African governments must impose clear rules governing natural resource extraction to ensure they do not waste the “biggest opportunity” for economic transformation the continent has ever faced, according to one of the world’s best known development economists.
Paul Collier, professor of economics at Oxford University, played down fears that Africa would be severely impacted by the bursting of a bubble in commodity prices, saying revenues would remain strong over the coming decade because of the untapped potential underneath African soil.
But in an interview with Emerging Markets he warned that it was essential resource-rich states did not repeat the mistakes of the past.
“Wherever you go in Africa you get this burning sense of ‘never again’ in the sense they know that their society was plundered by elites and foreigners,” said Collier, author of bestselling books including The Bottom Billion and The Plundered Planet.
He urged states to establish clear rules to govern the five key stages in the exploitation of natural resources: discovery; taxation; engaging the local community; the balance between spending and saving; and the best use of revenues.
“This is the decision chain that has to go right to successfully harness natural resources,” he said. “The political challenge is how to get that chain right – not just once but repeatedly through generations,” he said.
“What we know about commodity prices is that there is a lot of volatility but what we know about Africa is that there will be a huge amount of resource discovery over the next few years.
“Africa’s revenues from commodities and the value of extraction of natural resources from Africa are set to go up almost regardless of what happens to prices.
“Of course the revenues will be very volatile but they will be there, and the challenge is how to harness them. It is about harnessing the process and getting that right.”
Many economists fear commodity markets are showing signs of a speculative asset bubble that could burst, triggering problems for economies dependent on commodity-based revenues.
According to Capital Economics, a consultancy, the prices of many industrial and agricultural commodities seem more likely to be forming bubbles which are set to burst than being in the grip of a super-cycle.
But Julian Jessop, chief international economist, told Emerging Markets that falls in prices could be positive for commodity exporting countries over the medium term.
“One of the reasons commodity prices have risen recently is supply shocks and shortages,” he said. “To the extent that prices fall because supply increases, countries whose supply potential has risen may be better off with lower prices.
“Suppose that agricultural commodity prices fall because oil is a lot cheaper, producers will still be better off because they can afford to produce more.”
Collier said the real danger was price volatility, which made it hard for governments to know how reliable future revenues would be. “You need to build a system which ensures you can withstand a certain amount of volatility,” he said.
Collier said low income economies should use revenues predominantly for investment to boost long-term economic growth and living standards.