Republic of Equatorial Guinea: Selected Issues and Statistical Appendix

This note analyzes the medium- and long-term prospects of the hydrocarbon sector as a source of growth. Substantial hydrocarbon and financial reserves implies a sizable upward shift in the sustainable expenditure path. Rather than suggesting a specific fiscal rule, four simple alternatives are simulated and their implications assessed in terms of the overall non-oil balance. Comparing cross-country experiences with the current set up in Equatorial Guinea and statistical data on economic indices of Guinea have also been presented in the paper.

Abstract

This note analyzes the medium- and long-term prospects of the hydrocarbon sector as a source of growth. Substantial hydrocarbon and financial reserves implies a sizable upward shift in the sustainable expenditure path. Rather than suggesting a specific fiscal rule, four simple alternatives are simulated and their implications assessed in terms of the overall non-oil balance. Comparing cross-country experiences with the current set up in Equatorial Guinea and statistical data on economic indices of Guinea have also been presented in the paper.

II. The Hydrocarbons Sector As A Source Of Growth - The Case of Equatorial Guinea2

A. Introduction

1. How have developments in the Equatoguinean hydrocarbon sector directly or indirectly affected the country’s economic growth? Besides the obvious direct growth effects of increasing production of raw petroleum, gas, and derived products, what are the consequences of hydrocarbon production for other activities? Of concern are the growth prospects for products and services along the hydrocarbon value chain, the potential for sectors that have synergies and complementarities with the hydrocarbons sector, and the broader effects of recent structural changes.

2. The economics literature usually frames discussions about growth in oil-rich economies in terms of the “resource curse.” This paper asks about the development potential that large oil reserves imply. The analytical framework needed to answer this must be able to incorporate a number of distinct aspects. Beyond the dangers posed by the resource curse, other direct and indirect effects enhance the growth potential of a country. These effects and the pre-conditions for their emergence will be detailed in section II.

3. The resource curse is not unavoidable; a successful resource-led development strategy can be devised. Section III reviews evidence from other resource-rich countries to find the structural changes that typically occur along with large-scale mineral production. Clearly, the size and the structure of the economy is fundamentally transformed during an oil boom. Changes like that, together with the revenues from oil exports, set the scene for future developments in the economy as a whole.

4. Equatorial Guinea has begun to take steps to manage its hydrocarbon wealth effectively, though much remains to be done if it is to become a source of sustained growth. Section D will apply the insights of sections B and C to derive elements of a consistent growth strategy. It will also assess how responsive the current economic structure is to the dangers of the resource curse. Assessing growth potential and designing an optimal policy response require a thorough understanding of the hydrocarbon sector itself: the extent of oil reserves, the dynamics of production, the mixture between upstream and downstream activities, and how the sector is governed (section D.1).

B. Analytical Background: Sources of Growth in Resource-Abundant Economies

5. In spite of its performance since 1995, if it is to alleviate poverty and improve living standards, Equatorial Guinea needs further sources of growth, in particular in the non-oil sectors. Are the preconditions for achieving sustained growth in place? What are the obstacles to continued growth? What policies must be implemented to remove them?

6. To answer these questions, it is necessary to identify factors usually associated with periods of sustained economic expansions, particularly in countries comparable to Equatorial Guinea in terms of the extent to which they depend on the production and export of mineral goods. Moreover, Equatorial Guinea is in sub-Saharan Africa (SSA), and the growth literature consistently emphasizes that countries in SSA can be very different from each other. The following discusses determinants of growth, particularly in SSA; current views on the relation between resource abundance and economic development; and an integrated perspective on the growth prospects of resource-abundant countries.

Sources of Growth in Sub-Saharan Africa

7. Recent cross-country research has yielded a number of variables that are robustly related to the growth rate of GDP per capita.3 Most studies agree that certain well-defined factors substantially explain international variations in past economic performance. Apart from initial income, the following variables can be considered robust determinants of growth (see, e.g., Doppelhofer, Miller, and Sala-i-Martin, 2004):

  • Extensive capital accumulation. Due to this finding the “Asian miracle” and the disappointing growth performance in many African countries have both been subject to reinterpretation. At least in the earlier stages of development, growth in total factor productivity is less important than factor accumulation as a source of growth.

  • Quality of human capital measures. Variables related to life expectancy, health, and primary school enrollment have a stable relation to growth. That is why investing in human capital has become central to government actions to promote growth.

  • Variables capturing a country’s openness. Countries with a long-term commitment to trade integration (measured, for example, by the number of years since 1950 that an economy has been considered open) have higher and more stable growth. Closely related, successful promotion of exports has proven to be an important determinant of growth, particularly for small low-income economies.

  • Variables measuring internal and external allocative distortions. Black market premiums and real exchange rate misalignments, for instance, have consistently had a negative relation to growth.

  • Macroeconomic stability. While it has proven difficult to establish a robust relation between growth and specific macroeconomic aspects, macroeconomic stability in a broad sense consistently produces a positive sign in the usual regressions.4

8. Social capital and institutions figure prominently in nearly all recent discussions of sources of growth. They are considered an important determinant of total factor productivity, shown to be a robust explanatory variable in cross-country regressions, and are consistently identified as a source of growth in cross-country studies. While there is “substantial uncertainty surrounding what might constitute an appropriate reform agenda for any particular country” (IMF, 2003, p. 113), there is considerable agreement on the need for an institutional framework that can protect property rights, implement the rule of law, safeguard against market failure through regulation, and support policies of macroeconomic stability and social cohesion.

9. While geographical variables do not consistently explain differences in growth rates, a large number of studies try to identify the reasons for slow growth in SSA.5 Even after controlling for the fact that African countries often score low on factors that lead to growth and high on factors that hamper it, being part of SSA has long been seen as an additional and largely unexplained factor6 that demands further study.

10. Most countries in SSA are characterized by low factor accumulation and low growth in total factor productivity (TFP). The lack of physical investment, including infrastructural, implies large growth losses relative to other regions. Growth accounting exercises suggest that low, or worse negative, growth in TFP has been the primary reason for disappointing economic performance since the 1970s. While these results support the findings of cross-country studies, they do raise questions about what explains low levels of investment, human capital formation, and productivity.

11. Some argue that a combination of high risk, lack of social capital, and a closed economy are the fundamental reasons for low growth in SSA.7 In this view, SSA does not differ qualitatively from other world regions in growth dynamics, but a complex interplay of endogenous or policy-dependent factors and exogenous characteristics has created a highly risky and capital-hostile environment. Exogenous characteristics alone—being landlocked, more extreme climate and health conditions, inheritance of specific colonial institutions, and ethnic fragmentation—would not have been sufficient to severely impede growth, but faulty macroeconomic and external policies have combined with debt overhang to push risks above a critical threshold. Private entities have reacted by either relocating financial and human capital or investing heavily in strategies to cope with the situation.

