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Relevant reading

Natural resources and development

by Lutz Neumann
A coal miner in eastern India

A coal miner in eastern India

Although problems with natural resources have been around for decades, there are only few solid academic studies with empirical evidence. The picture they show, however, is clear. By Lutz Neumann

Many of Germany’s partner countries in development cooperation are involved in the commercial exploitation of non-renewable natural resources. Examples include Afghanistan, Brazil, Chile, Ghana, Liberia, Mongolia, Niger and others.

The exploitation of crude oil, natural gas and mineral resources is the main economic activity in Africa. Africa’s annual revenue from the export of mineral resources and fossil fuels amount to about $ 180 billion, which is almost 80 % of the total export revenue. The resource sector thus generates about six times more money than wealthy member nations of the OECD (Organisation for Economic Cooperation and Development) spend on aid to countries in sub-Saharan Africa ($ 28 billion). The relevance of the sector is obvious in financial terms alone. None of the UN Millennium Development Goals focuses on extractive or other resources – but unless policymakers tackle this sector, the MDGs cannot be achieved.

Various socio-political phenomena that are related to natural resource exploitation have been evident for decades. They include resource conflicts and declining international competitiveness of other industries. However, there are only few evidence-based studies that rely on accepted methods of academic research. Relevant questions include: What effects on development does natural resource exploitation have directly and indirectly? What is the impact in the short, medium and long term? What causes what?

A review of the literature was carried out by the German Institute for International and Security Affairs (SWP) and GIZ (Mildner 2011). It provides guidance on publications in the areas of political science, economics, social studies and earth sciences. The vast body of literature is classified into three categories: Natural resources and eco­nomic growth, natural resources and conflict, natural resource governance mechanisms and policy recommendations.

The “resource curse” is often unthinkingly invoked to explain underdevelopment and poverty in countries with natural resources. However, there is no automatism to commodities becoming a “curse”. The specific context and the institutional landscape matter very much (Basedau 2008). When natural resources are discovered and extracted, a specific interplay arises for each country and for each type of resource. At the local level, the industry develops various characteristics, depending on the quantity in which resources are produced and the quality of governance.

To date, there are only few studies which can claim originality and are based on statistical and quantitative analysis at the same time. The works of Paul Collier, an economics professor at Oxford University, stand out in this respect (please note interview on page 238). In 2007, his book “The bottom billion” came to the conclusion that a wealth in natural resources often results in more harm than good for poor and badly governed countries. Collier considers resources the biggest missed opportunity for economic development. In his popular follow-up, “The plundered planet” (2010), he presents more recent results of research he and his colleagues have carried out, in a generally comprehensible style. Collier is not optimistic about good governance in the poorest countries, and he therefore advocates bottom-up change and civic activism.

Oil and diamonds

Three publications help to get a better understanding of governance of crude oil, diamonds and production methods in small-scale mining respectively. Crude oil is the most important global natural resource. Michael Ross shows in his groundbreaking work “The oil curse” (2012) that, among developing countries, oil-producing nations are on average less democratic and economically stable and more prone to suffer from internal conflict. At the same time, he makes policy proposals that should contribute to keep problems in check. In regard to the diamond sector, Ian Smillie’s “Blood on the stone” (2010) is a pioneering and very readable account of African producer countries. It assesses conflicts which have led to 4 million deaths, deals with the history of the industry and elaborates on approaches to regulating the international diamond trade.

A related topic is the problems that result from the production methods used for one quarter of global diamond production. Small-scale mining serves to extract other precious materials too, including gold and coltan. From a development perspective, small-scale mining is very important because of its social, economic and security consequences. These issues are spelled out in a collection of essays that was edited by Koen Vlassenroot and Steven Van Bockstael (2008).

It is estimated that the number of people dependent on small-scale mining is about 50 million in Africa, and 100 million worldwide. The sector offers employment and income, for example, for ex-combatants after civil wars. However, the industry’s largely informal character undermines state institutions, especially in fragile states in West and Central Africa. In regard to mining, governments tend not to enforce a law-bound monopoly on the use of force, which is essential for stable statehood. Moreover, taxes tend not to be levied and laws are often not enforced in a fair manner. In many cases, not even human rights are respected – forget about environmental standards. The international community is only slowly rising to these challenges by introducing certification procedures for raw materials that are affected by conflicts.

Global governance

An anthology edited by Raimund Bleischwitz and Florian Pfeil (2009) on behalf of the Bonn-based Development and Peace Foundation (SEF) provides an introduction to the complex global governance issues that relate to raw materials. The book discusses challenges that relate to security, development and the environment. It also assesses topics like corporate social responsibility, transparency standards and codes and international legalisation. The book is easily accessible to non-experts.

In comparison, the World Bank publication “Rents to riches” (Barma et al. 2012) is more advanced reading. It outlines mechanisms which could result in development, driven by natural resources. The core idea is to follow the decision-making chain for natural resources, starting with the discovery of unexploited resources and including decisions on exploitation, concessions, public investments and the pursuit of the common good in the context of development-oriented policymaking.

Countries with natural resources will only be successful if they consider and take control of all stages of this decision-making chain, the book argues. For example, transparency of revenue flows in itself will not help much, unless it is followed up by a sensible investment policy. Countries, in other words, need a strategic and systematic approach which goes beyond technocratic considerations. Individual interventions must be designed to bring about improvements at the macro level of society. The World Bank’s team of authors is particularly interested in the poli­tical economy of reform. Their approach is relevant for development cooperation with resource-rich countries – not only in the natural resources sector, but in agriculture, forestry and other sectors too.