Natural Resources, Good Governance, and Development: From Aspiration to Reality in Africa?
On how African countries can leverage the economic opportunities from natural resource extraction to advance their development and meaningfully improve the well-being of their populations
Before becoming known as Ghana upon its independence from the British in 1957, the West African country was first known to Europeans as the Gold Coast. The name was a direct reference to the availability of gold which attracted Portuguese, Dutch, English and other European traders to Ghana’s coast from the 15th century onward. Unsurprisingly, gold played a significant role in its development. Today, numerous industrial mines operate across Ghana and gold still represents its number one export. The country has even overtaken South Africa as the largest gold producer in Africa during 2018 according to Bloomberg, while oil and gas production started over the last decade. However, does the country and its population benefit from this natural resource wealth?
The importance of the profits generated from natural resources for Ghana relative to the size of its economy is a useful benchmark. Data from the World Bank’s World Development Indicators show that these profits represented 16.4% of the Gross Domestic Product (GDP) or USD 7.8 billion for 2016. This was the equivalent of USD 269 per person. As a comparison, total government revenues that year were 16.6% of GDP or USD 273 per person, while Official Development Assistance stood at 1.4% of GDP or USD 24 per person. Thus, the profits or rents generated from natural resources in 2016 — which include forest, mineral, oil, and gas for Ghana — were about equal to total government revenues and about 12 times larger than foreign aid. These numbers underline the considerable potential for natural resources to contribute to the development of Ghana. Average numbers for the whole of Sub-Saharan Africa, shown in the same figure, tell a similar story. Namely, that adequate taxation and effective use of the profits from extractive industries across the continent could help to significantly increase spending on social and economic development for the foreseeable future.
Beyond the Resource Curse: Where There Is Wealth You Need Effective Institutions
The mere presence of natural resource wealth does not necessarily translate into development for the population of a country. There is a vast literature that looks at the “resource curse”, where the presence of significant natural resource wealth negatively affects the social, economic, and environmental well-being of a country and its citizens. Looking at the evidence, one can sadly find numerous countries in Africa where this is the case, including the Democratic Republic of Congo or Nigeria. However, Botswana and Namibia provide examples of countries that managed to harness natural resources to foster their development. The literature highlights one critical factor that makes the difference between resources being a curse or a blessing: the quality of national institutions and governance. This includes the presence of adequate laws and policies that are effectively implemented, along with transparency in the management of natural resources contracts and revenues. In addition, accountability of politicians and governments to citizens, and free media, further support good governance.
Returning to Ghana, the country ranked 140th out of 189 countries in the Human Development Index for 2017, corresponding to a medium human development level. It is also ranked 6th of 54 countries on the Ibrahim Index of African Governance for the same year, although it has experienced some decline across key indicators over the last 5 years. Therefore, Ghana represents a relatively well-performing and governed country compared to the average for Sub-Saharan Africa, although the Natural Resource Governance Index does highlight some weaknesses. According to this index, the country has a “satisfactory” ranking for its management of oil and gas resources, but a “weak” ranking for mining resources. The “poor” ranking on revenue management, which includes budgeting and subnational transfers, explains this disappointing performance for mining. This contrasts with the “satisfactory” ranking for both generating value (mining revenues captured through taxation and licensing) and the enabling environment (government effectiveness, accountability, and transparency).
Extractive Industries and Development: The Critical Role of Transfers to Local Governments
The town of Bogoso, located in the Prestea-Huni Valley Municipality in the Western Region, provides a relevant case study. The first gold mine started operating near the town in 1873, and industrial mines still operate today. Bogoso is the largest town of the municipality. From Takoradi, the main city and port of Western Ghana, you need a 3-hour drive north on poorly maintained roads through a lush tropical landscape to reach Bogoso. Despite the long-standing presence of the mining industry, the Municipality ranked 205th of 216 on the 2017 District League Table published by UNICEF and the Ghana Center for Democratic Development. This index ranks all districts in the country relative to their performance in the areas of education, health, water, sanitation, security, and governance. The ranking for Prestea-Huni Valley reflects a relatively weak performance relative to most other districts in terms of basic service provision, with some services a responsibility of the local government, and others of the central government. This performance highlights that the presence of the extractive sector is far from a guarantee of development.
