African growth, natural resources in sub-Saharan Africa

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African Growth, Natural Resources in Sub-Saharan Africa

Bachelor thesis July 2013

Faculty of Economics and Business Universiteit van Amsterdam

Name: Tim van den Ende

Student number: 5981085

Supervisor: Drs. N.J. Leefmans Specialization: Economics and Finance Field: Economics and Finance

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2 1. Introduction

After decades of sluggish economic growth, Sub Saharan Africa1 _{(SSA) is now among the}

fastest growing regions of the world. Starting from the mid-1990s, this developing region has been experiencing a remarkable economic recovery, breaking the long history of poor economic

performance. The Gross Domestic Product (GDP) growth rate has been around 5 percent per year for the last fifteen years. In 2010, over a third of the Sub Saharan countries had growth rates of 6 percent, recovering beyond pre-crisis rates from 2007 (The World Bank, 2013). In addition, unlike the past, growth occurred across the whole region covering both countries rich of natural resources and non-resource rich countries2_{. Also non-oil producing countries reached an average of 4% annual}

growth from 1998 to 2008 (Arbache and Page, 2008). In 2012, private capital inflows such as foreign direct investments added up to $55 billion, exceeding the amount of foreign aid for the first time in African history (APR, 2013). If the growth rates of the last ten years can be sustained, a lot of the Sub Saharan African countries could be ranked as middle-income countries by 2025 (Devarajan and Fengler, 2012).

Two major reasons can be attributed to the recent economic growth acceleration. On the one hand, various macroeconomic reforms have been implemented during the mid-1990s, varying from openness to trade to financial stabilization. On the other hand, African growth is largely due to the heavily increase in international demand for natural resources, which has driven up the

commodity prices. Natural resources are defined as ‘natural assets, or, raw materials, occurring in nature that can be used for economic production or consumption’ (OECD, 2001). Mineral and energy resources, such as oil and raw minerals are by far the largest fraction of Africa’s poorly diversified exports (Chuhan-Pole, 2012).

Sub-Saharan Africa’s recent extraordinary economic growth has been subject for much research, varying from the concept of the ‘resource-curse’, whereby developing countries despite their natural resource abundance tend to perform worse than non-resource rich countries, to research about management of exploitation of mineral resources. Previous studies (Arbache and Page (2007a), Cook and Beny (2008), Devarajan and Fengler (2012)) focussed on whether Africa’s recent growth is robust and sustainable, or whether it has been a consequence of the boom in demand for natural resources, resulting in a surge of commodity prices. Other studies (Dufrenot et al. (2006), Ndulu et al. (2007), Moss (2011)) examined the benefits of governance and exploitation of natural resources. This study tries to understand the following question: To what extent did natural resources contribute to the recent economic growth performance in Sub Saharan Africa? By natural resources is particularly meant non-renewable resources such as crude oil and minerals resources. This study investigates the period of rapid economic development which started from the

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mid-3 1990s, providing an analysis of the relation of natural resources to the African growth performance since 1995.

In an attempt to answer this question, this paper is organized as follows. Section two provides an investigation on the recent economic growth in Sub Saharan Africa (hereafter ‘Africa’). The study examines whether this growth is largely due to the increase in demand of mineral commodities, or whether structural improvements in governance have also been underlying it. Section three describes the natural resource abundance in Africa. A subject related to developing countries abundant in natural resources which are struggling with sustainable growth is the hypothesis of the resource curse, also named as the ‘paradox of plenty’. Section four tries to refer the main findings on this phenomenon to the question examined in this study. Section five provides an extended literature review on studies of the explanation of the recent growth performance. Examined are the main determinants of the recent economic growth. Section six examines the role of good governance and management of the wealth from natural resources. Section seven

concludes.

My hypothesis is that the natural resources abundance has had the main strong positive contribution to the recent economic growth in Sub Saharan Africa. The increased international demand for mineral resources and oil is expected to have fuelled the recent economic growth. Also, I doubt whether the recent growth can be sustained, as commodity prices can be highly volatile. Moreover, the fragile state of the world economy may lower demand for Africa’s natural resources and indirectly harm economic performance in that region. Also, I expect the indicators for economic management (explained by the World Bank governance indicators) to have improved since the policy reforms implemented during the 1990s. Improvements in governance could support the long term economic growth achieved by exploitation of natural resources, as benefits from these natural resources could be invested in more structural economic pillars as infrastructure, services and diversifying exports.

1. Sub Saharan Africa consists of 48 countries. See appendix for the list of countries (World Bank Development Indicators, 2013).

2. A country is defined as resource-rich if ‘on average more than 5% of its GDP has been derived from oil and non-oil minerals’ (Chuhan-Pole, 2012). The countries included are: Angola, Botswana, Cameroon, Chad, Democratic Republic of Congo, Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Guinea, Liberia, Mali, Mauritania, Namibia, Nigeria, Sierra Leone, Sudan, and Zambia.

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4 2. Recent economic growth performance in Sub-Saharan Africa

This section provides a literature review on the recent economic growth of the Sub Saharan Africa region, paying attention to two major possible explanations for this growth namely macro-economic circumstances and demand for mineral resources3 _and_oil.

The past thirty years in Africa can roughly be divided into three separate decades each with its particular economic characteristics. The first out of these three decades is the decade from 1980 until 1990, a period characterized by low economic growth performance largely due to the debt crisis across many African countries. During this decade, the per-capita income decreased nine out of eleven years (WDI, 2013), see figure 2. This poor economic performance continued during the early 1990s. This low growth was in strong contrast to other developing regions in the world such as Asia, which showed outstanding growth in that period.