12. Recent studies also emphasize deficiencies in public service and the role of public investment, in particular investment in infrastructure and human capital. The role of public investment and provision of public services in SSA has been controversial. Because public investment in SSA has not been significantly lower than in other parts of the world, some observers conclude that attempts to foster growth by increasing capital expenditures are doomed.8 Yet there seems to be an emerging consensus that public capital can further growth (de Haan and Romp, 2005) and have a positive impact on private investment (Hadjimichael and Ghura, 1995),9 Rates of social return might be specifically high in basic infrastructure services (transportation and communication) and in provision of health care and education.

13. Low-income countries that implement policies to reduce investment risk can thus benefit substantially from accumulating public capital. Some recent studies have identified circumstances in which public investment is conducive to growth or leads to crowding-in effects.10 Countries with particularly low income can benefit substantially from public investment, though certain preconditions must prevail. Most important, the macroeconomic, external, and institutional environment has to be supportive of spillover effects: If risks remain high after a public investment in productive infrastructure, the risk-adjusted rate of return might not increase enough to trigger private investment. Moreover, financial intermediation has to be able to provide the funds to private entities willing to invest. Finally, special attention has to be devoted to the actual delivery of public services.

Natural Resources and Economic Growth: The Prevailing View

14. The “resource curse hypothesis” has largely shaped discussion of the relation between natural resource wealth and economic growth. Based on cross-country econometric evidence, it is argued that resource-abundant countries have generally lower growth rates (see Sachs and Warner, 1995 and 2001), with the resource curse operating through a number of channels whose relative importance is still controversial.

15. One group of researchers argues that hydrocarbon-related revenue inflows lead to the phenomenon of Dutch disease. In its basic version, the theory asserts that a boom in the resource sector (and the resulting productivity and wage increases) will attract common production factors away from the non-resource tradables sector. If prices for both outputs are determined in world markets, profits and production in the non-booming sector will be squeezed. If a non-tradable sector is added to the scenario, increased demand for goods caused by increased revenues from resources will lead to price adjustments for non-tradable relative to tradable goods. The associated real exchange rate appreciation will drive factor movements and manufactured exports will lose competitiveness. Since the latter are believed to be important in the development process, due to technology spillovers and scale economies, growth in general slows down.

16. Other observers emphasize the volatility of economies that rely heavily on resource exports. Since macroeconomic stability is a major precondition for growth, volatility in fiscal, and often as a consequence monetary, aggregates is a major challenge for political and private-sector decision-makers alike. Such volatility may interact negatively with other aspects of resource-rich economies (Hausmann and Rigobon, 2002), Specifically, in an economy with a sizable nonresource tradables sector, resource income volatility (shocks to nontradable demand) can be partly accommodated by factor movements, dampening the necessary movements in the real exchange rate. As the tradable sector disappears, a change in demand for nontradables can only be accommodated by adjusting the return on capital, and thus the price, of local goods and services. The resulting expenditure switching will force a change in the relative price of these goods to guarantee market clearing, which will magnify the variability in the real exchange rate. If investors dislike the resulting volatility of profits, financing conditions deteriorate within the tradable sector (where prices cannot adjust), leading to a vicious circle of low investment, a shrinking tradables sector, and low growth.

17. Another channel operates through incentives for rent-seeking. Resource-abundant economies become less entrepreneurial because local elites find it more profitable to engage in competition for natural wealth deposits. Some authors argue that the institutional quality of resource-rich countries deteriorates because of this rent-seeking. In particular, point resources like minerals can cause conflicts over the power of disposal. Moreover, the reliance on non-tax revenues may reduce political participation and thus the availability of alternative revenues when prices are depressed.

18. While many researchers have advocated the resource-curse view, closer inspection suggests a more cautious assessment.11 Though indisputably a large number of countries have suffered from resource-curse-like effects, evidence for the benefits of being resource-rich has often been neglected. Oil-producing and other resource-intensive countries have in fact grown in line with or more than the SSA average in recent decades (see figure 1). This is underlined by studies using Bayesian averaging; they find that the fraction of GDP in mining is positively related to growth, but the fraction of primary exports in total exports is negatively related.

Figure II.1.
Figure II.1.

Sub-Saharan Africa: Average growth rate in oil- and non-oil economies

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: International Monetary Fund, 2005.

19. Moreover, many of today’s industrialized countries have successfully followed a resource-led growth path (see Stijns, 2005). Some of the most encouraging development experiences in recent decades have been closely associated with natural resources. So why do countries with similar initial conditions perform very differently? Why has growth in Indonesia outstripped growth in Nigeria, even though both economies are equipped with significant hydrocarbon wealth? Why did Botswana have the highest growth rate worldwide between 1965 and 1998, and Sierra Leone one of the lowest, though both have large reserves of diamonds? These and related questions are discussed next.

Growth strategies in resource-rich economies: An integrated perspective

20. One problem with the resource-curse view is that it is not sufficiently integrated with other theories of economic growth; nor has it led to clear policy prescriptions. In particular, current views neglect the possibility that other determinants of growth could be positively influenced by mineral production. In particular, the failure of some countries to use resource rents effectively may have been overly generalized (see Deaton, 1999), so that resource abundance is often viewed as fate. Some observers have proposed leaving the resources “in the ground” or hoping for depressed commodity prices. This section offers an integrated perspective for a more policy-oriented analysis.

21. At least three channels link resource abundance to economic growth: the direct growth effects of mineral production, the mechanisms of the resource curse, and indirect growth effects. Since the direct growth effects of mineral production are finite, countries have to ensure that other activities take over as soon as mineral production flattens. Such measures might be policies to prevent the macroeconomic pitfalls of resource booms and policies to encourage non-mineral production. The latter have to make active use of indirect growth effects, which are related to the fundamental changes that take place in countries where natural resource production increases significantly. These include spillover effects from the primary to the secondary and tertiary sector, structural changes that reshape comparative advantages, and increased government spending on infrastructure, capacity building, and human capital investment.

22. In terms of indirect growth effects, point resources like hydrocarbons often provide few backward and forward linkages (Hirschman, 1958).12 Since most inputs to the production process are imported and further processing is often done closer to the final market, growth impulses from backward and forward linkages are quite rare. Stressing local content can contribute to future non-mineral growth only to a limited extent.

23. Depending on the size of the resource base relative to the population, demand, and fiscal linkages between the major commodity and the rest of the economy are often significant. Consequently, growth policies in resource-rich countries have to capitalize on the rents accruing through mineral production. The fact that rent utilization is the single most important determinant of future economic performance suggests an alternative interpretation of the resource curse: Growth in resource-rich countries is not impossible but it depends on mechanisms for (mostly fiscal) resource allocation that are more prone to policy failure than market-based ones.

