Monday, November 24, 2014

One Flew Over the Resource Curse

GENEVA – Geopolitical insight is often gained through real-life experience, rather than big-picture thinking. Arriving at Charles de Gaulle airport in Paris from Conakry, Guinea, is a case in point: Conakry’s airport, located in one of the world’s poorest countries, outperforms France’s prestigious global hub in terms of cleanliness, service, and pride.

By amplifying such exemplars into a national project, Guinea could join the small group of commodity-rich countries that have bucked the curse of corruption and economic decay that often accompanies large natural-resource endowments.

History demonstrates the difficulty of avoiding the so-called “resource curse” – and that it does not plague only less-developed countries like Nigeria, as many assume. In the 1980’s, the United Kingdom’s North Sea-driven oil and gas boom undermined the country’s broad-based economic competitiveness, while Prime Minister Margaret Thatcher’s government wasted much of the revenue on handouts that encouraged excessive consumption.

While a handful of commodity-rich countries have managed to buck the curse, including Botswana, Chile, and Norway, they have, nevertheless, failed to diversify their economies, remaining dependent on natural resource-based exports. But history is not destined to repeat itself, and leaders of commodity-rich countries are seeking alternative futures.

Countries across Africa – including Ghana, Liberia, Mozambique, Rwanda, and Uganda – are showing early signs of success. Zambia recently issued a $750 million inaugural ten-year bond at an annual interest rate of 5.375%. Oversubscribed by 24 times, the issue will allow Zambia to borrow more cheaply than many European countries can.

Such developments reflect growing confidence in Africa’s economic prospects and, thus, in its ability to escape the resource curse. But these countries still face significant obstacles to development.

First, governments must balance long-term goals with short-term achievements. Given unlimited time, less-developed commodity-rich countries would first invest in human capital and institutions, then direct their growing commodity revenues into infrastructure, and move on to diversify their economies by strengthening the agriculture, manufacturing, and service sectors.

In the real world, of course, such countries’ political economies demand short-term gains, beginning with basic services like potable water and electricity. If governments fail to respond to these basic demands, citizens take to the streets, often destructively. This summer in Guinea, for example, citizens’ frustration with widespread poverty and weak institutions, memories of ethnic persecution, and distrust of unfamiliar democratic processes fueled violent protests.

Second, development requires both money and the right conditions. But, in many cases, the conditions placed on funding create barriers to investment.

The International Monetary Fund and the World Bank lead the chorus of traditional players eager to help, offering debt write-offs and concessionary finance. But the stringent institutional reforms that they demand, while beneficial in theory, might not stabilize, let alone enhance, the development process.

Newcomers, most notably China, have become a ready alternative source of cheap finance. But, in exchange, the Chinese expect business opportunities and, to some extent, political influence.

Sovereign-wealth funds, too, are increasingly involved in financing development. But, despite being state-owned and subject to policy decisions, they function as commercial enterprises (with the possible exception of Norway’s hydrocarbon-funded state-owned investment vehicles).

Financing for the most expensive projects – implementing green-energy systems, building transport infrastructure, and developing modern cities – must come from foreign institutional investors. But high-quality private investors are resistant to financing lumpy, illiquid investments in fragile, volatile states. Those who are willing to engage often demand steep risk premiums that dramatically increase the cost of capital, often to usurious levels.

Global mining companies like Rio Tinto are increasingly working alongside emerging-economy leaders like China’s Chalco to support development. As the most heavily invested, they have the most experience using cheap debt to create value. But, with commodity prices beginning to drop, even the most bullish companies are reassessing ambitious investment plans – a trend reflected in the Brazilian mining giant Vale’s recent decision to put its investment in Guinea on hold.

Bucking the resource curse requires, first and foremost, strong, legitimate domestic political leadership, underpinned by effective institutional arrangements. But it also requires a global investment community – public, private, and mixed – that can move beyond short-term thinking, ideological bias, ignorance, and cynicism. After all, bets on leadership, vision, and earnings potential should not be limited to investments in California-based technology start-ups.

Guinea, which is making progress despite annual per capita income of roughly $450, exemplifies the potential of the world’s poorest countries to surpass expectations. Investors should take note.

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    1. CommentedNathan Coppedge

      Again and again, I think the key insight is how to extend cheap resources. Maybe this is already a big consideration for corporations, but I wonder if companies always connect with local governments about the very cheapest benefits. Sometimes someone may reflect that architecture, parking lots, etc. are themselves "contending with nature", but there is a trend in the news to exaggerate the effects of natural destruction, surely it could be realized that even crumbling cities are the basis for cities per se. Even if this is not the most ambitious goal, it might be the cheapest. I would not be surprised if local economies could often afford a crumbling city, when a little economic aid is taken into account. This seems like an underrated approach to development, which is perhaps taken for granted, and therefore does not always take place.