The period from 1990 until 2000 was a decade in which various macroeconomic reforms were implemented in an attempt to improve economic performance. These policies of reform included trade liberalization, financial deregulation and fiscal reforms (Summers, et al., 2005). With cooperation of the World Bank and the International Monetary Fund (IMF), Africa started several projects to finally overcome the economic failure of the past decades. Examples of these IMF projects are the Structural Adjustment Programs (SAPs), which were seen as controversial, implying that African countries continued to receive aid, under strict condition that structural policy and economic reformations had to be implemented. Another example is the Poverty Reduction Programme, in which countries made commitments on implementing recommended economic reforms. These policies tended to improve the macroeconomic situation for Africa, serving as a fundamental for future sustainable growth (Devarajan and Fengler, 2012).

The last of these three decades is the most recent period, from 2000 onwards, in which Africa has shown a remarkable economic growth performance. Annual African growth of the Gross Domestic Product (GDP) had an average of 4.7 percent in the period from 2000 to 2011, including the low growth rates in 2008-2009 as a result of the global economic crisis. Per capita GDP growth averaged around 2.25% annually from 2000 to 2012. Unlike the past, growth occurred across the whole region. Both countries rich of natural resources and non-resource rich countries performed well. As a result of the economic growth, poverty rates were decreasing by more than one

percentage point per year (IMF WEO, 2012).

3. Mineral resources are defined as a category of natural resources, covering the minerals tin, gold, lead, zinc, iron, copper, nickel, silver, bauxite, and phosphate (World Databank, 2013).

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5 Also, commodity prices increased manifold that decade. In the first place, this increase in commodity prices is explained by the great increase in demand from emerging economies such as China and India. Second, heavy speculative investments by the international markets on the rise in commodity prices accelerated this increase in price even more (Kusters and Matthysen, 2009). Figure 1 and 2 present the recent economic growth recovery of Sub-Saharan Africa. Figure 1 shows the annual GDP growth rate from 1980. Growth has been around 5 percent for the last fifteen years. The strong performance after the 2007-2008 crisis can also be seen.

Figure 1: Sub Saharan African annual GDP growth.

Source: WEO database, IMF 2012

Figure 2 shows the GDP per capita annual growth. From 1980-1990, the per-capita income decreased nine out of eleven years. From the mid-1990s onwards, GDP per capita increased.

Figure 2: Per capita GDP growth, 1980-2012, annual

Source: Trading-economics, from World Bank, 2012

http://www.tradingeconomics.com/sub-saharan-africa/gdp-per-capita-growth-annual-percent-wb-data.html -2 0 2 4 6 8 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 An n au l growth (% ) Year

Sub Saharan African growth, 1980-2012

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6 Since the mid-1990s, many studies observed a distinct growth pattern which Africa had not experienced in the two decades before. A phenomenon that contributed to the growth acceleration is the boom in international demand for natural resources, especially for fossil fuel (crude oil) and mineral resources. The increased demand for these natural resources resulted in a surge in price indexes for these commodities. This ‘commodity boom’ started in 2003 and ended during the financial crisis in 2008. Oil and mineral resources are the major part of Africa’s total export growth between 2000 and 2011, amounting up to 55% and 20% respectively of total export growth during this period (Chuhan-Pole, 2013). Figure 3 and 4 show the increase in commodity prices. Prices of both oil and metals rose sharply from 2003 to 2008. (For example, the price of copper increased by 500% in that period. Other minerals and metals showed increases in price around the same degree). The boom in commodity prices was largely driven by growing of global players such as China. For example, China’s demand of copper was around one fifth of global demand for copper in 2005 (Kusters and Matthysen, 2009).

The commodity price boom and the risk of future volatile price evolvement raises the question on the sustainability of the recent growth performance of resource abundant Africa.

Figure 3: Commodity prices, 1993-2013.

Source: IMF World Economic Outlook Database, October 2012. Own calculations.

http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weoselagr.aspx 0 50 100 150 200 250 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 In d ex, 2005= 100 Year

Commodity prices

Index, 2005=100

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7 Figure 4: Price of crude oil, 1995-2013.

Source: IMF World Economic Outlook Database, October 2012. Own calculations.

http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weoselagr.aspx

3. Natural resources

3.1 Natural resources abundance in SSA

As stated earlier, natural resources are raw materials existing in nature that can be used in economic activity to provide (economic) benefits. These raw materials can be categorized into different types of resources. This study mainly focused on two types of natural resources, namely mineral resources and oil. Sub-Saharan Africa is abundant in natural resources. For example, in 2007, Africa’s share of total world oil production was around 13%. Mineral exports in up to fourteen African countries account for over 50% of total export value (Kusters and Matthysen, 2009). Mineral resources and oil are a major factor of income in many Sub Saharan African

countries. The share of these natural resources contributes to over 75% of total export earnings. Up to half of the oil producing countries doubled their oil production from 1996 to 2006. In the African mining industry, six metals have been dominating. Gold, iron and copper amount up to 50% of total value of mineral and metal mining activities. Zinc and nickel account for 8,5% of this total value. Bauxite represents 1.5% of this production value (Kusters and Matthysen, 2009).