24. An integrated policy response to large-scale mineral production will aim at maximizing the effects of linkages. Given the prominence of the fiscal linkage, in resourcerich countries public policy must assume major responsibilities for organizing related activities, either through direct distribution of rents or through targeted investments. This in turn requires a stable fiscal framework that emphasizes long-term objectives. At the same time, fiscal policy has to safeguard the economy against the macroeconomic pitfalls of resource booms. This double role can only be accomplished where there is a structured process of budget formulation, extensive monitoring, and effective accountability.

25. The concept of two-pronged growth strategies that originated with Rodik (2004) is a useful operational framework for analyzing these issues. It is based on the following generalizations about economic growth in the last fifty years:

  • Growth spurts are frequent and are associated with well-defined policy reforms.

  • These policy reforms usually incorporate elements of both orthodox and unorthodox institutional practices; they are usually associated with a strong increase in exports.

  • Sustaining growth spurts is difficult because the single most important prerequisite for prolonged expansions—institutional capacity—is difficult to achieve and maintain.

Based on these stylized facts, the concept of two-pronged growth strategies emphasizes policies that can both kick-start growth (first prong) and sustain it (second prong).

26. The first prong consists of creating a stable macroeconomic framework, committing to trade openness, and providing the basic public goods necessary to foster growth. Policies here are usually more activist and are in the area of trade. Examples are active marketing and research support for emerging industries, export processing zones, and improved access to financing for emerging industries. All these policies in turn aim to improve the environment for private-sector activities outside the primary sector. Indeed, successful implementation of first-prong policies can successfully encourage private-sector activity; in particular, private investment can be boosted by increased government investment if that is complemented by a stable macroeconomic environment, financial deepening, and improvements in the quality of institutions (Hadjimichael and Ghura, 1995).

27. The second prong consists of policies for strengthening the institutional environment. Here one of the major challenges is for countries to avoid the trap of dynamically inconsistent policies. It is always desirable to encourage private investment through improvements in the business environment. Ex post, however, incentives to renege on promises are strong. Anticipating this, private businesses might refrain from investing, thus jeopardizing the initial policy reforms. The only solution to this problem is a history of kept promises, leading to a long-term commitment to good governance.

28. Small resource-rich countries often can support both sets of policies. Investment in physical and human capital can be frontloaded. The local infrastructure for trade is usually improved substantially, for example, by constructing deep-water ports or by financing the means to import productivity-enhancing goods. As for the second prong, since mineral resources are often exploited through foreign companies, countries can demonstrate their willingness to make long-term commitments, thus attenuating one of the major challenges of institutional capacity building—its dynamic inconsistency.

29. Still, the peculiarities of resource booms may undermine successful implementation of the strategy. Macroeconomic stability can be adversely impacted by high and volatile inflows of rents. Private incentives to engage in non-mineral activity may be jeopardized because the booming sector is temporarily attractive, which often stimulates excessive rent-seeking. Institutional improvements may be difficult to achieve when competition for rents sets other priorities.

30. Resource-rich countries need policy frameworks that defend against these problems. These include macropolicies to avoid excess volatility and steps to preempt overstretching absorptive capacity. The institutional environment needs to be augmented to account for the complexity of resource-intensive industries (ensuring, in particular, transparency for all mineral-related activities). Finally, trade policies have to be tailored to the new structural characteristics of the economy. Four major elements will characterize appropriate policies:

  • During resource booms, the competitive disadvantages for tradable goods must be countervailed. Governments have a variety of instruments at their disposal. Besides the exchange rate and a sound fiscal policy, they can enhance productivity by improving the physical infrastructure and forming human capital. An open trade policy, stronger financial intermediation, and selective incentives for investment in non-resource tradables can also help.

  • Before the boom subsides, policies to allow for a swift rebalancing of relative price adjustments must be in place. In particular, labor markets have to be organized in a way that allows for flexible reactions to changing economic conditions.

  • Prevention of excess macroeconomic volatility usually requires changes in fiscal policy.13 The role of revenue-sharing arrangements in dampening or increasing volatility also has to be assessed thoroughly.

  • Finally, policies to prevent deterioration in the social, institutional, and environmental infrastructure must be implemented. The most important policy choices here are in the area of mineral policies themselves. At the same time, building capacity and investing in effective and accountable governance will be essential.

C. Growth and Resource Abundance: Cross-Country Experiences

Examples of sustained resource-led growth

31. The following section draws from four recent examples of successful resource-based growth strategies; to make such a comparison valuable for Equatorial Guinea, it was necessary to choose countries that have similar characteristics. Initial conditions must be broadly comparable: countries like Norway may provide useful points of reference for specific details of resource exploitation but their economic and institutional preconditions for growth are poles apart. The type of resource endowment also matters. Land-abundant can be distinguished from mineral-abundant countries, and the latter can be classified into countries with point or diffuse resources. Because Equatorial Guinea’s off-shore hydrocarbons are supplemented by substantial quantities of other natural riches, among them non-oil minerals, extensive forests, and a favorable climate, comparators should be not only mineral and oil-rich countries but also economies with diversified natural resources. Given the current structure of the Equatoguinean economy, the peer group should also contain examples of successful diversification away from a predominant staple. Finally, the countries analyzed should be considered not only resource-abundant but as having at least partly employed natural resources to increase long-term economic growth.

Figure II.2.
Figure II.2.

Botswana, Chile, Indonesia, and Malaysia: Indicators of Growth and Living Conditions

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: World Development Indicators.

32. The developing and emerging countries studied have implemented successful resource-based growth strategies. Moreover, they initiated their growth spurts at relatively low levels of economic activity (GDP per capita in Botswana, Indonesia, Malaysia, and Chile was below $2,000 in the early 1960s, the period corresponding to the starting point of this investigation), they have diversified progressively, and they all have substantial mineral and other natural wealth, so they have had to deal with the challenges of resource volatility (figure 2). While none of these countries is an unambiguous success story, they have all experienced impressive growth and sustained improvement in living conditions for a prolonged period:14

  • Botswana has been the fastest-growing economy in the world for several decades. Between 1965 and 1997 GDP grew at an annual average rate of 7.7 percent. Active use of mineral resources, in particular diamonds, has been a major factor in this performance, even though the country has faced boom-bust cycles for its major export commodity and significant challenges in developing other primary commodities.15

  • Before the Asian crisis in 1997/1998, Indonesia managed to develop from a country with one of the lowest per-capita incomes to a medium-income economy. The availability of natural resources has often been identified as one factor in this growth. Indonesia, however, is also an example of the problems that occur if growth does not lead to institutional improvements.

  • Since the early 1960s Malaysia has successfully used an export-led strategy to diversify its economy. Its wide range of natural resources (including tin, rubber, logs and timber, and crude petroleum and liquefied natural gas) has significantly assisted this process.

