Getting it out of the ground is the easy part

Paul Collier brought his big news to SAIS Friday:  Africa will find lots more resources in the next decade.  The question is whether it can take good advantage of them to transform the continent and its non-resource economy, which is already doing pretty well.

OECD countries have discovered about five times more than Africa in natural resources beneath every square kilometer.  But there is no reason to believe resources are so unevenly distributed.  So Africa has a lot more to find and exploit.

But in order to do so it needs to master a difficult chain of economic decisions:

1. Discovery:  to avoid hesitancy about private investment  that then turns into “gold rushes” when discoveries are made governments will have to collect and publish relevant geological information to reduce the uncertainty and encourage private companies to explore.
2. Taxes:  these are especially important in poor countries because the companies and high tech workers are so often foreigners.  Society will not gain much unless taxes are collected.  But poor countries need to focus on taxing things that can be observed and observing things that can be taxed, which is not their natural inclination.
3. Division of revenue with local communities:  Local communities should be compensated for environmental and other damage and get a fair share of the revenue, but they should not capture all of it.  This requires credible legal mechanisms as well as willingness of the national authorities to resist local capture of the rents (as in the Niger Delta).
4. Savings at the national level:  Poor countries should be saving at least 30% of the revenue and progressively more as the resource is depleted, thus ensuring a balance between present and future requirements.
5. Spending at the national level:  That still leaves 2/3 of the revenue for expenditures.  When it comes to spending the two-thirds of the revenue that is not saved, health and education are good candidates, as they have very low productivity in Africa.

The Norwegian model, which many hold up as ideal, is a sovereign wealth fund invested entirely outside Norway and only the returns on investment spent.  This would not be appropriate for a poor country that lacks adequate capital.  African countries should first of all invest in building the capacity to invest well, then invest in increasing the capacity to produce outside the natural resource economy, since it is by definition in long-term decline.

Turning to the politics of natural resources, Collier sees two problems:  the coordination of decisions across many governmental units (Ministry of Mines, Finance, Environment, parliament, local governments, courts, etc.) and the need for many decisions over decades when most of these governmental units have short time frames.

There are three answers:

1.  Rules to provide guidance for natural resources;

2.  Institutions to make the decisions;

3.  Citizens who understand the issues and support the rules and the institutions.

The key to citizen understanding is a narrative of stewardship.  It is important that natural resource discoveries not be seen as riches to be exploited but rather as opportunities that need stewardship.  This is the difference between Nigeria’s “we’re rich!” narrative and Botswana’s “we’re poor and need to save” narrative.  The latter is far more likely to produce wise decisions over long periods.

Exploitation of natural resources should build the non-resource economy over a 25-year time horizon.  Governments don’t think inter-generationally, but citizens do, as they plan for their children’s future.  With the right narrative, they will control the government’s worst impulses through rules and institutions.