Equity in Extractives
Africa’s economies have been riding the crest of a global commodity wave that could transform the continent’s prospects. The 2013 Africa Progress Report explains how this unprecedented chance could lift millions out of poverty and improve the prospects of generations to come.
The report sets out an agenda for maximising Africa’s natural resource wealth and using it to improve well-being. African governments should start with a strengthened focus on fiscal policy and equitable public spending on infrastructure, health, education, water and sanitation. Moves towards greater transparency and accountability should be broadened and deepened.
International action can create an enabling environment for strengthened governance in Africa. Tax evasion, illicit transfers of wealth and unfair pricing practices are sustained through global trading and financial systems – and global problems need multilateral solutions. African citizens should demand that their governments meet the highest standards of propriety and disclosure. Governments in developed countries should demand the same thing of companies registered in, or linked to, their jurisdictions.
Foreign investors can play a critical role in facilitating change by partnering with governments to strengthen transparency, by supporting skills development, and by carefully assessing the social and environmental impacts of their operations – and many companies are providing leadership in these areas.
The surge in resource wealth brings with it complex challenges and very real risks. Yet it also brings an unrivalled opportunity. And with new exploration revealing much larger reserves than were previously known, Africa stands to reap a natural resource windfall. If this resource wealth is managed effectively and equitably, it could put the region on a pathway towards dynamic and inclusive growth.
THE NATURAL RESOURCE PARADOX – RESOURCE WEALTH AMID HUMAN POVERTY
Africa’s economic fortunes have changed dramatically in the past decade. Economic growth –especially in countries rich in natural resources – has been driving up average incomes, and most countries have recovered from the past years’ global recession.
Some resource-rich countries have made impressive strides in improving the lives of their people.But overall progress has been uneven – and in some areas it has fallen short of expectations. Aftera decade of strong growth, several of Africa’s resource-rich countries remain at the bottom of the international league-table for human development. Others register some of the world’s largest inequalities in wealth and in wellbeing, as captured by indicators such as life expectancy and education.
Chapter One of the report reviews the record of the past decade and the potential for resource wealth to accelerate human development. Chapter two looks at the gap between wealth and wellbeing in resource-rich countries, and explores the complex and varied interaction between economic growth, inequality and poverty reduction. Chapter three documents the environmental threats posed by extractive industries, their failure to provide a long-term boost to local economiesand job markets, and the risks and opportunities presented by artisanal mining.
THE COMMODITY “SUPER-CYCLE” AS AN ENGINE OF GROWTH
For more than a decade, African economies have been riding the crest of a global commodity wave. Demand for energy resources and metals has been outstripping supply, pushing up prices to near record levels in some cases.
Commodity booms do not have a good record in post-independence Africa. Short-term booms have often been followed by a protracted decline in prices. But the global premium on raw materials continues to rise in the face of strong growth, demographic pressures, urbanization and, above all, the emergence of China as a global economic power.
With investment in exploration increasing, new technologies lowering the cost of discovery, and demand rising, the level of Africa’s extractable mineral reserves has been rising. Major discoveries and the development of existing facilities are changing the resource map of Africa and the region’s place in global markets, with potentially far-reaching consequences for national income.
The commodity “super-cycle” offers Africa’s resource-rich countries tremendous opportunities for sustained growth and human development if they can attract the right kind of investment and integrate into global markets on the best terms, while planning for uncertainty. To unlock the full economic potential of its natural resources, African countries urgently need to climb the value-added chain of mineral processing and manufacturing.
THE COSTS OF MISMANAGEMENT
Africa’s governments have a unique opportunity to use natural resource revenue to transform the lives of this and future generations. That opportunity comes with several challenges. In countries with limited technical and regulatory capacity, and weak checks and balances, resource windfalls can act as a catalyst for corruption.
To avoid this danger, African governments need to strengthen the transparency and accountability that are the foundation for trust in government and effective management of natural resources.
One pillar of such reform is better management of state companies and concessions to prevent resource diversion and the undervaluation of assets. All too often the operations of state companies are hidden behind opaque financial management systems, with little legislative oversight and restricted auditing procedures.
Another pressing governance challenge is obtaining a fair share of natural resource wealth. Governments need to attract investment from extractive companies, but they also need to maximize public revenues and ensure that those companies’ investments contribute to the domestic economy.
The third key challenge is allocating natural resource proceeds equitably through public spending. Many of the poorest people in Africa have yet to see the high growth of their national economies translate into improved access to health care, education and better infrastructure.
UNLOCKING THE POTENTIAL FOR FUTURE GENERATIONS
The most pressing natural resource governance problems in Africa have solutions that are already being applied through practical reforms in some of the countries in the region. This part of the report focuses on three critical areas.
First, transparency needs to be strengthened as a force for accountability and the empowerment of Africa’s citizens. Governments need to open up their accounts to public scrutiny and oblige extractives companies to do the same. The Extractive Industries Transparency Initiative, the US Dodd–Frank Act and similar EU legislation are showing that greater global transparency is in everybody’s interest.
Second, governments need to spread the benefits of mineral wealth through fair taxation, efficient and equitable public spending, and strategies for linking extractive sectors to national markets. Fair taxation is a global challenge that needs concerted international action.
Third, the social and environmental impacts of natural resource exploitation need to be assessed and managed so that countries, people and the environment all benefit. International and regional cooperation is necessary to break the link between conflict and natural resources. And the rights of Africa’s millions of vulnerable artisanal miners need to be protected.
A SHARED AGENDA FOR CHANGE THAT BENEFITS ALL
The report concludes by summarizing policies that can unite Africa’s people, governments, civil society, foreign investors and the wider international community around a shared agenda for realizing the potential of Africa’s resource wealth to lift millions of people out of poverty.
Everyone stands to gain from such a shared agenda. When governments strengthen disclosure standards and improve accountability, they improve their legitimacy in the eyes of their citizens. When foreign investors adopt more stringent disclosure standards and avoid irresponsible practices, including tax evasion, they stand to gain from a more predictable competitive environment, improved standing in the host countries, and from the reduction of risk that could damage shareholder interests. If the international community comes together to tackle tax evasion, rich countries as well as poor will gain as the losses associated with aggressive tax planning diminish.
As well as offering specific policy recommendations for African governments, regional organizations, the wider international community and international companies, the report details recommendations for immediate global action:
• Adopt a global common standard for extractive industries transparency;
• Realize the Africa Mining Vision;
• Use the African Peer Review Mechanism;
• Build a multilateral regime for tax transparency;
• Boost economic linkages, value addition and diversification;
• Ensure equity in public spending;
• Protect artisanal mining.