  • Chile is often cited as a prime example of strong export-led growth and accelerating economic diversification. Starting in the mid-1980s, Chile has consistently achieved growth rates well above 5 percent. At the same time, it has diversified away from copper and other minerals (which represented more than 80 percent of exports between 1960 and 1970) to other primary and manufacturing exports.

Botswana

33. Nearly all observers agree that Botswana’s impressive growth can be attributed to policies that have taken due advantage of resource abundance. According to the World Bank (2002), “In each of the major policy areas, growth-promoting policies have dominated.” Among them are a policy of free trade, exchange rate management that has prevented disproportionate real appreciations, wage increases that track productivity increases, and a disciplined fiscal policy. Besides these factors, however, a number of other policies were important anchors for sustainable growth.

Figure II.3.
Figure II.3.

Botswana: Development Indicators relative to upper-middle income and SSA countries

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: World Bank

34. Botswana’s organization of the mineral sector has provided a stable framework for the sustainable exploitation of natural wealth, with important spillover effects on the business climate, and growth linkages. Harvey and Lewis (1990) give an insightful account of the way mineral policy was carried out, revealing a number of decisive elements. First, the government always emphasized local content and ownership, stressing the need to be involved in project development and making local inputs a requirement in important agreements. Second, sourcing was designed to create further linkages. For example, the decision to manage the infrastructure of copper-nickel exploration locally led to the initiation of coal production and the creation of the Water Utilities Corporation and the Botswana Power Corporation, two entities that later played a major role in advancing particularly urban development. Third, the institutional framework for mining policy (involving, among other bodies, the Mineral Policy Committee) provided for continuity, expertise, and representation.

35. The uncertainty related to the profitability and technical challenges of mining have made recurrent renegotiations necessary. While the government made it very clear from the beginning that it would not accept unfavorable terms, contracts were always adjusted in a cooperative style, within the scope of contract law and with an emphasis on long-term relationships. This policy not only guaranteed efficient and profitable exploitation of natural resources, it also signaled to other private entities that property rights would be honored (see Leith, 2004) while the government maximized the developmental impact of resource wealth.

36. An important factor behind the country’s growth performance was the availability and effective fiscal use of mineral rents. In contrast to accounts that attribute Botswana’s success to limited public involvement in the economy, the government has intervened extensively, mostly through investments in productive infrastructure, to the point that critics of Botswana’s development strategy have often argued that the budget was too “heavily weighted to roads, urban infrastructure, railways, airports and telecommunications” (Harvey, 1990). These investments in fact successfully improved living conditions and productivity in the private sphere, as did extensive investments in education and health.16

Figure II.4.
Figure II.4.

Botswana: Size and Structure of the Development Budget, 1975–2000

In percent of Development Budget, unless otherwise indicated

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: Lange and Wright

37. The six-year national development plans (NDPs) provide a stable framework for spending policies; they have a long-term perspective and proper monitoring. Several features of the NDPs are worth noting: First, they were formulated through an elaborate consensus-seeking process (Leith, 2004). Second, the policy directive of the Sustainable Budget Index (SBI) was to use all proceeds from mineral production for investment (Lange and Wright, 2004).17 Third, they introduced extensive financial controls and monitoring mechanisms, properly funded and complemented by strong efforts to measure and forecast key economic variables. Fourth, a culture of forward-looking decision-making has emerged, as demonstrated by recent attempts to augment medium-term planning with long-term strategic exercises.

Figure II.5.
Figure II.5.

Botswana: Sustainable Budget Index and Human Capital Expenditure, 1976–2001

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: Lange and Wright

38. Besides public investment, the government has pursued more activist policies to promote growth. Beyond the local sourcing provisions in contracts it has set up a number of successful state-owned enterprises (SOEs), Though these entities have been criticized lately, they were an important source of growth in the early stages of development. Besides SOEs, the government undertook other initiatives to promote growth in both the agriculture and the manufacturing sector. Often, the government provided infrastructure that directly related to a specific production activity, as with cattle. Trade policies emphasized competitiveness, providing active marketing support, and avoiding the protection of high-cost manufactures. When protection or subsidies were granted, the agreements were based on strict requirements to maintain low cost and high quality. It is important that these policies were undertaken cautiously but with flexibility. For example, instead of picking a few likely winners for large-scale support, the government modestly subsidized a wider range of diversification efforts.

39. The macroeconomic pitfalls of resource inflows have been prevented by a combination of exchange rate, monetary, and fiscal policy measures. Volatility was smoothed using countercyclical reserve management and relatively conservative spending policies in times of large inflows. The cushion of large reserves not only contributed to the effectiveness of fiscal management during economic downturns but also to the smooth functioning of monetary policy.

40. While a number of historical factors have contributed to the institutional prerequisites for effective policymaking, continued capacity building has been important in sustaining growth. Among the potential sources of institutional quality, observers (see Acemoglu, Johnson and Robinson, 2003) have noted that (1) precolonial tribal institutions were largely untouched by British colonization, which encouraged broad-based participation, and (2) rural interests were powerfully defended by cattle owners and chiefs with an interest in promoting “institutions of private property.” While these factors were indeed important, so are the continued attempts to improve institutional quality and capacity.

Indonesia

41. Indonesia’s economic success between 1965 and the mid-1990s is closely related to its adoption of the New Economic Order (NEO) policies in 1965. Up to that point, Indonesia had suffered from a severe economic crisis. When the new government under Suharto came to office, it swiftly implemented macroeconomic reforms and a program to attract foreign financing from donors and private businesses. These policies, together with the investments following the oil windfall of the 1970s, yielded rapid economic expansion and a significant improvement in living conditions.

42. The rents from natural resources and from the oil boom in the 1970s were used to expand public investment, in particular in rural development and human capital, without overstretching absorptive capacity. Government investments were mainly targeted to the productive base of the tradable sector, to rural development, and to education. As a result, Indonesia achieved impressive educational attainments in a short time. In the ten years after a major educational program was adopted in 1973, the net primary enrollment ratio increased by 50 percent; by the 1980s enrollment was nearly complete (Rock, 2003), and disparities among regions or between boys and girls were largely eliminated.

43. Dutch disease and related problems were avoided by adjusting the exchange rate and by sustaining the effects of devaluations through prudent fiscal and wage policies. Though the government invested extensively, the years of the oil boom saw a steady accumulation of budget surpluses. These were used to smooth the oil price declines in the 1980s. At the same time, wage policy was designed to enhance the emerging manufacturing sector.

Figure II.6.
Figure II.6.

Indonesia: Resource Dependence and Structure of Government Expenditure

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: International Financial Statistics, World Development Indicators, and Usui (1997).

