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sharing in governance of extractive industries

Lessons from foregone mineral opportunities – the imperative for diversification in Ghana

Recent events in mineral-producing countries, namely Zambia as of late, are shedding renewed light on whether mineral producers have adequately linked their resources to broader socioeconomic development, or whether an opportunity has been missed. Communities with significant mineral reserves have long wrestled with how to make the most of these endowments – how to establish employment-generating industries that build on these reserves both upstream and downstream along the value chain for mineral-based goods. Zambia is currently making international headlines regarding debt and allegations of financial mismanagement, but the source of these controversies is an issue that has been brewing for some time, that of responsible use of mineral sector revenues and the orientation of the sector as a whole towards more productive, sustainable sectors.

As the situation in some mineral producers fluctuates and worsens, it is notable that many aspects of the Africa Mining Vision – the continental framework which outlines the imperative productive use of natural resources for structural transformation, job creation and development – represent a great opportunity if exploited. Short term developments – such as commodity price fluctuations, the issuing of debt and the source country, organization or currency of that debt – while important, do not tell the full story of long-term strategies that countries can pursue regarding the role of resources. A progressive vision would then permeate down to inform sector-specific strategies, macroeconomic policy, resource mobilization, education and training, infrastructure and a whole host of related policy actions. Yet in many mineral producers, a combination of failures to formulate, apply and implement such a developmental vision across the economy has persisted.

The development of Zambia’s economy and copper production since independence has been well studied. What should be emphasized amidst recent uncertainty and anxiety is how Zambia – with relative improvements in governance perceptions as per the Ibrahim Index[1], external debt as a percentage of GNI which was brought down significantly and then hovered just over 20 per cent for the past decade until recent rises to around 50 per cent (see Figure 1), a clear aspiration for commodity-based value addition and development, and endowments of a mineral increasing in global price and demand – managed to end up in this current state. One factor is the persistence of primary extraction. Mineral rents as a percentage of GDP have been hovering between ten and twenty per cent, and are a larger percentage of exports, while the figure for manufacturing as a percentage of GDP (as a proxy for value addition and diversified sources of jobs and incomes) has remained below ten per cent.

Figure 1: External Debt Stock                                               Figure 2: Ghana's Mineral Sector, 2016

Source: World Bank World Development Indicators 2018       Source: AMDC forthcoming report “Scaling up

                                                                                                        value creation and local development

                                                                                                        in the upstream mining sector in Ghana"                  

In the case of Ghana, despite relatively strong performances, worrying trends abound. While Ghana ranks 8th in Africa as per the Ibrahim Index, its score has been slightly declining in recent years. Similar to Zambia, debt-to-GNI was brought down markedly but has begun to steadily rise from an average around 30 per cent per year to over fifty per cent by 2016. Ghana’s mineral rents have played an outsized role in some areas, accounting for 22 per cent of government revenue and 45.5 per cent of exports as of 2016[2]. Yet it has not been similarly significant for income and job creation (see Figure 2), while manufacturing value added, in comparison, stagnates below five per cent.

In light of these developments, there are a number of takeaway messages of the crisis we see unfolding for other mineral producers, many of which are echoed in ongoing work of the African Minerals Development Centre (AMDC) as it assists countries in implementing the Africa Mining Vision.

  1. A strong reputation in extracting one primary commodity will on its own yield little without upstream or downstream value addition. Zambia is synonymous with copper; even the national football team has the nickname “the copper bullets”. Yet unlike a similarly reputable and larger copper producer in Chile, Zambia generally exports copper in raw forms, with limited downstream processing into higher-value products. Upstream linkages to domestic mining supply are similarly underutilized. Once the production of the raw material alone starts to wane – with the DRC for example now producing more copper than Zambia and Ghana’s status as the second-largest gold producer on the continent threatened by Burkina Faso, Mali, Sudan and others – without adequate linkages the limited income and export generated by raw materials will become even more apparent. In the case of Ghana, while there is potential for significant upstream value-addition as noted by AMDC, this will require concerted promotion.
  2. Industrial linkages require an apex-level mandate and strong coordination amongst actors. Strategies regarding the use of minerals are often seen as the purview of ministries of mining alone and left to them to implement. Rather, the mandate must come from the head of government, with implementation coordinated amongst key actors bringing their own fields of expertise regarding investment, workforce development, trade, lands and so forth.
  3. Revenues need to be strategically applied towards linkage development. Spending, even on useful activities, must be undertaken through coordinated plans. Much has been made of the spending on certain infrastructures in Zambia and whether or not these will facilitate economic transformation. Sound analysis of realizable opportunities, commitments by private sector actors and long-term planning are all vital. The joint initiative of the Government of Ghana and AMDC, for example, will establish a National Suppliers Development Programme (NSDP) to strategically identify and build the capacities, capabilities and competitiveness of domestic suppliers to link-in with mineral value chains.
  4. Perceptions matter. Rents from minerals must be applied in a manner in which the citizens of the mining municipality and country as a whole feel included and are real shareholders in both the resources and the development agenda. Important will be that foreign actors – whether from China, Europe, North America or elsewhere – hold no outsized influence or overly-generous concessions. This will involve balancing the roles of multinational mining and processing firms, financiers, local firms of all sizes, artisanal and small-scale miners, with the local community and public at large as ultimate shareholders and decision makers on mineral wealth.
  5. Commodity producers looking to promote industrial linkages should draw on regional opportunities. Indeed, while an upstream supplier or downstream processor may find limited demand for their products within the domestic economy, once neighboring countries are factored in this market increases. The evidence of this is clear in that intra-African trade is far more diversified than Africa’s trade with other regions, and movement towards the Continental Free Trade Area (CFTA) is yet another sign of the political will for greater regional integration to spur industrialization.

[1] See https://mo.ibrahim.foundation/iiag/

[2] AMDC forthcoming report, “Scaling up value creation and local development in the upstream mining sector in Ghana”

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Comment by Mkhululi Ncube on October 10, 2018 at 11:17

Concise piece that's a great and relatable read.

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