Natural resources and economic (under)development in Africa
Unless domestic elite property rights substantially improve, the natural resource sector will not power Africa's economic takeoff
I: Why aren’t there more African resource sector billionaires?
For a continent allegedly full of natural resources, African economies have created very little in legible productive wealth from the resource sector.For example, in 2019 alone the continent produced $406b in mineral exports. Yet despite such eye-popping annual flows, the confluence of personalist politics, weak institutions, and possibilities of elite collusion in the natural resource sector has not produced many regional commodity billionaires.
For the ambitious and well-connected, what could be easier than accumulating wealth by hiring people to dig stuff from the ground and ship it abroad?
As it turns out, it is not easy become a legible resource billionaire in Africa. Not even when you are a lifetime personalist president of a resource-dependent state — like Ali Bongo Ondimba, Teodoro Obiang Nguema Mbasogo, or Denis Sassou Nguesso. These men and their families may yet be billionaires, but the fact that they have to hide their wealth and therefore not invest them in productive enterprises limits their ability to sustainably accumulate personal wealth, not to mention invest in improving their citizens’ welfare.
The list of the region’s billionaires (see below) suggests that the sectors that facilitate the accumulation of incredible amounts of wealth are related to fast moving consumer goods, finance, telecoms, and entertainment. There are also a few billionaires who minted their wealth in the import/export business — i.e., trade facilitation and business services. Only a handful of billionaires made their money directly from mineral exploitation.
Admittedly, the very short list represents a fair amount of survivor bias. Presumably, lots of would-be billionaires, in differing sectors, tried to accumulate wealth but failed for one reason or the other. Because it is hard to tell the sectoral composition of would-be billionaires, we cannot necessarily conclude that it is harder to become a resources sector billionaire. However, while the Forbes list of African billionaires is far from telling the whole story, it is suggestive (given what we know about African countries political economies) of the general inability of African states’ natural resource sectors to create productive wealth. By productive wealth I mean wealth that is legible, stays in the region, and that can be channeled to other sectors of the economy — like manufacturing, technology, or even reinvestments in resource sectors.
It has been common to focus on state-level failures in the management of natural resources. However, it is also worth examining why individual elites have failed to leverage African states to accumulate wealth through direct operations in their countries’ respective resource sectors. The claim here is that state-level natural resource failures begin and end with African elites’ apparent inability to fully control and accumulate wealth through the region’s natural resource sectors.
A number of structural features partially explain individual Africans’ inability to accumulate significant levels of legible productive wealth in the resource sector. These include the fact that (1) contrary to popular belief, the natural resource sector is actually small in comparative perspective; (2) the sector remains beholden to foreign firms for (geo)political reasons; (3) transfer pricing and trade policies skew against local value addition and wealth accumulation; and (4) weak property rights make it difficult to grow legible and productive wealth in the sector.
Overall, the profile of Africa’s natural resource sector — including in “green metals” — simply doesn’t look promising as a means to powering the region’s economic takeoff. This is, in part, because the international and domestic politics in many African countries do not allow for the types of property rights protections that would enable the emergence of “developmentalist natural resource barons.” Consequently, the African Union should rethink its mineral-centric infrastructure masterplan (see the Africa Mining Vision). As I have argued here, here, and here, investing in agriculture as a step towards mass job creation in urban areas is a much more promising growth model.
II: Rethinking the natural resource sector in Africa
Several factors are commonly understood to explain the inability of resource-rich African countries to benefit from their endowments. Below I focus on two factors that deserve a lot more attention than they receive in much of the press and academia.
Africa’s accessible resource wealth tends to be overstated
It is important to put African state’s natural resource wealth in global perspective. Despite having almost 17% of the world’s population, in 2019 Africa accounted for a mere 5.5% of global mineral output. As shown below, Africa’s share of global mineral output peaked in 2005. Part of the reason is historical under-investment in prospecting and development, as well as transfer pricing by tax dodging foreign firms. In 2019 only two Africans countries (South Africa, 8; Nigeria 17) appeared in the top 20 global mineral producers by value.
Either way, the fact of the matter is it doesn’t matter what is in the ground. In order to realize the value of the continent’s resource potential it has to be extracted, sold on the global market at a fair price, and the taxes/royalties accrued by public authorities invested in improving human welfare.
In addition, the region’s natural resource wealth as tends to be concentrated in only a few countries. For instance, 5 out of 54 sovereign countries (South Africa, Nigeria, Algeria, Angola, and Libya) account for two thirds of the total. This reality belies the common trope of a region teaming in natural resources ready for nationalist developmentalist exploitation. While countries like Ghana, Tanzania, and Sudan can certainly benefit from prudent management of their gold mines, it would be wrong to assume that their mining sectors can credibly serve as the foundation of broad-based economic takeoff.
