Growing Poverty With Mineral Wealth

from All Africa

UN Integrated Regional Information Networks

Maputo

For years, the coal-mining town of Moatize, in the northern Mozambican province of Tete, has been a ghost of its former self, but this is about to change.

Its railroad is closed and the purpose-built prefabricated neighbourhood, called Berlin after long-disappeared German miners, now houses local residents. Like much of Mozambique's extractive industry, the decades-long civil war resulted in large-scale damage to infrastructure, and the region's mineral wealth was all but ignored.

But the peace dividend appears to be paying off since hostilities ended in 1992. Vale do Rio Doce, a Brazilian mining company, is expected to resuscitate coal mining at Moatize by 2010 and its investment has already begun to bring rapid changes to the town.

Like similar projects across Mozambique, the new coal-mine in Tete Province is a reflection of the government's policy of using mineral wealth as a lever to eradicate stubborn poverty levels; nearly four fifths of the about 20 million people live on US$2 or less a day, according to the United Nations.

The rights to Mozambique's minerals, including heavy metals, coal, natural gas and possible oil reserves have been auctioned off to multinational companies at a rapid rate in recent years.

In the past five years alone, South African company Sasol has begun exporting natural gas from Inhambane Province; Kenmare, the Ireland-based firm and South African company Corridor Sands are mining titanium deposits in Gaza Province, about 200km north of the capital, Maputo, and an array of companies from the United States, Brazil, Canada, Norway, Italy and Malaysia are prospecting for oil reserves.

If oil is found, Mozambique's economic profile is expected to change drastically ... But the prospect of joining the world's oil-producing countries is being met more with consternation than euphoria

If oil is found, Mozambique's economic profile is expected to change drastically. According to estimates by the government's Ministry of Planning and Development, even small reserves of oil would increase total annual exports from US$6.5 billion to more than US$10 billion by 2020; if the finds are more extensive, total export values of US$60 billion annually are being predicted.

But the prospect of joining the world's oil-producing countries is being met more with consternation than euphoria. Australia, Canada, Norway and Botswana have managed to use their mineral wealth for the good of their economies and populations, but this has not necessarily been the case in countries like Angola, Nigeria, Equatorial Guinea and Sudan, where vast oil reserves have failed to improve the livelihoods of the majority of the inhabitants.

The curse of oil

A study, "Exploring Natural Resources in Mozambique: Will it be a blessing or a curse?", released in June 2007 by the planning and development ministry, summarised concerns using data from other countries rich in mineral resources.

It found that, on average, the relationship between natural resource wealth and GDP growth was negative. It also determined that natural resource wealth has no demonstrable relationship to a population's overall wellbeing as measured by the United Nation's Human Development Index (HDI).

Known as the "natural resource curse", the negative effects of mineral wealth on a country's population are legion: it can inflate the local currency, making other enterprises less competitive in the international market; fluctuations in the price of oil, gas and minerals create a volatile exchange rate that often discourages foreign direct investment; mineral revenue windfalls also have a tendency to encourage poor government policy and increase foreign debt.

"Resource revenues may contribute to myopic behaviour and irrational expectations on the side of the government, leading to accumulation of debt with resource stocks as collateral," the study noted.

Investment in education has a tendency to diminish in such countries, while the civic institutions that are key to monitoring corruption have a tendency to falter when governments earn the bulk of revenue from foreign companies.

"The treatment of existing projects of large dimensions - the so-called 'mega-projects' - most of which operate in the area of natural resource exploration, is so far characterised by a persistent lack of transparency and granting of extraordinarily large fiscal benefits," the report said. "If this situation is to be continued, Mozambique indeed is vulnerable to suffer at least the risk of continued weak institutional quality."b

Avoiding the curse

Aurelio Bucuane, one of the authors of the study, said the political consequences of an oil windfall was his greatest concern. "It's there that I identify the biggest problem, above all, regarding transparency. Even to do this study it wasn't easy to obtain facts about the contracts involved."

Unlike other developing countries, whose institutions might not have been adequately prepared for the sudden influx of oil revenues, the Norwegian government has been involved in capacity-building assistance to the government for more than 20 years.

"It's true that in the bulk of countries that are very rich in mineral resources, [this can] enable the government to extract so much money it becomes independent of its own people," said Mette Masst, a Norwegian diplomat based in Maputo.

She said Norwegian assistance had helped Mozambique negotiate better terms with multinational companies, such as less generous tax holidays, ensuring that the country obtained a better return from foreign investments.

"The Mozambican government is conscious about this [oil reserves]. I have a lot of respect for those who manage petroleum in this country," she said. "The most useful thing we have done in 30 years here is for the petroleum sector, but anything can be derailed. Things are so dependent on individuals."

The study's authors recommended a slow approach to any possible development of reserves, but Masst disagreed. "Advisors have said don't rush too fast, but this is a very poor country that needs revenues." The Norwegian company, Norsk Hydro, is one of many companies currently prospecting for oil in Mozambique.

Tourism versus oil

One potential source of conflict the study did not address was balancing the economic impact of an increased focus on mineral resources against the country's emerging international tourism market.

Mozambique's pristine beaches and marine biodiversity are primary attractions for tourists, and local environmentalists contend that the impact of mining and offshore drilling might destroy a nascent industry that has the potential to create mass employment.

There are countries that have achieved development through tourism, more than have achieved it from oil

"There are countries that have achieved development through tourism, more than have achieved it from oil," said Daniel Ribeiro, member of a local environmental group, Justiça Ambiental (Environmental Justice in Portuguese).

"Tourism is one of the largest industries in the world but it's difficult to measure because the monetary impact is so dispersed. The government prefers to support mega-projects because they are easier for it to control."

Like the authors of the study, Ribeiro believes the government should not allow mineral extraction until it has a plan for controlling spending and borrowing, encouraging economic diversification, and a system of anti-corruption checks and balances.

"Mozambique is not ready," he said. "We're not there. We need more planning and we need more debate. [The oil] will always have value - it's not going anywhere."

[ This report does not necessarily reflect the views of the United Nations ]