Africa’s potential of unexplored minerals and crude oil combined with high commodity prices resulted in increasing amounts of capital inflows to the region. In 2012, the total amount of foreign direct investments to Sub Saharan Africa reached around $55 billion and are estimated to increase heavily up to $77 billion in 2015 (Chuhan-Pole, 2013). For comparison, foreign direct investments were around $1 billion dollars in 1995 and amounted up to $18 billion dollars in 2005. Rents from natural resources are defined as ‘the difference between the price of a

commodity and the average cost of producing it’ (World Data Bank, 2013). Total natural 0 20 40 60 80 100 120 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Dolla rs p er b ar re l cru d e o il Year

Crude Oil, petroleum

Dollars per barrel

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8 resource rents4_{amount up to 30% of GDP on average for the whole Sub-Saharan Africa region. A}

distinction is made between countries that are abundant of both mineral resources and oil, and countries that possess mineral resources (and no oil.)5_{. Figure 5 below shows the share of natural}

resource rents as a share of total GDP for both oil-resource rich countries and non-oil resource rich countries. Natural resource rents are higher in countries with both oil and resources, around 35%, compared to 20% resource rents for non-oil resource rich countries.

Apart from the overall increase in rents since 1995, the share of resource rents in non-oil countries has been increasing heavily since 2003, showing the strong increase in demand for mineral resources beside the demand for oil. Also, the commodity price boom from 2003-2007 is well reflected in natural resource rents, as well as the quick recovery of Africa’s growth after the global crisis in 2008-2009.

Figure 5: Natural resource rents for resource rich countries

Source: WDI 2013. Own calculations.

http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators

The high dependence on the wealth from natural resources is also a major drawback for African growth. High volatility in commodity prices as a result of shocks in supply and demand, political conflicts and unforeseeable weather conditions, form a risk to wealth from resources and could harm economic growth stability. On the other hand, large emerging markets such as China and India are increasingly searching for natural resources to fuel their fast growing economies. Together, these economies contribute to almost 30% of world imports for mineral resources and account for 30% of global imports for oil (Kusters and Matthysen, 2009).

4. Resources rents are the sum of oil rents, natural gas rents, coal, mineral, and forest rents. 5. Classification of oil and non-oil resource rich countries from World data Bank, WDI (2013).

0 5 10 15 20 25 30 35 40 45 50 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 re n ts a s % o f G DP Year

Natural resource rents (% of GDP)

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9 Their increasing demand for oil and mineral resources is expected to continue in the future, as estimations of growth figures are still above 6% annually (WEO, 2013).

3.2 Value adding activities

Besides the increased wealth from natural resources, this study looked at other value adding activities in different sectors such as the agriculture sector, industry, services and manufacturing. Examined are eighteen countries rich of natural resources (both oil and non-oil resource rich countries). By ‘value added’ is meant the net output of a sector after adding up all outputs and subtracting intermediate inputs. Value added is expressed as share of GDP.

In this way, the value added from the natural resources sector can be compared to value added by other industries. Figure 6 below shows the value added of each sector as a percentage of GDP. Labor productivity in manufacturing sectors did not improve, resulting in a stagnating share of value added by manufacturing sectors. Value added by the agriculture sector gradually decreased, from 27% of GDP 1995 to 20% of GDP in 2011. For the industry sector, value added rose from 17% of GDP in 1995 to a peak of 42% of GDP in 2005, ending up at 39% of GDP in 2011 after a slight

decrease from 2007 to 2009.. Increased value added by industry activities has been evident during the last fifteen years. A marginal note has to be made, as the data for industry value added includes value added in mining activities (next to manufacturing, construction, electricity, water and gas). Part of the increase in value added can therefore be attributed to value from mining of natural resources. In figure 6, both resource rents and industry perform a substantial increase from 2003 to 2005. Overall, these two lines perform roughly the same development, implying the possible interlink because of the mining activities included in both variables.

Value added by the services sector is the highest share of GDP in resource rich countries. This share remained around 40% of GDP from 1995 to 2011. On the other hand, the stagnating development implies little improvements in productivity of services. Rents from natural resources increased up to 30% of GDP, almost doubling from the share of GDP in 1995. Value added from natural resources performed the largest increase of all value adding sectors showed in figure 6. The heavy increase in value of natural resource rents as a share of GDP compared to the stagnating developments of the other sectors (services, agriculture and manufacturing) implies that natural resources have had a major impact on the recent economic growth in Africa since 1995.

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10 Figure 6: Resource rents and value added by manufactures. Average of resource rich countries.

Figure 7: Resource rents and value added by manufactures. Whole SSA region.

Figure 7 shows a comparable figure to figure 6, now calculated for the whole Sub Saharan Africa region. This result is less clear, as also non-resource rich countries are part of the data, which do not earn rents from natural resources. Also, some countries lack data for various years. However,

0 5 10 15 20 25 30 35 40 45 % o f GDP Year

Value adding activities, % GDP

agriculture, industry, services, manufacturing & res. rents Resource rich countries

Agriculture Industry Services

Resources rents Manufacturing

0 10 20 30 40 50 60 % o f GDP Year

Value adding activities, % GDP

agriculture, industry, services, manufacturing & resource rents

Whole SSA region

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11 even taking into account all the 48 Sub-Saharan Africa countries, the increased reliance on rents from natural resources remains evident. The same patterns of value adding activities can be seen for the different sectors. Industry and rents from natural resources increased, agriculture and

manufacturing stagnated. Only the services sector shows different pattern, as the share of GDP increased compared to the stagnating performance in resource rich countries alone from figure 6.