44. Combining an active industrial and agricultural policy with a largely open trade regime supported economic diversification. When oil prices fell sharply in the 1980s, the government took quick measures to liberalize trade and to encourage new economic activities. Even in the 1970s, the government adopted a number of controversial industrial policies to diversify the production base.

45. Indonesia is also an example of how a country can “grow into trouble” (Temple, 2001) if economic expansion is not accompanied by institutional advances. While macroeconomic policies continued to be prudent for a long time, the approach of many economic actors to micromanagement increasingly was characterized by close ties between large industrial players, financial institutions, and the official sector. This from of “cronyism” became important enough that it contributed to the severity of the crisis in 1997/98.

Malaysia

46. Malaysia is an example of a country with a diversified resource base that managed to move into competitive manufacturing. Central to the Malaysian development strategy were its dependence on high private and public savings rates (partly related to resource rents), public involvement in capital accumulation and economic diversification, an emphasis on human capital, and an outward orientation (see Abidin, 2001). Moreover, Malaysia’s development strategy combined diversification in primary products with diversification into manufacturing.

Figure II.7.
Figure II.7.

Malaysia: Structure of Commodity Exports

Share of Primary Commodity and Manufactured Exports

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: Abidin (2001).

47. Public investment was a major input into economic development; it emphasized basic infrastructure and education. While fiscal policy was not consistently prudent and growth-oriented (especially in the first half of the 1980s, when large-scale spending on individual industrial projects and other outlays led to severe macroeconomic imbalances), it has generally contributed to increased productivity while supporting external competitiveness. As with other Asian economies, a high share of spending was targeted to human capital accumulation, a factor that has helped to make Malaysia an attractive target for foreign direct investment in manufacturing.

48. Malaysia combined an open trade regime with swift macroeconomic and structural reactions to declines in competitiveness. Authorities used structural measures in trade and the financial and labor markets to quickly react to decreasing competitiveness. Moreover, after severe imbalances in the first half of the 1980s, exchange rates were adjusted and fiscal as well as wage policy was tightened. The success of these measures is an important lesson for resource-abundant countries. As resource income declines, it is essential to let relative prices adjust back to nonboom levels. Flexible labor markets and an open economy substantially facilitate such adjustments.

Chile

49. Many observers of the Chilean experience claim that it is a result of orthodox economic policies combined with favorable initial conditions. Indeed, the radical trade liberalization that took place between 1974 and 1979 was crucial in sustaining export-led growth. Equally important were the government’s sound macroeconomic and structural policies. From the 1980s onwards, these policies have become increasingly countercyclical, helping to smooth out the significant volatility caused by copper price changes. Meanwhile, the availability of considerable human capital and infrastructure boosted the supply response to outward-oriented economic policies.

50. Part of Chile’s success is related to its export portfolio of minerals, unprocessed and processed agricultural products, and now manufactured goods. The Chilean product mix has made considerate use of specific comparative advantages. Moreover, it has been characterized by a few niche exports that have the advantage of being less prone to trade conflicts. The government has supported this trend by providing assistance broadly and by limiting large-scale support to forestry, where comparative advantages were thought to be too substantial to be ignored.

Figure II.8.
Figure II.8.

Chile: Indicators of Resource Dependence and Export Diversification

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: Global Insight

51. A less discussed aspect of economic policy is Chile’s active support for exporters. Since the mid-1980s, the Chilean authorities have implemented a number of heterodox policies. While they do not interfere with private sector decisions about what might constitute a successful business strategy, they provided targeted policy incentives and support to engage in non-traditional exporting (Agosin, 2002):

  • Exchange rate misalignments were closely monitored and corrected. Fiscal policy sustained real exchange rate realignments, providing clear price signals for potential exporters.

  • Two drawback schemes were incentives for exporters. The “simple drawback,” consisting of a small cash subsidy for exports below a certain threshold value, has shown that modest incentives can have powerful effects.

  • The government has been active in resolving coordination problems within the private sector. Through an extensive network of foreign offices, the trade promotion division within the Ministry of Foreign Affairs gathers commercial information, does active marketing, and subsidizes industry associations. Similarly, technological development and investment in R&D have been fostered through joint programs with the private sector, often within Fundación Chile, a semipublic venture capital setup.

  • Sectoral policies were carefully designed to avoid overinvestment in government-picked industries and to track the comparative advantages available. For the cultivated salmon industry, a niche market with substantial backward linkages was penetrated with the support of Fundación Chile. In general, though, targeting specific sectors was avoided, except for forestry, which benefited from special programs to relieve financing constraints, improve the legal framework, and provide training in forestry engineering after it became clear that comparative advantages in forestry were exceptional.

  • Investments in human capital before and after the take-off were designed to align with the development strategy by complementing general efforts to boost education and form experts in crucial areas like forestry and agriculture.

52. Copper and other minerals played, on balance, a supporting role in development. According to De Gregorio (2004, p. 26) “there is no evidence that Chile’s abundance of natural resources has been detrimental to growth; on the contrary, it has increased the country’s income and welfare.” Besides being a source of revenues, the copper industry has been the channel for the majority of foreign direct investment (FDI) inflows into Chile. The way the government approached foreign ventures (for example, through reforms of the FDI regime and the mining law) has given the country a strong reputation for institutional quality. Nonetheless, volatility in prices, revenues, and foreign exchange inflows has been seen as a major challenge; it led to the creation of the Copper Stabilization Fund whose resources have mainly been used to reduce Chile’s debt burden.

Further evidence

53. To put these examples into perspective, it is useful to consider both other experiences and recent econometric evidence, to further respond to the following questions: What was the relative importance of the different channels of the resource curse? How did fiscal policies contribute to the growth effects of resource dependence? And in particular, how important was the mix of current and capital spending relative to the quality of the projects financed? What are the specific lessons from the experiences of oil-exporting countries in SSA and CEMAC, where initial conditions are closest to those of Equatorial Guinea?18

54. There is strong econometric evidence of the importance of fiscal policies in shaping development outcomes; it may be that the most important challenge is to limit current expenditures relative to public investment. Atkinson and Hamilton (2003) show that the negative effects of resource abundance might only emerge if there is excessive government consumption. Adding an interaction term of current government expenditures and resource rents to a standard cross-country regression, they find that the coefficient of this term is negative and significant. Moreover, after the term is included, the coefficient for resource abundance becomes positive but insignificant, suggesting that excessive government consumption explains a large part of any resource-curse effect. In contrast, the coefficient of the interaction term between resource rents and capital expenditure is positive and significant. Consequently, targeting spending on investment might substantially benefit a country, especially where private saving rates are low.19

Figure II.9.
Figure II.9.

Resource Rents and Gross Savings Rents

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: World Bank.

