Mine workers busy with the construction of the Everest platinum mine in Mpumalanga in June 2005.  Picture: SUNDAY TIMES
Mine workers busy with the construction of the Everest platinum mine in Mpumalanga in June 2005. Picture: SUNDAY TIMES

IN THURSDAY’s article on this page, titled "Rethink needed to allow ‘dirt diggers’ to aid the economy", I questioned the South African government’s policy of forcing beneficiation on the mining industry.

Here, I am bringing forward the results of a ground-breaking study by Eunomix, the consultancy I manage.

It analyses 40 years of natural resource rent management in sub-Saharan Africa, by looking at how rents have been affected by commodity prices and how they have influenced economic growth. (Resource rent is the difference between the value of production for a stock of resources at world prices, and their total costs of production.)

Analysing resource rent management is critical to understanding the mechanics of the natural resources economy.

Only a long-term perspective can bring meaningful understanding of what policies are effective, rather than simply popular.

This is critical at a time when most governments feel they have not benefited enough from their resource endowments, and are taking measures that increase state ownership and control.

The study is based on public World Bank data, and begins with a comprehensive measure of mineral and oil rents for 48 sub-Saharan countries between 1970 and 2010.

It then conducts a series of rigorous correlations between rents, prices and growth.

These correlations have allowed us to show unambiguously that resource rents follow a clear long-term pattern, where commodity prices have a direct effect on the formation and direction of natural resource rents, which in turn affect economic growth. This is not entirely surprising. What the study also reveals is that natural resource policy can critically influence this pattern, whereby good policy improves rent formation and economic growth, and bad policy hobbles rent formation and economic growth.

The analysis’s three case studies — on the Democratic Republic of Congo, South Africa and Zambia between 1970 and 2010 — provide a spectacular illustration of this.

The Zambian story has been told many times. What our analysis incontrovertibly demonstrates is the enormous economic cost of nationalisation, which we calculated amounted to $45bn between 1970 and 2000. This staggering figure was obtained by calculating the mineral rent the country would have unlocked if it had managed to keep its copper production at 700,000 tonnes, a level last reached in 1970.

Nationalisation led to a continuous decline in production, which bottomed out at 230,000 tonnes in 2000 — and has recovered since privatisation of the mines.

Advocates of pronounced state intervention have often argued that declining copper prices were at fault.

This is incorrect.

Average prices rose during the period: from $1,470 a ton in the 1970s, to $1,840 in the 1980s, and $2,220 in the 1990s.

In fact, Zambia’s rent performance was remarkable in the first half of the 1970s, despite comparatively low prices.

Thereafter, the poor governance and low investment typical of state ownership ensured that even large price increases could not sustain high rents. And when prices decreased, the rent tumbled. There were times when Zambia’s mineral rent was near zero. Its mineral production created no economic value whatsoever.

The study also demonstrates that minerals are much less economically productive than oil and natural gas, by a large margin.

This has critical implications for the role of the state in ownership, investment and regulation. Mining simply cannot accommodate the kind of policies that make sense in oil-rich countries — such as production monopolies, production-sharing, and the like.

Such policies applied to mining lead to disinvestment and production declines.

Our analysis shows the enormous cost of well-intended but flawed policies across the board — particularly when applied to mining. Designed to increase benefits for the country — through nationalisation, indigenisation, local content rules, etc — they generally produce the opposite: production collapses, disinvestment and rent destruction.

This has invariably led to lower growth and greater poverty.

Instead of finding national autonomy, governments have often been forced to painful recourse to international financial support and economic aid.

In agreement with a new study by the United Nations Economic Commission for Africa and with the broad goals of supporting diversification by the South African government, our study shows the necessity to leverage natural wealth towards greater social equity and sustainable development.

Overreliance on natural resources brings wealth, but also vulnerability to external shocks and unbalanced development.

The analysis proves that resource-rich African countries have mostly failed to diversify meaningfully.

In fact, since 2000, resource dependency has grown enormously.

Our data shows the unmistakable link between this and the extraordinary expansion of the Chinese economy, and Africa’s rents show uncanny correlation with China’s imports of oil and minerals.

Africa is therefore critically exposed to China’s economic restructuring and its shift away from export-led growth.

This is a major economic risk, which will undermine the region’s progress and higher growth rates.

The key is the right policy, with three integrated components: create the conditions for maximum rent formation at given price conditions; ensure that the rent is sustainably shared between stakeholders (business, labour, communities and the government); and support long-term diversification.

But, as we argued on Thursday, meaningful diversification need not be in or around the natural resource. In fact, there is ample evidence that comparative advantage may lie in sectors unconnected to natural resources.

Most African countries apply the wrong policies at the wrong time in the commodity-rent cycle: they deploy interventionist or nationalistic policies at or near commodity boom peak — too late to achieve their stated goals, but fostering the opposite because they lead to cost increases, lower margins and uncertainty; they maintain these policies too long, leading to rent destruction, with their attendant negative economic and social consequences; and they revert to procyclical policies long after such reversal was required, with potentially significant opportunity cost in rent foregone.

This negative countercyclical policy paradigm has been at play for most of the past 40 years, allowing procyclical rent formation only during short periods, including in the 2000s.

Alarmingly, fuelled by a commodity supercycle which is now over, resource nationalism is back.

And, as in the 1970s, this push is occurring at the wrong time, putting at risk resource rents that are already endangered by the retreat in global demand and prices.

It is urgent that Africa’s resource-rich countries adopt policies that maximise rent formation at a time of declining global demand and prices, and ensure effective economic diversification. The fashion for resource nationalism represents a clear and present danger.

Baissac is MD of Eunomix, a consultancy specialised in derisking resources and infrastructure projects.