"Free trade in natural resources bad for development"

Many African countries follow the strategy of exporting as much as they can and, since they are uncompetitive in manufactures and services, they export raw materials, Mark Halle, director of the International Institute for Sustainable Development, said in an interview with IPS about the World Trade Report 2010 on trade in natural resources.

IISD is a Geneva-based research institute that works, among others, on trade and global subsidies.

The report, released by the World Trade Organisation (WTO) on Jul 23, showed that fish, forestry, fuels and mining products represented 24 percent of world trade in 2008. Fuels account for three-quarters of this trade and have experienced a rapid growth since 2000.

Intra-regional trade among African states remains at exceedingly low levels - an average five percent - while most of Africa's exports continue to consist of commodities and particularly energy commodities.

Regions that are rich in natural resources mainly ship these to industrialised countries. In 2008, the natural resources exports of Africa amounted to 406 billion dollars, of which 86 percent was for fuels, which represents 73 percent of the total commodities export of the continent.

The natural resource sector is affected by export rather than import measures, according to Michele Ruta, an economist at the economic research division of the WTO.

Import tariffs in more advanced economies are low - even though they tend to increase with the stage of processing - but large exporters usually impose quantitative restrictions and export taxes, Ruga argued.

"The core focus of the WTO system has been the reduction of import tariffs but in the case of natural resources it is not the big issue.
Few countries impose import duties on oil, for example," said Joost Pauwelyn, professor of international law at the Graduate Institute for International and Development Studies in Geneva.

"Production restriction, export duties and consumption taxes are not all violating WTO law but some are harmful and inefficient. A trade body like the WTO should do something about it. Free trade is more important in natural resources than in other sectors," he concluded.

This statement is correct but incomplete, Halle told IPS. "Developing countries have been forced to lower import tariffs through different trade rounds and they have lost sources of government revenue. They have to try and make up somewhere and export taxes are what they do.

"Do these taxes lead to economic inefficiency? Yes, probably, but the answer is not to export more natural resources to compensate for the loss of revenue - which they may be tempted to do - because this will lead to environmental problems.

"What are you looking for? Better development in Africa or maximum trade efficiency?" he asked.

According to the WTO report, domestic policies such as consumption taxes, technical regulations and subsidies are widely used by exporting countries.

For Halle, subsidies are a different story. Most of them do not affect trade and are a domestic policy issue. "But is that the best use of public money?" he asked. For example, fossil fuels are subsidised in a number of African countries. Governments set a price for petrol and if the market price is higher, they pay the difference.

"The issue is: what is the government trying to do? And most of the time, the answer is: trying to get re-elected. But if your purpose is to improve transport, then that money should be invested in public transport to help the poorest. They don't drive vehicles, so subsidies profit the middle class in most of the cases."

Therefore, the money that a country needs for health and education goes to subsidise the middle class in a way that promotes carbon-based energy. "It is a very poor strategy. But it is not an African problem. The EU and the U.S. do the same thing. Subsidies are almost always dominated by political considerations," he concluded.

The WTO report also noted that natural resources experience high price volatility. "There is much talk about price volatility but income volatility is also important," Claudine Sigam, UNCTAD project officer on the optimisation of natural resources in Africa, told IPS in an interview.

One of the dangers of over-dependence on natural resources is the so-called Dutch disease, she explained. In the 1970s, a sudden discovery of gas in the Netherlands brought in an influx of money that pushed up the value of the Dutch currency, making exports more expensive and the manufacturing sector less competitive.

An important point of Dutch disease is the time lapse between the discovery of the mineral and the moment when the money comes in, Sigam continued. By the time contracts are signed and foreign companies start to pay taxes, five to seven years have lapsed.

"If oil earnings are used as income, they become highly volatile for three reasons: the variation in the rate of extraction; the change in the timing of payment by companies; and the fluctuation in the price of natural resources," Sigam explained.

The Chinese followed a different approach upon entering the mining sector in the Democratic Republic of Congo. Their "infrastructure for resources" model addressed the issues of variability as they built infrastructure and roads while exploiting resources at the same time.

"It is a complete paradigm shift that avoids the time lapse problem," Sigam stated.

Article published courtesy of IPS Africa