Stated differently, Mali’s heavy reliance on gold exports (true since the 14th century!!) isn’t as much about the sheer amount of gold it exports as it is about the tiny size of the non-gold sectors of its economy.
Politics, the resource sector, and elite property rights
A priori, one would think that states would have the easiest time generating revenue from extractive sectors; or protecting elite crony’s property rights attached to specific mineral resources. Yet across Africa, resource-rich states have historically struggled on both dimensions. In my view, this partially explains both the individual level inability to accumulate legible productive wealth from direct exploitation of natural resources and African states’ seeming inability to convert resource flows into improvements in human welfare.
A quick look at the historical political economy of natural resources in Africa reveals that a confluence of history, geopolitics, domestic elite political instability, and the specific features of resource sectors resulted in incumbent governments’ unwillingness to grant politically-empowered local elites (would-be resource barons) credible property rights over natural resources. The absence of models of credible wealth sharing mean that not even leaders can accumulate legible personal wealth as it would attract all manner of intra-elite squabbles and erosion of public legitimacy. Otherwise, African presidents would find no need to hide their wealth abroad (if even presidents cannot guarantee their own property rights, who can?)
The operational features of the extractive sector exacerbates this problem of credible elite property rights. Mining is capital intensive and involves rather sticky supply chains. This means that it is very costly to change firms and customers on a whim or according to the dictates of politics. At the same time, leaders intent on staying in power and being the ultimate gatekeeper to rents would have lots of reasons to be wary of promoting specific permanent domestic “resource barons” with the potential to become power brokers in their own right.
This domestic political incentive structure facilitates manipulation and domination by foreign firms and governments. Foreign firms have capital and lack domestic political power. They also tend to come from major global powers interested in maintaining a stranglehold on the supply chains of specific strategic minerals, and which can provide protection to incumbents against their fellow domestic elites (e.g., the French government and firms in Niger’s uranium mines since 1971).
For countries whose elites cannot solved for domestic elite property rights over natural resources, the global politics of the sector are especially harsh. Foreign firms often have the expertise and leverage to strike obscenely lucrative bargains, backed by the sector’s high tolerance of unimaginable levels of corruption (see the case of Glencore). Over time, resource-rich countries that don’t solve for domestic elite property rights tend to become ever more dependent on foreign extractive firms and fail to develop domestic mechanisms for reaping maximal benefits from their natural resources.
The point here is that, all else equal, stylized explanations like the “resource curse” only capture a small part of the variation in outcomes between countries like Equatorial Guinea or Nigeria on the one hand, and Oman or Indonesia on the other hand. Even absent “strong constraining institutions,” ruling elites that solve for their own property rights (perhaps leveraging non-state socio-cultural institutions) can leverage international firms and markets in a manner that facilitates domestic accumulation of legible productive wealth as well as public investments in improvements in human welfare (see the Gulf states, as an example).
Finally, as I argue in some of my work, it is worth noting that institutions work best when elites serving in them have “skin in the game.” For example, the fact that elites in the DRC cannot solve for their own property rights and therefore cannot accumulate legible productive wealth effectively forecloses on potential institutional mechanisms of converting the country’s resource riches into human welfare.
I have argued that there is little reason to bank on natural resources as the catalyst for economic takeoff in African states. The region’s natural resources compose but a small share (5.5%) of global annual production. Furthermore, the political economy of the sector — especially with regard to elite property rights — is such that it is difficult to avoid foreign exploitation or to accumulate legible productive wealth that can stay in the region and get reinvested in other sectors.
All this is before we even get to the standard natural resource sector questions of price volatility, windfall management, the “Dutch disease,” transfer pricing, corruption, and corrosive impacts on institutions and politics.
I say legible here because there might as well be many more unknown billionaires in Africa for purposes of tax evasion and hiding of illicit wealth. However, I doubt the number is substantially larger than what is publicly knowable. My conclusion here is informed by information on the holdings of Angola’s Dos Santos clan and Nigeria’s oil barons, both of which serve as upper limits on what is possible.
"what could be easier than accumulating wealth by hiring people to dig stuff from the ground and ship it abroad?". One would think this but look at what is happening in South Africa due to the declining state-owned railways: (https://www.economist.com/middle-east-and-africa/2023/01/17/south-africas-disintegrating-freight-railway-is-crippling-firms). As you have mentioned, mining is incredibly capital intensive — the JSE was founded in the 1880s to help dig the gold below Johannesburg. Combine this with Africa’s lack of domestic capital and high cost of borrowing might also contribute to explaining the lack of resource sector billionaires.