4. Natural resources and growth performance in developing countries: the ‘resource curse’ When examining the growth performance of countries abundant of natural resources, previous literature concentrates on the issue of the resource curse, also named as the paradox of plenty. This resource curse hypothesis states that developing countries which are largely dependent on wealth from natural resources, especially non-renewable resources such as oil and mineral resources, experience worse economic growth than other countries. This paradoxical situation could be explained by several factors. Resource rich countries may suffer from an appreciated real

exchange rate due to revenues from natural resource exports, which can worsen competitiveness. The high reliance on natural resources is exposed to the volatility of the commodity markets, where large swings in commodity prices do not contribute to stability of economic growth (Van der Ploeg and Poelhekke, 2008). Also, resource rich countries often have to deal with high corruption and bad management of the resource revenues by public institutions. Last, countries producing mineral resources and oil do suffer from bad forward linkages of the resource sector. A forward linkage contains that the final products of one sector can serve as raw materials for sequential production processes, so that a lot of value can be added trough a supply chain, within a country’s economy. By producing and exporting raw natural resources directly, a lot of potential added value is lost. In general, the resource curse tends to harm competitiveness of developing countries and as a result economic performance is damaged (Van der Ploeg and Poelhekke, 2008).

Many research has been done on this topic and the main consensus is that wealth from natural resources tends to worsen economic growth instead of fuelling it. Early studies by Sachs and Warner (1995 and 2001) found that countries which are highly dependent on natural resources experience reduced economic growth. Others have questioned the consensus on the resource curse and showed that the evidence is not robust when testing this hypothesis with use of different regression methods (Brunnschweiler, 2008). Rosser (2006) finds that there is substantial evidence supporting the existing of a resource curse, but it is not totally conclusive because of differences in types of natural resources causing a resource curse and because of differences in measurements of variables.

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12 A study by Boschini et al. (2007) shows that the relationship of the resource curse is

conditional on the quality of political institutions. They argue that it is not the natural resources per se that harm economic growth, but that natural resources only damage economic growth when there is lack of good governance. This implies that in the presence of good institutions, natural resources can contribute positively to economic growth. Mehlum et al. (2006) come to a quite similar conclusion which says that when institutions are more 'producer friendly', hence supporting and regulation the exploitation of natural resources, revenues from natural resources can increase economic growth. The debate is still continuing about whether natural resource abundance in developing countries is harming economic growth or not.

An extensive study on the possible resource curse specified to Sub Saharan Africa by Jones (2008) challenges the conventional wisdom of the natural resource curse. The study evaluates the recent debate and finds that the current explanations of the resource curse are not captured in robust theories, and lack a clearly defined hypothesis covering the relation between natural resource rents, institutions and economic growth. Using data from the World Bank from 1990-2005, the study critically distincts between the interaction of institutions and natural resource rents to economic growth. This ground-breaking study finds that the relation between natural resource abundance and growth is hard to identify, given different degrees of quality of (political) institutions. Empirical results point out that only a ‘curse’ of worse quality of institutions can be detected. Hypotheses about the resource curse limited to natural resources alone could not be supported. This implies that economic growth and institutions are independent from wealth from natural resources (Jones (2008).

A second outcome of the study is that it confirms the recent literature that there is a strong relationship between institutions and economic growth. The main difference to the conventional theory is, however, that this interaction is independent of the share of wealth from natural

resources. This means that under poor governance, reduced economic growth is as likely to occur in resource rich countries as in countries that do not possess these resources. Jones (2008) does not support the conventional wisdom considered in the resource curse theory. His empirical results only show an impact of low quality institutions on economic growth. The study underlines the need for further research in which the comprehensive interaction of good or bad institutions to natural resource wealth could be explained.

In general, the debate on the real existence of a resource curse for developing countries is still going on. An increasing number of recent publications question the conventional explanations of the resource curse. The long term pattern of increased demand (and prices) of natural resources and the increased awareness of the role of (mineral) governance are changing the directions of the

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13 debate. While struggling before the 1990s, Africa now seems to take more advantage of the

abundance of natural resources due to higher resources rents and fiscal reforms relating to exploitation of oil and mineral resources (Sala-i-Martin and Subramanian, 2003). In contrast to countries in wealth from natural resources harmed economic growth (Angola, Nigeria, Democratic Republic of the Congo), there is also a consensus for natural resources wealth supporting long term economic growth (Botswana, Chile, Australia). Good quality of governance is the principle concept to maximize revenues from extraction of oil and mineral resources. Improving governance quality could lead to an even greater impact of natural resources on sustainable economic growth (Liebenthal et al., 2003)

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14 5. Literature review on Africa’s recent economic growth performance

5.1 Describing Africa’s recent growth performance

Three studies by Arbache and Page (2007a, 2007b and 2008) have examined the

determinants of the recent economic recovery in Africa since 1995. Another study by Cook and Beny (2008) examined whether Africa’s recent growth experience is due to structural macroeconomic policy reforms or whether it is explained by increases in commodity prices. The study finds that both the reforms and the rise in commodity prices have contributed to the outstanding economic

performance. This thesis uses the study by Cook and Beny (2008) as a starting point for examining this thesis’ research question.

Cook and Beny (2008) studied data of 57 African countries and compared it to data of 239 countries by performing multiple regressions on growth of GDP, including several control variables for supply and demand of exports, terms of trade and demographic factors (including the

dependency ratio, life expectancy and the labor force participation). To measure the effect of the macroeconomic policy reforms, policy and institutional variables were added, such as government consumption as fraction of GDP, rate of inflation and a black market premium6_{. To measure the}

effect of primary commodities on economic growth performance, Cook and Beny (2008) looked at different export variables including oil products, agricultural and mineral exports, all expressed as a fraction of GDP. The study finds that the growth of export and openness of trade are very important to economic growth for Africa (Cook and Beny, 2008). These findings are consistent with earlier research by Ndulu and O’Connell (2007), who stated that reducing trade barriers to global markets is vital for higher economic growth.

