African economic growth
We received the following response from Professor Paul Stevens of Chatham House, a think-tank, about a recent article in The Economist
On January 10th 2015, The Economist published an article entitled "African economic growth: The twilight of the resource curse?" The article argued that the economic outlook for many African countries looks promising despite falling commodity prices. This, it was claimed, reflected growing economic diversification by these countries away from dependence on commodities, and lessons learned about the power of good governance. It was argued that, "with better education systems, investment in infrastructure and sensible regulatory reforms, the continent could completely break the spell that has held it back so often in the past". The article concluded that countries with natural resources should encourage their development and not be concerned about the threat of "resource curse".
This view reflects a growing consensus away from the idea that resources are a curse for poor countries towards the view that economic growth led by extractive industries (mining and the like) is a viable path to broader development. Such views are forthcoming from governments, companies in the sector and international institutions, all seeking to tell a positive story about what resources could do for the economy as a whole. However, a new report from Chatham House argues that, while they are not inevitable, the dangers of resource curse have been dismissed far too easily.
Some of the risks of this agenda have not changed since the classic resource-curse argument was developed. In particular, in the absence of strong institutions, such an agenda leads to the enrichment of minority elite groups. As the sector develops, the interest of those groups in capturing rents and maintaining their hold on power acts as a barrier to improving governance. There are also new risks to be considered. The global commodities boom that underpinned the performance of resource-rich economies has ended. Meanwhile, mounting efforts to tackle climate change will seriously impact the markets for many extractive resources in the future. A growth agenda based on these industries therefore may be unsustainable.
The key point is that revenue from extractives is not income. It is simply the reshuffling of a country’s portfolio of assets: exchanging resources below ground for cash above it. Overall success is determined by the extent to which a country can capitalise on such reshuffling—namely, by investing the cash productively and by forging linkages between the sector and the rest of the economy. In many cases, the institutional capability of countries to diversify in this way is seriously lacking. In such situations, policy advice to rapidly develop the natural resource may be misplaced. It may be prudent to slow the development of projects to give time for improved governance to take root. Indeed, in some cases, it may well be better to leave the resource in the ground, as commodity revenues are liable to make a bad situation even worse.