      A second factor (allowing for a respectful pause on the first subject) is the value of top-down industries or pre-existing industrial tools to manufacture/produce durable goods for a mass market. Unless the economy is not taken seriously, there is sometimes potential (say, in crumbling cities) to finance mass-consumer goods made cheaply by pre-existing equipment. I predict that sometimes there would be a return on investment, even in some low-development countries.

      This double approach, of crumbling cities and cheap manufacturing, seems like a star point when it comes to global development, and I think was taken for granted as a cheap idea in the earlier more robust sensibility, say, when people had details like the belief in classical literature and the durability of hardware made in Great Britain. Again and again I return to the point that qualia counts, and no "marketing assumptions" should get in the way of "detailing" the progress of the least common denominator. The very real conventions and realities of the poor should not be overlooked as a basis for patterns which return economic strengths. It is not just someone "up there" looking at an accounting book. There must be a loophole.

    2. CommentedJ St. Clair

      "a global investment community ".....this group is sounding like an "entitlements" group.....could it be the top 2 percent again...

        CommentedNathan Coppedge

        In my view I have resolved that the top 2% owns the economy, and shifted to the macro benefits of a controlled economy. For example, the benefits of industry for the lowest common denominator is very evident in the mass production of sports jackets, etc.

        If one person gets a platinum tabletop from space mining, that's just a sign of economic robustness from my point of view. Soon enough, other people will have virtual platinum, and the only difference will be reality. This makes sense when it is assumed that industry benefits improve for the least common denominator, but not when industry fails to provide structural or qualia-based improvements. Consider for example, the limited benefits of public architecture for the very poor.

        CommentedJ St. Clair

        all yet "undeveloped" countries need to NOT look at what other countries have already done....they need something completely new and different....forcing people to live the same way "developed" countries live today is not the answer.....

    3. CommentedZsolt Hermann

      There are multiple problems here for which the present socio-economic setup, and most importantly the prevalent human attitude does not provide answers.
      Just to mention 2:
      - Since in the democratic political system politicians, parties elected in 3-4 year intervals, and since politics is all about winning the next elections, gaining as much public support during incumbency as possible, no politician or party is interested in long term solutions. Thus their motivation is to exploit whatever they gain in the short time they are in power so as a result they can extend their power. Only in quasi-democratic, or non-democratic governance systems can leaders plan for long term without disturbances, but of course such governance system hurts them in other areas as we see in China for example.
      So first the general attitude of these leaders would need to change, them becoming servants in every meaning of the word to the public that elected them, only caring about the long term well-being of the nation they are chosen to serve.
      Of course such politicians could only emerge from a society that have such values, and those values would triumph over the values we keep in high importance today, as fame, power, ruthless competitions, humiliating defeat of others and so on. Thus the whole society and its values need to change first.
      - The other attitude that needs to change is how we relate to natural resources. In the previous and present fragmented, polarized worldview we looked at the world in partitions, as if the land we happened to be born on would belong to us, as if we deserved it, and whatever is found there is our own and we can do whatever we want with it. In a global, interconnected and interdependent world we evolved into, such approach cannot work. We do not own anything, we have no right to exploit something just because we sit on top of it. We are caretakers of the natural resources that is found in our proximity and we have a responsibility in how we share it with everybody else, and in return we get what others have.
      Just like in a healthy body, for example if the lung decided that it wants to keep all the Oxygen to itself or only sells it on to the other organs with huge profit, the body would die of asphyxia, and lung together with.
      This is how we behave today, while humanity has become a single, intertwined network, like one organism, we still behave as if we were separated and can operate on our own. Thus our whole approach to life, to the world, to human society needs to change.
      If we could achieve the above mentioned attitude adjustments, we could create "paradise" here on earth, as there is more than enough resources to satisfy the needs of 7-10 or even 15 billions of people.
      Everything depends on our attitude and mutual cooperation. This is the key for a predictable, peaceful and sustainable future for humanity.

        CommentedEdward Ponderer

        There are two direction in existence -- order and chaos, unification or dissolution, information or entropy, life or death.

        Mr. Hermann's observation show recognition of this fact, pointing out particular example of the path towards death, and suggesting to turning around of the path towards life.

        What can I say -- I agree with him 100%. Who in their right might doesn't!