Monday, August 18, 2014

Extractive industries key to averting resource curse


Discoveries of large quantities of commercially viable hydrocarbons and mineral ore in Eastern Africa continue to raise a fundamental question: can these resources be a blessing that unleashes a tide of wealth and prosperity?

On average, the so-called resource rich countries have performed poorly on political, social and economic indicators. Such countries tend to have slower economic growth, which is often characterized by inequitable distribution of national wealth. More often than not, resource rich do not re-invest resource revenues into productive ventures. Moreover, political wrangles and conflict over access and control of resource rents begets corruption and undermines democratic institutions. 

Governments can do a lot in the way of legal, policy and institutional mechanisms to avert the resource curse. Countries where governments have turned resources into a blessing such as Botswana and Norway, to mention just a few, demonstrate what can be accomplished through transparent and accountable political leadership. 

At the macro level, extractive industries contribute substantial revenues for host national governments in the form of royalties, income taxes and other profit sharing mechanisms. For reasons largely attributed to the resource curse, the benefits of the extractive sector have consistently failed to generate growth, expand economic opportunity and reduce poverty, especially among host communities.

Consequently, there is urgent need to examine the role of extractive industries can play in expanding economic opportunity to improve livelihood choices of the communities who live where resource are extracted. This is especially critical in the Kenyan context where the resource-rich counties like Turkana, Baringo, Kisumu, Mandera, Wajir, Garissa, Tana River, Lamu, Kilifi and Kwale are among the poorest, with poverty levels ranging between 50-80 percent.

For poor host communities, livelihood options ranging from entrepreneurship to employment are constrained by a spectrum of related constraints including political marginalization, geographic isolation and market failure. Poverty alleviation in resource rich poor communities must be about creating economic opportunity. I think about economic opportunity in this context a confluence of factors that enable the poor to harness their physical and social assets to generate livelihood choices.

Some in the private sector may argue, and rightly so, that creating opportunity is the responsibility of government, not the private sector. Such an argument would be naïve. Here is why; creating opportunity at the local level gives the private sector the credibility, enhance social license to operate, and reduce the risk of local grievance and conflict.

As an academic who works on extractive resources, I am always baffled the fact that very little work has been done in Africa on approaches by extractive industries for enhancing economic opportunity for host communities, especially evaluation of what works where and why.

There are four elements upon which the extractive industry players could build a strategy for expanding economic opportunity and avert the resource curse in the host community economy.

The first element is creating inclusive business operating models, which involve the poor as entrepreneurs, suppliers, distributors, retailers, consumers as well as employees. Local procurement of goods and services could be framed as a contractual obligation under local content requirements. Moreover, extractive sector can have greater impact when they incorporate local SMEs into their value chains.

The second element is investing in developing human capital through improving health-care, expanding access to tertiary education and technical-vocational training and skills development for local workers. At the school level special initiatives could be created to promote science, technology, mathematics and the arts, especially among girls. Investments could also be made in capacity building, including mentoring programs for local suppliers, distributors and retailers, which target women and youth.   

The third element is building institutional capacity through a variety of initiatives such as providing funding for university programs in social sciences, management and engineering, strengthening oversight capabilities in civil society and community based organizations and supporting industry networks and associations to facilitate knowledge transfer and sharing of best practices among local entrepreneurs. 

The fourth element is strengthening transparency and accountability through engagement in governance and accountability process through publication and verification of payments to governments. This could ensure that economic opportunities from the extractive sector are distributed more equitably.

Extractive industries in East Africa do not have a wide range of choice in investment locations. Hence expanding economic opportunity in host communities is in their best interest and will increase profitability in the long term and help avert the resource curse. 

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