55. Oil-exporting countries in SSA and CEMAC have faced a number of specific challenges and policy problems and have often had difficulties in transforming oil wealth into improved living conditions. Katz et al. (2004) detail some developments, emphasizing, among other things, the following:

  • Because fiscal policy has often not been able to smooth out oil-price-induced volatility, there has been a pronounced pattern of procyclicality in spending. Ratchet effects following spending increases have also created situations that severely restricted the flexibility of fiscal policies, and in most cases there have not been medium-term fiscal frameworks to prevent these effects.

  • While many observers emphasize the availability of and need for expedient public investment opportunities in SSA (see paragraphs 12 and 13 above), because of institutional weaknesses and administrative capacity constraints, too many ventures have had low or even negative returns. The experience of Nigeria, a prime example of these problems, is discussed extensively in Sala-i-Martin and Subramanian (2003),

  • Given the limited capacities of many countries to sterilize large resource-related inflows and the membership of many countries in currency unions, monetary and exchange rate policies have been less suited to minimizing the macroeconomic effects of resource inflows.

56. In SSA, it is believed, problems of debt overhang are closely related to the growth-inhibiting effects of resource abundance. Natural-resource-backed borrowing has been characteristic of early resource exporters during booms. This has had serious consequences when credit constraints tighten. Manzano and Rigobon (2001) document the pattern, presenting strong evidence that controlling for debt overhang largely eliminates the negative effect of resource abundance on growth.

57. While the relative importance of the different channels of the resource curse is still debated, there has been a tendency to emphasize mechanisms other than Dutch disease. Apart from debt overhang, recent studies favor approaches based on macro volatility and the effects of resource abundance on social capital. The following contributed to this change in emphasis:

  • Oil-exporting economies grew strongly during the boom period up to 1980 (when real exchange rates tended to appreciate) but inadequately when prices were depressed (Table 1). Though Dutch disease is likely to have a lasting effect on economic activity, it is difficult to reconcile it with this evidence when decline of the resource sector (and the related real depreciation) continues for decades.20

  • In SSA, industries displaying the sort of learning-by-doing and scale effects necessary to generate Dutch disease have not been present independently of the scale of mineral resource production. While agricultural production, particularly cash crops, has sometimes declined deeply after oil booms (see Davis, 1995), the replacement of one dominant primary export staple by another should not have much effect on growth.

Table II.1:

Growth of oil versus non-oil exporters, 1960–1998

Source: Hausmann and Rigobon (2002)

58. The evidence in Africa suggests that failing to implement a fair distribution of oil revenues can lead to a severe deterioration of social capital:

  • Countries plagued by the resource curse have often channeled resource wealth to selected interest groups and prestigious projects. This, in combination with unsustainable fiscal and mineral policies, has led to an evaporation of social capital, disintegration, and violent conflicts, as is documented in a large number of studies (see Collier and Hoeffler, 2000, and Lane and Tornell, 1999),

  • By establishing social safety nets or improving the infrastructure for health care and education, a number of countries have spread the new wealth more evenly. An alternative approach is to distribute some revenues (or part of the interest income of a fund, as in Alaska) directly to the population. Such a procedure, among other things, empowers civil society and makes potentially more efficient use of inflows through individual decision-making. However, the macroeconomic impact of the resulting increase in private-sector spending and the practical obstacles to direct distribution await further exploration.

59. Case study evidence thus supports an integrated perspective on resource abundance, as does the most recent econometric evidence on growth and resource abundance. The latter casts doubts on the general applicability of the resource-curse hypothesis by highlighting the following relationships:

  • Higher levels of education spending can offset any negative effects of resource abundance (Bravo-Ortega and De Gregorio, 2005). Interestingly, a substantial part of the negative correlation between growth and natural resources may be due to lower spending on education in resource-rich economies (Gylfason, 2001).

  • Controlling for institutional quality significantly alters the underlying relationships. For example, Brunnschweiler (2006) finds that several measures of resource abundance, particularly mineral resources, show a positive correlation with growth that becomes stronger as institutional quality improves. Similarly, Mehlum, Moene and Torvik (2005) show that good institutions can completely offset any negative effects of resource abundance as measured by Sachs and Warner (1995). Figure 10 provides similar evidence.21

Figure II.10.
Figure II.10.

Resource Dependence, Growth, and Institutions

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: Own calculations based on Sachs and Warner (1995) and Mehlum, Moene and Torvik (2005).

Summary of Cross-Country Experiences

60. The “resource curse” is not a curse: linkages between the staple commodity and the rest of the economy and structural measures to increase competitiveness can successfully generate growth. Despite assertions to the contrary in the literature, it is possible to actively employ mineral resources. Strategies to do so, however, will only be successful within a stable framework for fiscal and mineral policies that emphasize productive investment in infrastructure and human capital, as well as macroeconomic stability. Moreover, selective policies to increase the outward orientation of the economy and to strengthen diversification capacities are important for kick-starting growth. To sustain growth, continued improvement in institutional quality and capacity are necessary.

61. Sound planning for resource exploitation is a precondition for sustained growth; it can have positive spillovers to the rest of the economy. The approach to foreign participation in resource exploitation is central. In dealing with foreign stakeholders, the government must have a clearly communicated set of objectives. How the government approaches the trade-off between maximizing rents for the society as a whole while protecting property rights will determine how attractive the country will be to foreign investors. Though backward and forward linkages are often limited, emphasizing them can contribute to the growth prospects of resource-rich economies.

62. In resource-rich countries, fiscal policy has a dual role: It must protect against excess volatility and overheating while employing resource rents to effectively promote development. Botswana, Indonesia, and Malaysia demonstrate that targeted spending can be crucial to development of the nonresource economy. Those countries often concentrated spending on physical infrastructure, building trade capacity, and investing in human capital. At the same time, safeguards against excess spending proved vital in preventing the initiation of low-productivity projects, unnecessary recurrent expenditures, and macroeconomic imbalances. Long-term development plans can be an important element of a fiscal framework that incorporates such safeguards. At the same time, the budget process in general must be institutionally sound, probably to a larger extent than in countries without substantial resource wealth, especially because inflexible fiscal rules with specific fiscal targets have been less important to successful resource-led growth.

