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




Economic data

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Is technological progress slowing down. Is it speeding up? At the OECD, we believe the research from our Future of ‪Productivity‬ project helps to resolve this paradox.
  • An employee prepares breakfast in front of the Eiffel tower at the Parisian luxury hotel Le Plaza Athenee, France July 30, 2015. Nowhere in the world has more accommodation available on Airbnb than Paris. Now the home-sharing website that has transformed budget travel to the French capital is giving its super-deluxe hotels a fright too (©REUTERS/Stephane Mahe).
  • Is inequality bad for growth? That redistribution boosts economies is not established by the evidence says FT economics editor Chris Giles. Read more on www.ft.com.
  • On 19-20 September, come and visit the OECD to learn more about our home and our work.
  • Low interest rates here to stay for half a century, says OECD director Adrian Blundell-Wignall.
  • OECD speak on support it will offer to Greek
  • Bill Gates visited the OECD on 26 June. He met with the Secretary-General Angel Gurría to discuss areas of collaboration with his foundation and participated at a briefing session on official development assistance modernisation with OECD experts.
  • The People’s Republic of China decided to enhance longstanding collaboration with the OECD and to join the OECD Development Centre, in a historic visit by Chinese Premier Li Keqiang on 1 July to the OECD in Paris.
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • One dollar in aid for trade generates eight dollars in extra trade for all developing countries and 20 dollars for low-income countries. Read OECD Secretary General's post on the newly released Aid for Trade at a glance 2015.
  • Catherine Mann, OECD Chief Economist, explains on Bloomberg why "too much bank lending can slow economic growth".
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Come va la vita in Italia? How's life in Italy? The OECD Better Life Index is an interactive online platform in seven languages that goes beyond GDP by offering important insights into measuring well-being and quality of life. Try it for yourself!
  • The IMF calls for a decisive energy subsidy reform in order to use the freed resources to meet critical public spending needs and to reduce pollution ahead of the Paris climate change summit.
  • Have a look at these posters representing a world without fundamental rights at work – including child labour, forced labour and inequality. Read more about this ILO image competition here.
  • Africa vs profit shifting African countries heavily rely on the income generated by multinationals’ taxation, which can represent as much as 88% of a country’s tax base. Little wonder Africa is involved in the OECD’s initiative to address tax base erosion caused by profit shifting, known as BEPS. The need to strengthen inter-governmental co-operation to curb cross-border tax losses was reaffirmed at the Africa Tax Administration Forum (ATAF) in Sandton on 21 April 2015.
  • Africa v. profit shifting
  • After three decades of extraordinary economic development, China is shifting to a slower and more sustainable growth path, according to the OECD's latest Economic Survey of China.
  • In pursuit of the American Dream.

Most Popular Articles

Poll

What issue are you most concerned about in 2015?

Euro crisis
Unemployment
Global warming
International conflict
Other

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2015