Friday, April 25, 2008

African prospects dependent on reinvestment of resource rents

Why do we have these polar opposites in opinion on African prospects? This is much more then a simple case of Afro-pessimism or Afro-optimism.  What we have is a different focus by economists, development experts and policy makers on different and often partial aspects of African reality. 

One example of this is the narrow focus on short-term wealth creation through consumption driven by a sole focus on GDP as a measure of wellbeing. Africa, in general, is rich in natural resources, but lacking in productive and intangible resources. This leads to a situation where a relative small and connected part of the population reaps the benefits from rapid natural resource extraction.  With weak institutions, and no or little private incentive to reinvest, not enough resource rents are captured for reinvestment in productive and intangible assets, stalling a much needed diversification of the economy.   

It is common knowledge in resource economics that to sustain constant consumption one has to reinvest all resource rents in reproductive capital (see Hartwick rule).  The temptation is huge however, to rather consume these rents as illustrated in this graph based on an analysis by the World bank.  

Countries with a high percentage of minerals and natural resources rents (expressed as percentage of gross national income) tend to save less (as measured by genuine savings).  A country with no savings has much less room for investment.

This is a wake-up call to reinvest, to diversify natural resource based economies and to safeguard future prospects of wealth. A focus on increased consumption of natural resource wealth in the short term is not a sustainable strategy.  A simple start is changing how we measure wellbeing. This is a topic on its own.


Anonymous said...

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Anonymous said...

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Anonymous said...

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