63. Avoiding the resource curse using such policy approaches simply creates the preconditions for further growth; further policy action is usually required to spur growth and sustain it. In particular, the governments of successful resource-rich countries have often actively helped the private sector to build its capacities to compete internationally. While the exact policy measures undertaken to foster integration vary substantially, they usually combine elements of orthodoxy (policies to liberalize trade and avoid import substitution) with institutional innovations such as public investments in building trade capacity building, as by spending on infrastructure, research and marketing support, or more direct forms of export assistance. Attempts to pick “winners” have been less successful.22

D. The Case of Equatorial Guinea

The Hydrocarbon sector: recent developments and the medium-term outlook

Endowments, upstream activities, and expected production profile

64. Equatorial Guinea has substantial hydrocarbon reserves. Proven oil reserves are estimated at 1.28 billion barrels.23 Current production is taking place in four major fields. The Alba field 12 miles north of Bioko Island, which is operated by Marathon Inc., was developed in the first half of the 1990s. Production there has focused on natural gas, including condensates. The largest field, Zafiro, northwest of Bioko Island, which is operated by Exxon Mobil, holds most of the country’s proven oil reserves. Production is projected to decrease continuously from now on. Besides production offshore Bioko recent years also saw major developments in the Rio Muni area, near the mainland, which has both off- and onshore deposits, though the latter are largely unexplored. Offshore the third major field, La Ceiba, is operated by Amerada Hess, which will also operate the fourth field, Okume, which is nearby. Okume is expected to start production in 2007, with the first shipments in the third quarter.

65. Though exploration drilling has slowed down marginally in recent years, it is still significant. A fairly large number of foreign investors from a diversity of countries are doing the exploring, and significant acreage has not yet been licensed. Recent drillings have yielded some significant discoveries but their commercial value is yet to be determined. Given the high development costs for many offshore ventures, whether further production facilities are built will strongly depend on the outlook for oil prices.

66. While production increases in recent years have been impressive, unused acreage and uncertainties about the commercial value of less mature blocks complicate the planning for future production. Oil and gas production have increased from around 5,000 barrels of oil in the early 1990s to around 400,000 barrels of oil equivalent per day recently, and much of the area around Bioko Island and near the mainland is still being developed. Though exploration costs in the deep waters south of Bioko and around the island of Annabon are expected to be high, several companies have acquired or expressed interest in those fields, and blocks in the Douala and Rio Muni basin have recently been described as promising.

67. Based on staff projections and figures from the Ministry of Mines, major hydrocarbon production is expected to continue for at least two decades. Figure 11 offers a scenario for hydrocarbon production through 2030 based on proven reserves by production field. Production is expected to peak in 2008. While output in Zafiro and La Ceiba is decreasing, gas, particularly liquefied natural gas (LNG), will continue to provide a stable source of production activity and revenues.

Figure II.11.
Figure II.11.

Equatorial Guinea: Hydrocarbons production by field

(thousands of boe/day)

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Sources: Equatoguinean authorities; and IMF staff estimates and projections.
Midstream and downstream activities, and potential linkages

68. Equatorial Guinea has moved to expand midstream and downstream activities. The most important step was the construction of a major LNG plant, which is expected to start producing in 2007. Its annual capacity is estimated at about 3.4 million tons. A number of other ventures have been realized or are being considered:

  • Reconstruction of the port in Malabo and installation of a deep-water port in Luba could significantly improve the trade environment. A joint venture led by GEPetrol was awarded a concession as an “Autonomous Free Zone” in the hope that it would help promote the area as a hub and service center for regional hydrocarbon-related activities.

  • Recent attempts to reduce the flaring of gas and to use resources effectively have been very successful; saved resources, which would otherwise have been wasted and polluted the environment, are now feeding gas utilization projects. The methanol plant operated by a consortium led by Marathon has been a source of additional hydrocarbon growth. Similarly, formerly flared gas is used to generate gas power that supplies electricity to Bioko Island.

  • Finally, the government is considering local refining. Though it seems to have no concrete plans as yet, such a step could significantly resolve one of the major downstream problems, the marketing of fuel for local use. Currently this is a monopoly, which impedes effective allocation of resources. The viability of local refining should be assessed thoroughly, taking into account future oil production, refining capacity in the region, and the effects on technology transfer.

69. LNG offers a major opportunity in the medium term, though linkages to the rest of the economy will be limited. The market for LNG is expected to experience a major breakthrough in coming years. With its new plant, Equatorial Guinea has the potential to become an LNG hub, receiving inputs for transformation from the region (in particular, Nigeria and Cameroon) and exporting LNG, mostly to the U.S. Recent announcements by Marathon, the company producing LNG, suggest that processing will be much more productive than expected. Given substantial economies of scale in LNG production, plans to double capacity are being pursued. However, because LNG requires sophisticated inputs, it is expected to have limited backward and forward linkages.

Output sharing and sectoral governance

70. Equatorial Guinea has implemented a number of policies that resemble successful sectoral governance approaches in other resource-rich countries. The relationship between public bodies, the national oil company (GEPetrol), and foreign investors is generally described as cooperative. After the Riggs Bank scandal, the country took steps to increase transparency, most notably by preparing to adopt the Extractive Industries Transparency Initiative.

71. At the same time, numerous governance issues remain, particularly those related to a new decree on local ownership. The revision of the 2004 investment law may raise concerns among international investors. The law requires 35 percent local ownership in ventures related to hydrocarbon production and appears to be targeted at subcontractors. Oil companies may fear that it will increase the difficulty of outsourcing certain activities that are central to the functioning of the hydrocarbon sector. Moreover, the law’s retroactivity and scope may need to be clarified.

Impact of hydrocarbon production on other sectors of the economy

72. Large-scale hydrocarbon production has had a deep impact on the structure of economic activities in Equatorial Guinea. Labor markets, financial intermediation, the composition of investment, and the export/import mix have all changed significantly as the hydrocarbon sector has increased its share in production. Economic activities are more and more oriented to the hydrocarbon sector and closely related areas. The financial sector concentrates on providing financial services to foreign oil companies and related activities; it finances few non-oil investments. While data on labor markets are scarce, the current wage discrepancy between the oil and non-oil sectors is likely to have significant effects on labor allocation (Table 2),

Table II.2.

Equatorial Guinea: Monthly Minimum Wages1

(in CFA francs)

Manufacturing, retail, agro-, and services sectors

73. The composition of GDP reflects the changes that have occurred since major production began (see table 3 and figure 12). While the non-oil primary sector has lost substantial ground, segments of the secondary and tertiary sectors have grown strongly, mainly because of spillover effects, including large government investments, and activities closely related to hydrocarbons.

Figure II.12.
Figure II.12.

Equatorial Guinea: Sectoral Composition of Real GDP

In billions CFA Franc at 1985 prices

Citation: IMF Staff Country Reports 2006, 237; 10.5089/9781451815986.002.A002

Source: Equatoguienan Authorities, and Fund staff estimates.
Table II.3.

Equatorial Guinea: Sectoral Developments, 1990–2005

Geometric Average

For the hydrocarbon sector, the average growth rate for the period 1992–1995 is applied

74. The recent decline in cash-crop production can in part be attributed to structural changes following the oil boom. It is unlikely that the non-oil primary sector suffers primarily from classic deagriculturalization, because government price guarantees should have provided enough incentives to continue production. However, the fact that production facilities have difficulty retaining capital and labor suggests that factor inputs have migrated. Given the current divergences between rates of returns and wages in the nonoil economy (Table 2), such movements are indeed likely.

