“One Flew Over the Resource Curse” by Simon Zadek – Copyright: Project Syndicate, 2012
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.
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.
- Copyright: Project Syndicate, 2012