Also, the study by Cook and Beny (2008) provides evidence for Africa’s relatively better performance compared to the world since 1995. Increased government consumption contributed positively to per capita income. Inflation rates were positively correlated with economic growth. This means that price increases contributed to a greater extent to economic growth in Africa. Inflation rates became less volatile and therefore could be imply ‘good inflation’, supporting economic growth. The black market premium impact decreased. These findings suggest improvements of macroeconomic performance and reflect a development towards a more constant and solid economic environment.

6. A black market premium is the difference between the value of a currency in the non-legal system (black-market), and the official exchange rate, related to another currency (Jayaratnam, 2003).

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15 Figure 8 shows the development of the average inflation for the whole SSA region

(containing 45 countries), expressed in consumer price index (CPI) and GDP Deflator7_{. After surging}

inflation rates during the 1990s, the annual rate of both the consumer prices and GDP deflator index dropped and remained on lower and less volatile levels, providing a more stable economic

environment. Excluded from calculations are Angola, Zimbabwe and Liberia, as their inflation rates rose to exceptionally high values in some years. For example, the inflation rate was 24000% in Zimbabwe in 2007, and 4100% in Angola in 1994).

Figure 8: Inflation in Sub-Saharan Africa, 1995-2012.

Source: The World Bank, WDI (2013). Own calculations.

Figure 9: GDP annual growth, 1994-2013.

Source: WEO database, IMF (2013). Own calculations. http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weoselagr.aspx

7. GDP deflator is the ratio of GDP in current local currency to GDP in constant local currency (World Bank, WDI 2013).

0 5 10 15 20 25 30 35 40 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 A n n u al r ate , % Year

Inflation, average annual rate (%)

CPI and GDP deflator

GDP deflator Consumer prices Lineair (GDP deflator ) -2 0 2 4 6 8 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 An n u al growth (% ) Year

Gross Domestic Product (GDP), annual

growth

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16 Figure 9 shows that annual GDP growth in Africa has been above the world GDP growth since the late 1990s. From 2000 onwards, annual GDP growth has been outperforming the world economic growth by around two percentage points each year. It turns out that this positive growth gap increased in the last two years, 2012 and 2013. In contrast to the fragile state of the global economy, African growth performance remained solid. In figure 2 (page five), per capita GDP growth for Sub Saharan Africa from 1980 to 2012 is shown.

To compare this to the world per capita GDP growth, a similar figure 14 is added in the appendix. Figure 14 shows that since the mid-1980s, annual per capita GDP growth of the world never decreased below zero until the financial crisis of 2008/2009. At the end of the 1980s per capita GDP growth slowed down to almost zero. From the early 1990s up to 2008 annual per capita GDP growth averaged around 2%. This is in sharp contrast to per capita GDP growth of Sub Saharan Africa, which experienced average annual growth rates of below zero percent from 1980 to 1994. From 1995 onwards, per capita GDP growth became positive, peaking in 2006-2007 to 4%.

5.2 Determinants of increased economic growth

Export growth turns out to be the main determinant of economic growth in Africa (Cook and Beny, 2008). The contribution of export to economic growth differs for various types of exports of natural resources. The export of petroleum products alone does have a negative impact on GDP growth, but the coefficient of interaction between exports of petroleum products and goods and services does have a positive impact on GDP. Cook and Beny (2008) hereby find some evidence of the resource curse. The principle of the resource curse occurs when a (developing) country experiences reduced economic growth, due to worsened competitiveness, as a consequence of wealth from the (less diversified) exports of natural resources. The negative impact of just the petroleum exports on GDP confirms worsened economic performance when a country relies too much on one type of natural resource wealth.

At the same time, the positive coefficient of the interaction between petroleum and goods and services exports on GDP has a positive correlation with economic growth. This somewhat shows that it is important not to be too dependent of just one type of export. Combining different types of export positively contributes to economic growth. Diversification of exports is one of the main growth strategies for Africa proposed by Ndulu and O’Connell (2007). Songwe and Winkler (2012) point out that both export diversification as well as market diversification are important for economic growth. Moreover, Songwe and Winkler (2012) found that countries should diversify exports to products in which they have a comparative advantage. This creates more benefits than just diversifying exports including products in which countries may not have comparative advantage.

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17 Cook and Beny (2008) find that the impact of exports of metals and ores on economic growth is negative and thus supports the evidence of the resource curse hypothesis. In contrast, agricultural exports were found to contribute positively to GDP growth.

Figure 10: Export volume and export value, 1995-2012.

Source: WEO Outlook data, IMF (2013). Own calculations.

http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weoselagr.aspx

Figure 10 and 11 show the growth of exports (both in volume and value) of Sub Saharan Africa. Export values are the current value of exports converted to U.S. dollars and expressed as a percentage of the average for the base period (the year 2000). Export volume more than doubled since 2000. The value of export increased even more spectacular, implying increasingly more value added to exports from Africa, total worth of 400 billion (constant) dollars. Export growth has underlined Africa’s economic recovery, which is consistent with previous literature. In the appendix, figure 15 is added which shows the annual growth percentage of exports of goods and services. Exports of goods and services is a helpful variable to look at overall economic expansion, as is contains value of a broad range of goods (merchandise, freight, insurance, transport and royalties) and other services (construction, communication, financial, business and government). The figure shows that the annual growth of export of goods and services has been around 5%-10%, underlining Africa’s recent economic growth performance since 1995.

Exports of natural resources such as mineral and oil exports amount up to 75% of total export increase (Chuhan-Pole, 2013). One main explanation for the increase in the less diversified African exports is the increase in exports to the emerging markets China, India and Brazil. Together these three countries demand up to one third of all mineral and fuel exports from Africa.

