BY GETACHEW MINAS
Many African countries, including Ethiopia, are endowed with rich but “finite natural resources” that can be extracted, but exhausted, to promote economic development. The discovery of natural resource reserves and their extraction does “not necessarily lead” to higher economic growth, nor does it necessarily translate into better human development outcomes. “Weak linkages” with a country’s broader economy can lead to the creation of an “enclave economy”, disconnected from other sectors, making some macroeconomic indicators look better but without creating jobs or broad-based prosperity.
The resultant “skewed” currency and fiscal and human resource allocation along with self-enrichment of political elites may lead to what is known as the “natural resource curse.” This is exhibited by the failure of many resource-rich countries to benefit fully from their natural resource wealth.
The perverse “rent-seeking” nature of some African leaders failed to respond effectively to public “welfare needs.” Sub-Saharan Africa was forecast to have the highest growth rate in 2015 of any region other than Asia. Nonetheless, many African countries still exhibit “low” human development indices, as defined by the African Development Bank (ADB).
To protect Ethiopia from the natural
resource curse, economic linkages between the extractive sector and the rest of the economy need to be strengthened. This demands “effective” management to minimize unbalanced economic development. To benefit from “resource-led” growth policy, legislative and regulatory frameworks should be both pro-growth and pro-development. They have to be designed to mobilize and integrate human, financial and technical resources. Ethiopia may encourage public-private collaboration to harness investments in human resources, infrastructure developments and capital investments.
A growing extractive sector enables other economic sectors to create and extend new opportunities to the service sector such as banking, hotels, and transport that further create employment for Ethiopians. Ethiopian investors, as providers of permanent employment for citizens, need “predictability” of fiscal, regulatory and related governance frameworks. These factors reduce uncertainty and avoid risk. Good governance, devoid of corruption, is generally regarded as a “guarantor” of investment. Investors are ready to invest their resources where peace and security is guaranteed.
The role of government is to attract investors by guaranteeing “peaceful” environment for undertaking businesses in the mining sector. This promotes productive use of mineral and human resources of the country. Investors are sources of revenue for the government; they create employment, earn foreign exchange and secure foreign direct investment (FDI).
If the government fails to keep its obligations in serving their interests, the investors may be forced to close down their businesses and leave the country for good. This act is very harmful for the mining sector as foreign investors are the sole sources of FDI.
African economies and that of Ethiopia are heavily dependent on FDI for generating resources for the extractive industry. This sector is a contributor to the GDP, earner of foreign exchange, and generator of government revenue.
Properly managed, the mining sector has linkages with other sectors of an economy. These linkages may result in more employment, tax revenues, foreign exchange, and transfer of technology. There was considerable optimism that African economies were changing for the better. They were no longer dependent on “raw material” exports.
Ethiopia started earning foreign exchange from export of processed raw materials and commodities. However, the fall in commodity prices illustrated that country was “vulnerable” to variations in external demand. In highly competitive environment, “governance” and policy will become increasingly important factors in the performance of the mining sector.
Just as important will be the state of regulatory and administrative processes that ensure strong and diversified growth. These factors, too, will be vital determinants for attracting investment and growth in mining projects. As the WB noted, government is the single largest “determinant” of the flow of mining investments.
The Ethiopian herald December 26/2020