75. Recent trends may enhance growth potential over the medium term. In particular, the strong growth in construction and utilities services is likely to increase productivity and eliminate major bottlenecks in transportation, electricity services, and communication. Strong growth has already brought back a large number of nationals who had emigrated and brought in a substantial number of foreigners. The resulting improvements in the quality and quantity of the workforce may well be itself a source of growth.

Policies for growth in Equatorial Guinea: challenges and opportunities

76. The private sector should take the lead in identifying viable investment opportunities to diversify the economy. Private-sector-led growth will in turn require active government participation to safeguard macrostability, improve the business environment, and help build trade capacity. Though large-scale industrial projects initiated by government have often yielded low returns, governments in resource-rich economies can and must provide the infrastructure and preconditions to help the private sector diversify its activities.

77. With a coherent fiscal framework, fiscal policy could deter macroeconomic obstacles to growth.24 The prevention of internal and external price distortions has proven to be an important precondition for growth in resource-rich countries. Since there is no exchange rate-related adjustment mechanism, Equatorial Guinea’s fiscal stance drives the macroeconomic aspects of competitiveness. The experience of other countries shows that a structured process, augmented by a fiscal rule, can significantly improve fiscal outcomes.

78. Expenditures on health and education can enhance productivity. The government has stepped up its human capital formation activities. The experiences of other resource-abundant countries show that only significant investments in human capital can increase productivity enough to compensate for the structural changes that usually occur during resource booms.

79. By increasing the country’s resilience in responding to real exchange rate shocks, further trade liberalization could increase its growth potential. Such initiatives would be most effective on the regional level; particularly useful would be active measures to improve the availability of trade-related services (for example, in research and marketing).

80. Institutional quality and capacity must be increased if growth is to be sustained. Additional public service capacity (e.g., in statistics, planning, and tax administration) will be necessary to increase the efficiency of the public sector in a now much larger economy.

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2

Prepared by Ulrich Klueh.

3

Recent econometric work uses Bayesian techniques to circumvent the inconclusiveness of earlier results. Given the large number of potential explanatory variables, identification in cross-country samples is indeed challenging. Earlier studies using extreme bound analysis have emphasized the small-sample problem of the cross-county approach, arguing that stable relationships between country characteristics and growth performance are difficult to maintain.

4

For example, it is likely that the relation between growth and inflation is not linear and is thus difficult to capture in standard regressions. However, as soon as the macro-environment becomes inherently unstable, the effects on growth become strong enough to be detected even in the usually small cross-country samples.

5

Since the mid 1990s growth in many SSA countries has picked up speed. Early studies on the major drivers of acceleration suggest that the general assessment provided here is valid.

6

The presence of an “African dummy” in cross-country regressions has often been called a “confession of ignorance”.

7

Collier and Gunning (1999) survey the insights of a large number of studies on growth in SSA, comparing aggregate cross-country and microeconomic attempts.

8

See Artadi and Sala-i-Martin (2003), who refer in particular to government-financed production facilities. They acknowledge that public health services to improve the quality of human capital will be essential to boost growth.

9

The evidence in Serven and Calderon (2004), who calculate a principal component index of the infrastructure stock, supports this claim. After extensive testing for reverse causality and misspecification, they conclude that the stock of infrastructure (as measured by a principal component index) indeed increases growth.

10

See Atukeren (2005) as well as Isham and Kaufmann (1999),

11

Econometric studies to date may suffer from methodological problems, for example in the measurement of resource abundance. That may be why recent econometric studies yield a much more blurred picture about the relation between growth and natural resources (see Stijns, 2005, for a survey of recent results), Davis (1995) presents evidence that the development record of mineral-rich economies has been encouraging-better than in a control group of resource-poor economies.

12

In the version inspired by export base theory, linkage analysis asserts that four basic mechanisms relate the major export commodity (or staple) with the rest of the economy (Auty, 2001). First, activities related to the supply of inputs for the staple will give rise to backward linkages-production activity in the upstream sectors. Second, forward linkages will materialize when the processing and marketing of the staple leads to spillover effects in terms of local inputs. Finally, the spending associated with private and government incomes from production will lead to final demand and fiscal linkages.

13

Chapters III, IV, and V discuss respective policy issues in detail.

14

The sample of countries considered is restricted to more recent examples of resource abundance. Many of today’s industrialized countries benefited from large reserves of mineral and other natural resources (see, for example, the seminal study by Wright, 1990, and Stijns, 2005, and the references there in).

15

In spite of its growth record, Botswana still faces major challenges. Income distribution is very unequal, and AIDS has eroded early successes in increasing life expectancy. Nonetheless, Botswana scores high on most development indicators except the latter, relative not just to SSA but also to upper-middle income countries (figure 3).

16

Figure 4 shows the importance of different spending categories in the development budget. While transportation and communication dominated expenditures at first, utilities and other categories became successively more important. Education and health were emphasized throughout the period, their share in expenditures holding stable over time.

17

Figure 5 plots the SBI, which is calculated as the ratio of non-investment spending (excluding recurrent human capital spending for health and education, which has traditionally been budgeted as investment spending), to recurrent revenues. The SBI has been mostly below 1 in recent decades, signaling a sustainable path for public consumption. At the same time, the figure shows the significance of education and health expenses in expenditures for development.

18

The experiences of these countries are discussed extensively elsewhere. For references, see Auty (2001), which contains a selection of papers on a variety of countries (including Bolivia, Saudi Arabia, and a number of transition economies) or Sala-i-Martin and Subramanian (2003), who review the Nigerian case.

19

Figure 9 provides further evidence; it suggests that the relation between the tendency of a country to save (in physical or financial terms) and the importance of resource rents is at most weak.

20

For an illustration using a country case, see Sala-ì-Martin and Subramanian, 2003. They present different measures of competitiveness, showing that variables like the real exchange rate have depreciated strongly for extended periods of time without a later recovery of tradables.

21

As in Mehlum, Moene, and Torvik (2005), institutional quality is measured as an unweighted average of measures of the rule of law, bureaucratic quality, corruption in government, risk of expropriation, and a government repudiation of contracts index. The sample of 42 resource-rich countries was split using the median value of the index.

22

Botswana as well as Malaysia and Indonesia had disappointing experiences with largescale industrial projects (see Harvey and Lewis, 1990, on Botswana’s Sashe project, Abidin, 2001, on Malaysia’s “HCI Big Push” policies in the 1980ies).

23

Estimates for proven natural gas reserves vary substantially, the most conservative estimate being 1.3 trillion cubic feed (Oil and Gas Journal, 2006),

24

Elements of such a framework are discussed in the following chapters.

Republic of Equatorial Guinea: Selected Issues and Statistical Appendix
Author: International Monetary Fund