0 100 200 300 400 500 600 700 In d ex, y ear 2000= 100 Year

Export volume & export value index, 2000=100

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18 Figure 11: Africa’s exports to parts in the world.

Source: Chuhan-Pole (2013), from Africa’s Pulse (2013).

5.3 Patterns of economic growth

Rather than just focusing on determinants of economic growth, Arbache and Page (2007b) examined the relation between economic growth volatility and long run economic performance in Africa. The study looked for periods of growth accelerations and decelerations compared to the long term growth trend of a country, using an empirical method to classify periods of ‘growth

accelerations’ and periods ‘growth decelerations’ The study found that there has been a pattern of flows consisting of both accelerating and decelerating episodes of growth from 1975 to 2005

(Arbache and Page, 2007b). An illustration of their methodology can be found in figure 12 and figure 13 in the appendix.

In contrast to the sluggish positive long term trend before the mid-1990s, the variance of growth declined and GDP growth stayed above the long term trend from 1995 onwards. Arbache and Page (2007b) found that the frequency of accelerations is higher between 1995 and 2005 and that growth decelerations were more present in the two decades before 1995. Negative growth was less than half as frequent from 1995-2005 compared to the previous two decades.

Another study by Arbache and Page (2007a) categorized the African countries into similar geological types, resulting in ten different types of countries: coastal, landlocked, coastal without resources, landlocked without resources, oil exporters, oil exporters, resource countries, non-resource countries, and major and minor conflict countries. Interesting is the comparison between resource (both oil exporters and resource rich) and non-resource type of countries. The study finds that resource-rich countries substantially have more frequent growth accelerations compared to non-resource countries. Oil (resource rich) exporting countries and non-oil resource rich countries experienced more periods of growth, expressed in the highest frequency of growth periods, clearly above all countries’ mean. This difference in likelihood increased dramatically in the period

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1995-19 2005 compared to the long term trend from 1975-2005. This difference in frequency between resource and non-resource countries is larger compared to the difference between oil and non-oil exporting countries, which also increased for the period 1995-2005. The frequency of decelerations is somewhat the same for both type of categories in the long term trend. However, for the period from 1995-2005, the likelihood of growth decelerating period for resource rich countries decreased most compared to non-resource rich countries and oil/non-oil countries. This is expressed in a frequency for growth decelerations for resource rich countries that lies below all countries’ mean. For oil exporting countries, this frequency is equal to all countries’ mean.

In sum, two main conclusions from this figure can be drawn. First, natural resource

abundance is a major factor for increased economic growth performance. Recent economic growth has strongly been fuelled by resource rich and oil countries. Secondly, the sharp decrease in the likelihood of growth decelerations for resource rich countries may imply structural macroeconomic improvements resulting in less volatile economic environments. On the other hand, the period 1995-2005 is a relatively short period compared to the long term trend, thereby questioning whether the outperformance of growth from the resource rich countries is sustainable and robust. Nevertheless, the influence of natural resources on economic growth in Africa is evident and has been increasing since 1995.

Table 1: frequency (country-years) of growth acceleration and deceleration. Different country categories, 1995-2005 versus 1975-2005.

Source: Arbache and Page (2007a)

Arbache and Page (2008) compared economic growth determinants of resource rich to non- resource rich countries to see whether the difference in growth is also explained in fundamental economic factors (such as savings, investments, consumption, exports, foreign direct investment and

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20 inflation rates) to examine whether growth is robust. The study compared economic determinants from the decade 1985-1994 to the decade 1995-20058_{. The study finds evidence for the}

improvements of the variables which tend to be the major factors for the African growth recovery. Improved economic fundamentals are more in favor of resource rich countries. There is a substantial difference between some key economic variables for resource rich countries compared to non-resource rich countries. Overall, non-non-resource non-oil rich countries experienced a GDP per capita growth rate average of 1% from 1995-2005. Countries rich of oil and mineral resources averaged a GDP per capita growth of 5% annually.

The amount of foreign direct investment inflow as percentage of GDP in resource rich countries has been more than twice as high as in non-resource countries for the decade 1995-2005. This difference is even larger in periods of growth accelerations in the period from 1995-2005, resulting in 2.35% for non-resource countries compared to 9.44 % of GDP for resource rich countries. This significant increase suggests that most of the FDI flows to Africa are towards the mineral

resource sector (Chuhan-Pole, 2012). Savings and investments as percentage of GDP are both slightly in favor for resource rich countries. However, the ratio of consumption to GDP is not higher for resource rich countries. This suggests that revenues from natural resources did not fuel consumer spending in resource rich countries but are instead being saved or re-invested. The share of export of GDP is much higher for resource rich countries, amounting up to 40% of GDP compared to 29% for non-resource countries.

On the other hand, for the inflation indicators, expressed in consumer price index and GDP deflator, non-resource rich countries performed much better. Non resource countries experienced lower inflation during 1995-2005. The consumer price index rose with almost 78% in resource countries compared to 17% on average in non-resource countries. During periods of growth, the GDP deflator for non-resource countries was almost three times lower than for countries abundant of natural resources (Arbache and Page, 2008).

Overall, the recent economic growth is widespread in both resource rich and non-resource rich countries in Africa. However, substantial differences can be found between countries that are resource rich and countries which are non-resource rich. Recent economic growth differences can mainly be explained by natural resource abundance. This is reflected in many key economic determinants. Resource rich countries experience higher foreign investments, trade, savings and domestic investments than non-resource rich countries, resulting in higher economic growth in these countries. The impact of natural resources to growth has become more evident during the

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21 last fifteen years, as differences between the two types of countries increased compared to years before 1995. Increased differences in economic growth, due to larger benefits from exploiting natural resources, is also related to (possible) improved macroeconomic circumstances (such as improved fiscal management, improved economic regulations). Quality of governance is important to take advantage of the superfluous amount of natural resources in Sub Saharan Africa. To achieve sustainable growth, macroeconomic policy needs to increase savings, reduce conflicts and attract foreign direct investment. These growth determinants reduce the frequency of growth

decelerations. A challenge to long term stable growth is to avoid growth decelerating episodes. The next chapter will take a closer look at governance and natural resources.

