecast to live in the Sub-Saharan African region, and almost 75 per cent of the poor in Sub-Saharan Africa will be located in resource-rich countries (Cust, Rivera-Ballesteros, and Zeufack 2022).