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Extract 5 highlights the dangers of a lost decade what might this entail?


What is primary product dependence?



Why might abundant natural resources and high commodity prices turn
out to be a curse?
Extract 5 highlights the dangers of a lost decade what
might this entail?

1. A sustained period of slower economic growth (% change in real
GDP)

2. Weaker gains in real per capita incomes and rising inequality

3. A slower rate of growth of global trade and investment perhaps
reversing globalisation

4. Slower growth creates tensions and increases the risks of a move
towards protectionism

5. They link the possibility of slower trend growth to halting or partial
reversal of some of the development gains achieved during recent
years.
Key development gains in recent years:

The extract makes reference to these but no data is provided
as evidence. There are numerous indicators of human &
economic development. One approach might be to consider
some of the gains made in meeting the Millennium
Development Goals (MDGs).


The Millennium Development Goals represent a set of
development targets established in 2000 and
designed to be met as fully as possible by the end of 2015. A
new set of goals is expected in the near future.

Refer to textbook, pg 282-286
Why high economic growth fuelled by commodity
exports has not flowed through to significantly better HDI scores for
countries such as Gabon and Angola. Keep in mind that there is a
time lag between export-led growth and the extra resources
demonstrably improving life outcomes for millions of poor people.
But despite this, the main explanation goes back to the many
problems surrounding the natural resource curse.
The Human Development Index (HDI) is published by the UNDP and focuses on
longevity, basic education and minimal Income.

SSA scores low in all three dimensions of the HDI
In 2012, the HDI for SSA (0.475) was about a third below the global HDI (0.694)
SSA has the highest to the lowest HDI values within a region
Of 46 SSA countries, only two (Mauritius and Seychelles) are in the very high or high HDI
category
Eight (Botswana, Cape Verde, Equatorial Guinea, Gabon, Ghana, Namibia, South Africa and
Swaziland) are in the medium HDI category
Among the 30 countries ranked at the bottom of the HDI scale, only Afghanistan, Haiti and
Yemen are outside SSA
What is primary product dependence?

Many lower-income developing nations still relying on specializing in and then
exporting primary commodities. The prices of these goods can be volatile on
world markets (due to inelastic supply and demand).

High prices provide the bonus of fast-rising export revenues and increased tax
receipts for example, oil exporting countries in SSA have a lower level of
government (public) debt to GDP.

But when global demand and prices fall, an economy will see a sharp reduction
in export incomes, an adverse movement in their terms of trade, risks of a higher
trade deficit and a danger that a nation will not be able to finance state-led
investment in education, healthcare and core infrastructure.


Despite being rich in natural resources, for many countries this turns out to be a
curse not a blessing.
Why might abundant natural resources and high commodity prices turn out to be a
curse?

The so-called natural resource trap or resource curse can come about for a variety of reasons:

Conflict: Risk of political conflict and corruption. Government stands to gain from increasing
revenues, but their spending may be inequitable and favour the interests of one region over
another in a particular country. Corruption or weak tax-collection system limit the fiscal
dividend from exporting valuable commodities.

Inequality: Many of the gains from the commercial exploitation of rich natural resources are
kept by power elites in societies and millions of those who live above the resource endowment
see little significant improvement in their standard of living. There might be little progress in
inclusive growth and development.


Volatility: Vulnerability to changes in world prices which causes high levels of macro volatility.
SSA countries are at risk of suffering from a prolonged economic slowdown in countries such as
China and India which causes world demand and prices for resources to fall.
Sustainability: There is a danger of over-rapid extraction of finite and renewable resources
this can lead to some countries experiencing the tragedy of the commons.

Currency appreciation: Rising prices can lead to a currency appreciation damaging domestic
industries a strong exchange rate will make the exports of a developing countrys
manufactured products more expensive in overseas markets

Higher inflation: New finds of natural resources such as natural gas in Mozambique and
Tanzania or crude oil in Kenya and Ethiopia represent an increase in potential aggregate supply.
But the growth spurt they cause can also bring about demand-pull inflation which hurts the real
incomes of poorer groups who do not directly benefit from resource exploration and
production.

Weak linkages: In many countries, there are weak linkages between the resource sector and
the rest of the economy e.g. a coffee growing sector might have limited processing and
marketing capacity. Exports of natural resources might reduce the drive towards diversification
and investment in adding value to primary exports.

Limited employment creation: Resource extraction tends to be capital-intensive in nature and
often does not create a significant rise in new jobs. Foreign investment and inward migration of
workers may also limit the employment multiplier effects from resource extraction and export
Policies / Strategies to help overcome the Natural Resource Trap
Better government including more transparency & accountability to tax
payers and also higher and more effective public spending, especially on
infrastructure and public services such as health and education. SSA
currently has a high level of government fragility despite progress made in
strengthening democratic institutions in recent years.




