Natural Resources: The Levels of Inequality

According to United Nations Economic Commission for Africa (UNECA), there is “a high correlation between the levels of exports of natural resources and the levels of inequality”. The more a country depends on its natural resource exports, the more it will be vulnerable to illegal financial flows and price volatility.

The extraction of oil, minerals and precious metals alone accounts for more than half of the illicit flows. Countries active in these sectors are suffering this outflow of capital through various means: price transfers, tax evasion, falsification of prices, opaque contracts, undervaluation (under-invoicing) of raw materials. Moreover, these resource-rich countries often offer very favourable tax incentives to foreign firms such as low royalties and corporate taxes. Or else, concessions are often sold below the market price. Obviously, all this is realised in an opacity that characterises many contracts thus tainting the idea of any sustainable economic development.

For example, the DRC, a country rich in natural resources, loses a lot of money by outflows of capital. The repatriation of profits by companies active in the mining sector already exceeds foreign direct investment (FDI). The projections for 2019 raise fears that the repatriated profits will exceed FDI by a factor of 3 to 3.5. Moreover, the loss due to this repatriation of profits is more than three times the loss due to the “sales of mining assets” by the Congolese state. This suggests that multinationals account for the bulk of profits. In addition, the Africa Progress Panel illustrated the magnitude of overcharging by five mining contracts between the Congolese state and companies housed in tax havens. In these 5 contracts alone, the DRC lost $1.36 billion following the undervaluation of these mining assets.

Also, states lose financially in contract negotiation. Due to the need for know-how, states are obliged to enter into dialogue with companies to optimise mining production. However, the examples of contracts between the Congolese state and China or with multinationals show that the DRC pays a high cost. In these negotiations, it appears that asymmetry of information is exploited by international investors to the detriment of producer countries.

In the more general sense, multinational companies are more experienced in this kind of sophisticated negotiations where they seek to obtain advantages by putting forward exorbitant demands. In a competitive market, companies should receive returns on their investments in line with market-remunerative standards for mining and possibly “marketing” activities, and producing countries should benefit from their so-called resource-rent.

Nevertheless, in many cases multinational enterprises have been able to collect the bulk of the profits, which shows that the agreements have not been well formulated. Thus, wealth flees the country through companies and some agents of government. As a result, a renegotiation of contracts is necessary in many cases.

The artisanal and industrial sectors are mirror images of one another: industry is characterized by its capital intensity and its weakness in manpower, whereas the craft industry is the reverse. The craft sector is an important vector for the local economy and the survival of local populations. Indeed, it generates direct and indirect employment; it contributes to other sectors of the economy and thus creates a virtuous circle in the producing country, if only on a smaller scale.

Consequently, its contribution to local development is more pronounced compared to the industrial sector. Industrial enterprises operate in near isolation from the local economy and hire a limited number of people, often as “enclave economies” that generate “silo growth”. Indeed, its contribution should reside in the contribution of capital, but if the capital leaks massively this advantage is annihilated. Moreover, the industrial sector, if it is transnational, has more clout in the field of tax evasion and financial arrangements. The revelations of the Panamas Papers refer to the links between the natural resources sector and the offshore structures used by the stakeholders.

A balance should be struck between an efficient industrial and craft sector. Increasing the return on the artisanal sector through a contribution of capital seems a valid one. To derive greater benefits from their economic activities, elite-free captive support measures seem indispensable, in particular an improvement in the governance of the artisanal sector, which can contribute to the formalisation of the sector. This applies especially in countries where many people draw their livelihood from the artisanal sector.

Contracts should make it possible to transform this wealth into an opportunity for development. Clearly a component should be dedicated to avoiding massive capital outflows by repatriation of profits and tax evasion. To this end, a high level of transparency seems essential; this will also help combat corruption and raise citizens’ awareness of the sector’s income. Secondly, improved mining governance can guarantee a profitable price for the resources sold as well as a reasonable mining rent.

There is a need to strengthen international economic governance, as the logic of multinationals applying cost reduction and tax optimisation strategies exceeds the capacities of individual states. The loss of income for resource-rich countries caused by illicit financial flows requires a multilateral response. A simple focus on GDP in some producing countries does not allow conclusions to be drawn on sustained investment for development or on the distribution of these benefits and hence not on the reduction of the inequalities of poverty.

Therefore, taking more profits from their natural resources, especially considering a boom-bust economy characteristic of the sector and the gradual depletion of natural resources, is more than urgent. The possibilities are there, because the losses suffered by the financial haemorrhage are vast.

– Gino Brunswijck

Subscribe to our mailing list!

Recent Posts