Thu, Jul 2, 2015
The African continent is home to many poverty stricken countries with about 50% of the population living under poverty. This stands in sharp contrast to enormous advantages that Africa could tap into so as to fuel economic growth.
The African continent is home to many poverty stricken countries with about 50% of the population living under poverty. This stands in sharp contrast to enormous advantages that Africa could tap into so as to fuel economic growth. Of these advantages, perhaps the most notable are the vast natural reserves that Africa has been bestowed with. This observation makes one wonder why Africa continues to lag behind despite its sheer wealth in natural resources. This discrepancy between African resources and economic growth suggests the presence of conditions that inherently do not favor African countries. There has been a number of disputes in many African countries between governments and mining companies especially on re-evaluating contracts.
It is worthy to commence by evaluating these natural resources I claim African countries have in abundance. Oil takes the first slot, as the resource that is integral in any country’s economy and fortunately present in most African countries. Oil’s importance in an economy ranges from driving machinery, being a source of fuel to manufacturing of various chemical commodities. West Africa’s Nigeria produces an estimated 3.5 thousand kiloliters of oil per day making it the highest oil producing country in Africa and fourth in the world. Sudan, Libya, Algeria Egypt and Angola follow Nigeria as other major producers of oil. Some surveys suggest that there are more African oil reserves yet to be explored.
One other mineral that is of importance though not to a similar extent as oil is diamond. African diamonds in particular have been “popularized” in Blood Diamond suggesting Africa is among the main diamond producers relative to other continents. While most people are familiar with the lavishing jewelry or gem diamonds as they are usually referred to, diamonds come in two disguises; gem diamonds and their cousins named rather unimaginatively as industrial diamonds. Industrial diamonds are used to make tips of some industrial tools. What a waste right? The African continent is fortunately bestowed with numerous diamond deposits; Botswana, DRC, South Africa, Angola, Namibia, and Ghana lead the charts of diamond producing countries and are all among the World's Top Ten Diamond producers. Botswana, which produces about 31,000 carats, is home of the world’s largest kimberlite pipes such as the Jwaneng pipe, and is therefore Africa’s largest diamond producer. Diamonds from Botswana constitute 20% of the world diamonds. South Africa on the other hand boasts the world’s largest diamond, the 3 106-carat diamond commonly referred to as the “Cullinan”.
Copper, Gold, and Coal are among natural resources found in large quantities in the beautiful African continent. As highlighted earlier, there is an unsettling discrepancy between these large reserves of natural resources and living standards of most Africans. I have come to believe that poor negotiation skills and lack of manufacturing industries account for this unfortunate situation.
The vast natural resources that African countries possess have come to mostly benefit foreign countries. Yes, even in this post-colonialism era African minerals seem to benefit multinational companies more than the African counter parts where actual mining occurs. The core problem is the contract terms our African governments agree to when negotiating with multinational companies negotiators skilled at such proceedings. Most African countries have been trying to evaluate the terms of the mining contracts as to ensure that the countries get more “fair” conditions. Perhaps the most current re-negotiating is Zambia, which tried to increase its copper mining share from 2% to 8% but the negotiations have not been smooth. Some economists argue that unlike 5 years ago when mineral prices were on a rise, governments face the constantly declining copper prices (which is true for most minerals) as the main obstacle as they do not have a solid leverage to use. In most cases, mining companies use the unpredictability of copper prices to counter governments deals.
Lesotho is perhaps another example, the Gem Diamonds Limited a company that mines the Let’seng diamond mine, a mine that has produced 3 of the world’s top 15 largest diamonds owns 70% of the mine while the government owns a mere 30%. Of course this trend prevails in other countries like Nigeria and Zambia. Some countries though have changed the mining terms, which reflects in their improving economies. One such country is Botswana where the government now owns 40% of the mining rights in Jwaneng mine. One major problem is that most functioning mining contracts in African countries were negotiated in the 1960s when mining companies had an upper hand in negotiations, due to low mineral prices.
In line with poor negotiations, shortage of manufacturing industries forms the core of why African minerals do not fully benefit from their own minerals. Shortage of processing industries translates into minerals exported to “developed countries” in their raw state. This gives developed countries an opportunity to add value on minerals making them expensive when re-sold back to their African countries. African minerals, in such cases profit foreign countries more. The solution to this seems fairly simple: African countries should set up manufacturing industries. While the solution does sound feasible, such industries are unlikely to be profitable due to trade barriers set by developing countries. The European Union for example has set various tariffs on goods depending on the processing stages they are on, tariffs imposed on unprocessed minerals are as low as 3% while processed ones are charged over 50%. Given this scenario, even in cases where there are African entrepreneurs willing to establish manufacturing industries, the world market is not favorable for them. Particularly in the context of minerals like diamonds where the EU is the main market, these kinds of tariffs serve as means to discourage such entrepreneurs from starting manufacturing industries.
All this needs to change if Africa is to one day fully exploit its natural resource potential, so as to undergo significant economic transformation.
(Image credit: De Beers)
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