Create a Commodity Stabilisation Fund / Sovereign Wealth Fund e.g. to
fund human capital and critical infrastructure. These funds can invest in
alternative industries and build a buffer of currency reserves for when
world prices fall and revenues decline e.g. during a global economic
downturn. Some countries such as Angola, Gabon and Nigeria have set up
commodity stabilisation funds

Diversification investment in processing and manufacturing capacity giving higher value
added growth and increasing the productive potential for intra-regional trade within sub-
Saharan Africa



Higher taxes of natural resource profits (i.e. extracting resource rents) - the
extract mentions the importance of the tax / licensing regime for countries
with deep commodity reserves.


Aid: Most economists agree that Aid will help in conjunction with many other policies.
Policies / Strategies to help overcome the
Natural Resource Trap
Rising international commodity prices can shape economic growth in many different ways in
both the short run and the long run. Our focus in the points below is on countries that are net
exporters of commodities.

1. An increase in world prices brings about an improvement in a commodity exporters terms
of trade i.e. the ratio of export prices to import prices. Each tonne of cobalt or barrel of oil
exported is worth more (usually measured in US dollars). It allows benefiting nations to
import essential raw materials, components and capital equipment such as new technology.

2. Higher world prices ought in theory to bring about an improvement in the net balance
of trade for exporting nations. A stronger current account on the balance of payments
provide a key source of foreign exchange and help to overcome the risks from persistent
external deficits.

3. A surge in the value of exports is an injection into a nations circular flow of income and
spending which in theory will stimulate multiplier and accelerator effects for the
domestic economy. This can bring about a rise in real per capita national incomes and a fall
in extreme poverty

4. Rising real incomes fast forward the process of cutting the rate of extreme poverty and
general a higher level of consumer demand - Many SSA countries are expected to reach middle-
income status in coming years and will hope to sustain a higher level of real per capital gross
national income (PPP). Rising real incomes fuels demand growth in cyclical industries such as
telecommunications, banking, retail and construction/housing
5.Increased incomes allow for higher saving by private sector households and businesses
which in the long run will help to sustain economic growth by providing extra funds for
investment.

6. The production of raw materials in theory ought to bring about a significant increase in
revenue flows for a government. The IMF and World Bank forecast for example that annual
revenue flows from oil will be 2.3% of GDP for Ghana, from gas and coal they will be 18% of GDP
for Mozambique. And for Tanzania, gas, gold and nickel will drive revenue streams worth up to
15% of GDP.

7. High resource prices act as an incentive for inward foreign direct investment we have seen
a high rate of this into sub-Saharan Africa from countries such as China and Brazil. FDI can cause
a rise in labour and capital productivity, increased domestic employment and wages although it
carries risks too
Analyse how rising world commodity prices and resource discoveries have stimulated
economic growth in SSA?

Sub-Saharan Africa (SSA) is growing fast with annual real GDP growth of over 5% in the last
decade, second only to developing Asia.






Growth in physical capital stock - leading to a rise in capital per employee
(capital deepening)

Growth in the size of the active labour force available for production

Growth in the quality of labour (human capital)

Technological progress and innovation driving

productivity improvements i.e. higher GDP per hour worked

Institutions including maintaining the rule of law, stable democracy, macro
economic stability

Rising demand for goods and services - either led by domestic demand or from
external trade
What is capital-intensive production?


What is a dualistic economic structure?
What factors help to explain low productivity in many SSA agricultural sectors?
What is capital-intensive production?


Those that require a relatively high level of capital
investment compared to the labour cost.

These processes for example in deep-cast or open-cast
mining - are likely to be highly automated.

Due to capital intensity in resource extraction few jobs are
created.

This reduces the multiplier effect when there is a rise in
capital investment or exports.



Dual Economy:

A dual economy exists when an economy has two separate
sectors, divided by different levels of development, technology,
and different patterns of demand. The classic example of a
dualistic structure occurs with lower-income countries where
there is a significant divide between urban and rural regions and
between agriculture and manufacturing industries.
What factors help to explain low productivity in many SSA agricultural sectors?

If a country can improve farm productivity, incomes and savings, then a platform can be built for
further structural change in an economy.


1. Water shortages / water scarcity (drought) in many areas
2. Relatively low amount of capital per worker employed
3. Low take up of research and innovation in agricultural innovation
4. Insufficient irrigation infrastructure
5. Dominance of small-holder farmers with low exploitation of economies of scale
6. Limited education / human capital among farmers
7. High cost of buying fertilisers and small items of capital equipment for poorer farmers
8. State-monopolies might have damaged incentives to bring more farm land into production
Higher Farm output per worker

Increased incomes

Higher savings

Creates funds for capital investment

Frees up labour for urban areas

Surplus output exported



Gains from achieving higher productivity in farming