6. Economic growth performance and governance

An issue closely related to wealth from natural resources and economic performance is the role of public institutions and the quality of governance.

Two empirical studies, Dufrenot et al., (2006) and Ndulu et al., 2007), point out the close relationship between economic performance and governance by political institutions.

Dufrenot et al. (2006) define governance as ‘the way in which power is exercised in the management of a country’s economic and social development.’ Earlier research found that governance does have a great impact on growth. Poor governance can account for half of the difference between the growth potential of Africa compared to other developing regions in the world (Summers et al. 2005). Due to macro-economic reforms in the 1990s including trade liberalization, financial deregulation and fiscal reforms this difference in growth potential explained by governance has been reduced. However, improvements in the quality of governance still remains one of the main features for strategies to sustainable growth in Sub Saharan Africa (Ndulu et al. 2007).

Dufrenot et al. (2006) studied the relation between per capita GDP growth and governance of the ECOWAS9_{(Economic Community Of West African States) region for 1995-2004. Using a model}

consisting of equations on growth, investment and trade, the study found that poor governance does significantly decrease the potential of per capita income growth.

The qualification ‘governance’ is measured by variables such as political stability,

government effectiveness, rule of law, control of corruption, regulatory quality and accountability (WDI, 2013). Despite the impressive performance of economic growth, half of all indicators of policy and institutional performance worsened during 1995-2006 (Arbache and Page, 2007a).

9. ECOWAS consists of fourteen countries: Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, the Gambia, Ghana, Guinea, Guinea-Bissau,

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22 Indicators of governance for countries rich of resources are worse compared to non-resource rich countries. Governance indicators for oil exporting countries were even worse. The findings are consistent with previous literature in which government performance is poor in countries abundant of natural resources. These countries experience more corruption, political instability and lack good law and regulation systems.

The figure below shows the scores of governance indicators for the whole Sub Saharan Africa region for three separate years, 1996, 2005, 2011. Measurement of governance indicators scores started in 1996. The year 2005 is chosen to mark the first decade of governance indicators performance. Extending the figure to the latest data of 2011, an overall view of governance performance in Africa can be seen.

Table 3: Governance indicators for whole SSA region.

Source: World Data Bank (2013), own calculations.

From the figure can be seen that half of the governance indicators worsened from 1996 to 2005. Especially control of corruption and the effectiveness of government worsened substantially. Almost all indicators improved in 2011 compared to 2005. Compared to 1996, four out of six

indicators continuously improved up to 2011. The largest improvement of the indicators occurred in the last six years. Roughly all indicators performed better in 2011 compared to 2005. Interesting is see whether the structural improvements in governance indicators are a development of the last six years or not, implying a phenomenon that could positively contribute to sustainable

-0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0,0

Governance indicators scores (-2.5 to +2.5), 1996, 2005, 2011

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23 economic growth.

Overall, despite the weak scores of all the indicators, increasing improvement of governance performance can be seen in Africa. The scores for countries rich of natural resources on the

governance indicators were up to 0.1 point worse on average (WDI, 2013). To see the development of the governance indicators for all separate years from 1996 to 2011, table 4 is added in the appendix. Table 4 shows roughly the same development as shown by the three particular years in table 3. Overall, the variables government effectiveness and rule of law do still score worst of all six indicators. The largest improvements have been made in the variables political stability and voice and accountability10_.

Alence (2004) examined the relation between political institutions and the quality governance in Sub Saharan Africa. Although the current state of democratic institutions in Sub Saharan Africa is still very poor and has several shortcomings, the institutions contribute increasingly to sustainable economic development. The quality of this ‘developmental governance’ is improving but remains a major challenge in the search for broad economic development (Alence, 2004). A suggestion of a possible solution for the challenges of good governance of wealth from natural resources are the direct distribution of the revenues to citizens of resource rich countries. Apart from increasing income of these citizens, these direct transfers of money encourages public interest in wealth management from natural resources and therefore can positively contribute to the quality of (mineral) governance (Moss, 2011).

Another measurement to capture the quality of a country’s macroeconomic policy framework is the Country Policy and Institutional Assessment (CPIA). The CPIA score is a based on various policy and governance performance indicators11_._{In the appendix, table 5 shows the CPIA}

score for ten different CPIA variables, (including for example the variables business regulatory score, macroeconomic management cluster score, fiscal policy rating and property rights/governance rating), from 2005 to 2011 (the World Bank CPIA data set started at 2005). The scores of most of the included CPIA variables improved during these years, implying a more sound policy and institutional performance across whole Sub Saharan Africa. This improvement could contribute to a more solid long term economic growth.

10. Voice and Accountability captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.

11. The CPIA score consists of scores of sixteen criteria rated from 1 (low) to 6 (high). It measures the quality of institutions and policies

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24 Countries with lower macroeconomic management performance do experience more economic downturns (Arbache and Page, 2008). This is consistent with a study by Ndulu et al. (2007), which found that there is a close relationship between economic performance and governance by political institutions. The study found that this CPIA score is lower in times of

decelerations, but it is not significantly different between a growth acceleration period compared to normal economic times.

