Mining local strengths from global commodities

Commodities have been a major driver of Africa’s growth story in recent years. But you may be surprised to hear that natural resources could have contributed far more than they actually did to Africa’s 5% average GDP growth over the last decade. Although Africa’s primary sector has expanded, its global share of natural capital dropped from 11.5% in 1995 to 8.5% in 2005.

Meanwhile, other regions of the world have increased their proven reserves of natural resources through extensive exploration and by exploiting new technologies, leaving Africa trailing behind. However, resources play a crucial role in many African countries: resource-based raw and semi-processed goods accounted for about 80% of African export products in 2011, far higher than those of Brazil, at 60%, India, at 40%, and China, at 14%. 

Clearly, while Africa could reduce its dependency on resources, it could also derive far more value from them for the benefit of local economies. This applies not only to processing raw materials, but  should start with producing supplies for resource extractors.

The opportunities are several. Local businesses can supply goods and services, ranging from food and catering to high-tech equipment for mining operations. The wide range of inputs needed allows local producers to link into supply chains at various levels of complexity, depending on their capabilities.

In the past, multinational commodity firms were often accused of operating in isolation from local economies by adhering to established international supply chains. Now, conditions for locals to link into resource value chains have become more favourable. Businesses located near mines have several advantages when answering tenders. They can produce supplies tailored to the needs of commodity firms on their doorstep, and adapt available technology to the location-specific characteristics of local resource deposits. This may not only lower costs in lead firms’ supply chains, but improve their relations locally and their reputation internationally. Local businesses also benefit. Where they interact with lead commodity firms, they can gain from improved access to knowledge, technology and capacities, which in turn can be useful in other sectors. 

Take South Africa, where local technological expertise benefited greatly from serving the mining industry. This transfer of knowledge helped to establish a supplier network for the platinum group metals (PGM) industry, the world’s biggest consumer of PGM-related goods and services. This demanding clientele, coupled with global competition, played a crucial role in driving up the quality of locally produced equipment and services. Today, South Africa is a net exporter of world-class mining equipment and specialist services. 

South Africa is surely not an exception, and governments elsewhere can do a lot to promote local participation in resource value chains, and not just rely on import intermediaries. For a start, preferential employment of domestic workers can be required by law. The locals employed then become familiar with technologies used by lead firms, which are often foreign-owned, and soon understand their operations and needs. This knowledge can become instrumental in establishing local businesses producing inputs for these firms. In cases where there is a lack of qualified local personnel, lead firms will feel obliged to invest in training, in order to fulfil local employment quotas. A similar mechanism works where lead firms are required to source their supplies from local businesses.   Commodity firms can be given a series of increasingly challenging goals and be obliged to provide plans on how to reach them. For instance, the percentage of local contractors required can be gradually raised, thereby compelling lead firms to scale up their efforts in training local suppliers to meet their standards.

By actively co-operating with governments, commodity firms can facilitate the promotion of reliable, competitive supplier networks. Once set up, these networks give local communities access to the economic benefits of resource production through business opportunities and jobs.

An example of this is in Mozambique, where Mozlink, a supplier development programme run by Mozal, an aluminium smelter, the International Finance Corporation and the Investment Promotion Centre, has proven very successful. Between 2002 and 2007, 45 local suppliers were trained and enabled to compete for procurement contracts. Since then, Mozal’s operational spending on Mozambican companies has increased from $5 million to $17 million per month. The number of domestic companies supplying inputs to the lead firm increased more than six-fold from 40 to 250. 

Outside Africa there are further examples of how to profit locally from global commodity firms which governments can look to. Countries like Chile and Malaysia, and also the US, have successfully used natural resource endowments to help move their economies towards higher value-added activities.  They prove that resources themselves are not a curse, but that failing to tap their potential is.

References

Jaspers, J. and I. Mehta (2008), Developing SMEs Through Business Linkages, Mozal Aluminium and IFC, Maputo and Washington, DC.

Lydall, M. (2009), “Backward linkage development in the South African PGM industry: A case study”, Resources Policy, No. 34, pp. 112-120.

OECD (2013), African Economic Outlook 2013: Structural Transformation and Natural Resources, OECD Publishing

Wright, G. and J. Czelusta (2007), “Resource-based growth: Past and present”, in D. Lederman and W. F. Maloney (eds.) (2007), Natural Resource: Neither Curse nor Destiny, a co-publication of Stanford Economics and Finance, Imprint of Stanford University Press, and the World Bank.

See also www.oecd.org/dev and www.oecd.org/development

© OECD Observer No 296 Q3 2013




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