Indeed, despite the long-standing presence of the mining industry in Prestea-Huni Valley, the majority of the population still depends on agriculture for its livelihood. A common feature of capital-intensive extractive industries like mining or oil and gas is that they create relatively few jobs, and mostly specialized jobs. This means few local people will become employed in these industries, despite their sometimes large territorial and environmental footprint. In recent years, corporate social responsibility policies, where mines invest a small share of their profits toward community development projects and increase local hiring and procurement, have sometimes provided benefits to affected communities. However, the majority of the benefits from mining continue to accrue to a few actors, primarily to the mining companies’ shareholders and central governments who collect royalties and taxes from their operations. Therefore, if the typically large profits generated from extractive industries are to contribute to national and local development, taxes and royalties will need to be effectively collected and reinvested toward social and economic development.
This is typically where institutions and governance have faltered in many developing and resource-rich countries. Even if taxes and royalties are set at adequate levels and effectively collected, the resulting revenues also need to be allocated and spent toward development. However, insufficient and ineffective revenue collection, weak expenditure management, combined with the appeal of clientelism for some government officials and politicians, can result in limited development spending. This holds especially true at the local level in extractive areas, where research has shown that the presence of effective fiscal transfers is key to poverty reduction and development. Indeed, with the limited local employment creation typically resulting from the presence of extractive industries, combined with inexistent or ineffective transfers to local governments, this can often result in few if any local development benefits. Such a scenario not only reduces the acceptance of the population for the presence of these industries, but can frequently lead to conflicts.
In this light, the full implementation at country level of the Harmonization Directive on Mining Policy adopted by the Economic Community of West African States in 2009 would be a key step forward. This directive prescribes the equitable and effective distribution and transfer of a portion of mining income to local communities. In Ghana, this would involve fully implementing transfers to local governments sourced from mining revenues, which remain pending, following the adoption of the Mining Development Fund Act by Parliament in 2016.
Closing the Accountability Gap in Extractive Areas: Fostering Transparency and Responsiveness to Local Needs
Extractive industries are fundamentally unsustainable, as they involve the consumption of non-renewable resources. Nonetheless, if an adequate portion of the profits arising from resource extraction is used to foster social and economic development, and environmental impacts adequately mitigated, then the population can experience development and become better off over the longer-term. On the other hand, if an insufficient share of extractive profits is channeled toward national development, including toward local populations living near these industries, then natural resource wealth is more likely to be a curse and benefit only a minority.
This highlights why Ghana, and many other countries in Africa, need to foster more transparency and accountability on the use of revenues from natural resources by both local and national governments. The Extractive Industry Transparency Initiative (EITI) is providing data that allows to precisely track the sources and amounts of these revenues in numerous countries, including Ghana. However, the EITI is not tracking what precise expenditures these revenues fund and whether these are effective. Furthermore, transparency alone will not result in increased development without active citizen participation demanding greater accountability and responsiveness from their national and local governments. This is where citizens and local civil society have an important role to play. Public expenditure tracking surveys or social audits provide practical tools that allow citizens to assess how extractive resources are used and for what results in terms of development. This also complements transparency initiatives like EITI and help close the accountability gap in extractive areas, an approach that directly stimulates greater responsiveness to local development needs by government officials and politicians.
Ultimately, fostering more effective management of natural resource revenues is a key channel toward financing and stimulating development in countries and communities where extractive industries are present. For making this a reality, three critical conditions are necessary:
- Natural resource management policies have to be designed and implemented in a way that effectively improves the well-being of African populations;
- Local and national governments need to be accountable and responsive to their populations;
- Citizens and civil society need to engage actively with their local and national governments based on transparent information.
Under such conditions, the combination of natural resource extraction, good governance, and development can stop being an aspiration, and become a reality!