In sum, mineral resources and oil were a major cause of economic growth in Africa leading to increase in various fundamental indicators of growth. The sustainability and robustness of this economic upswing are to be questioned, as all major governance indicators implying macroeconomic stability only slightly improved from 1996 to 2011. CPIA scores for the whole SSA region improved as well, showing a development of better quality of governance. Lots of progress can still be made and here lies a huge challenge for African countries to sustain economic growth performance.

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25 7. Conclusion

This thesis has examined the impact of natural resource abundance on the recent economic growth performance in Sub Saharan Africa starting from 1995. The study performed an extended literature review on the relation of natural resources and Africa’s economic growth, examined the latest data sets and investigated closely related subjects as the resource curse and governance of natural resource wealth.

After decades of sluggish economic growth, Sub Saharan Africa is now among the fastest growing regions in the world and economic performance continues to increase. Although the recent economic growth is widespread, it remains fragile because African countries are still heavily

dependent on the less diversified exports of mineral resources and oil, which contributes to over 75% of total export earnings. The increased economic growth is mainly due to the availability of natural resources. Natural resources did have a major impact on (differences in) economic growth across the whole Sub Saharan Africa region. Substantial differences can be found between countries that are resource rich and countries which are non-resource rich. This has been reflected in many key economic determinants, whereby resource rich countries experienced higher ratios of foreign investments, trade, savings and domestic investments to GDP than non-resource rich countries. In this way, abundance of natural resources resulted in higher economic growth is these countries.

Another critical factor for sustainable economic growth is the role of good governance to deal with wealth from natural resources. Although the quality of governance is still poor, structural improvements have been made resulting in a less volatile economic environment. Quality of governance is important to take more advantage of the vast amount of natural resources in Sub Saharan Africa.

The negative effect of the reliance on natural resources to economic performance is increasingly being questioned. While harming economic growth in the past, African countries now seem to take more advantage of the natural resource abundance due to better governance.

Moreover, the impact of natural resources to economic growth has become more evident during the last fifteen years, as differences between resource rich and non-resource rich countries increased compared to years before 1995. Evidence found for the resource curse is different and not conclusive, and remains still open for debate.

To overcome the questions on the robustness of the recent growth period, Sub Saharan has to make structural investments in areas different from the natural resource sector, such as

diversifying of exports, manufacturing and service productivity, infrastructure projects and the agriculture sector. Challenges remain to take more advantage of both of the increasing rents of

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26 natural resources and the vast amount of foreign capital flowing into the region. Together with sound political institutions these issues are vital for long term economic growth of Sub Saharan Africa.

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27 References

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28 Jones, S. (2008). Sub-Saharan Africa and the “Resource Curce”: Limitations of the Conventional Wisdom. Danish Institute For International Studies, Working Paper, 14.

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29 Appendix

List of 48 countries of Sub-Saharan Africa:

Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Republic of Congo, Côte d'Ivoire, Equatorial Guinea, Eritrea, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, São Tomé and Príncipe, Senegal, Seychelles, Sierra Leone, Somalia, South Africa, South Sudan, Sudan, Swaziland, Tanzania, Togo, Uganda, Zambia, and Zimbabwe.

Source: WEO dataset IMF, 2013

Table 2: fundamental economic variables, resource rich versus non-resource rich (Arbache and Page, 2007a)

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30 Figure 12 and 13: Methodology of Arbache and Page (2007)

Figure 2 and 3 illustrate the methodology Arbache and Page 2007 created. Testing four-year periods to four conditions, (whereby the forward four-year moving average (t, t+1, t+2, t+3) minus the backward moving average (t, t-1, t-2, t-3) must be higher than zero; the forward four-year average exceeds the average growth trend of a country; the forward four-year average GDP per capita exceeds the backward moving four-year average; and that the first three conditions hold for at least three years in a row), the study identified periods of growth accelerations and decelerations. A growth acceleration is defined as a period in which a countries four-year average is above its long term growth trend, sustaining this for three subsequent years. The two figures below are to illustrate the methodology analyzed in this thesis.

For example, South Africa experienced a growth decelerating period from 1989 to 1994 and had an episode of growth acceleration in 1999 to 2005 (Arbache and page 2007)

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31

Figure 13: Illustration of methodology analyzed in this thesis. Case for South-Africa.

Source: Arbache and Page (2007)

Figure 14: World per capita GDP growth, 1980-2012, annual.

Source: Trading-economics, from World Bank 2012

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32

Figure 15: Annual growth of exports of goods and services, 1995-2012

Table 4: Governance indicators for whole SSA region, all years from 1996-2011.

http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators -5 0 5 10 15 20 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 A n n u al gr o wt h , % Year

Exports of goods and services,

annual growth (%) -0,9 -0,8 -0,7 -0,6 -0,5 -0,4 -0,3 -0,2 -0,1 0,0 Control of Corruption Government

Effectiveness Policital Stability

Regulatory

Quality Rule of Law

Voice and Accountability

Governance indicators scores (-2.5 to +2.5), 1996-2011

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33

Table 5: CPIA scores of ten different variables, whole SSA region, 2005-2011

Caption for table 5:

1 = CPIA business regulatory environment rating 2 = CPIA economic management cluster average 3 = CPIA equity of public resource use rating 4 = CPIA fiscal policy rating

5 = CPIA macroeconomic management rating

6 = CPIA property rights and rule-based governance rating

7 = CPIA public sector management and institutions cluster average 8 = CPIA quality of budgetary and financial management rating 9 = CPIA structural policies cluster average

10 = CPIA transparency, accountability, and corruption in the public sector rating 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 1 2 3 4 5 6 7 8 9 10

African growth, natural resources in sub-Saharan Africa