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Poverty Times #4

Pro-poor growth or boom and bust?

Many low-income countries, particularly in Africa, need to boost economic growth by as much as 7% to achieve the MDGs. Natural resources play an important role in economic growth in low income and rural areas. They are often the main wealth available. Natural resources such as forests, fisheries, wildlife tourism and groundwater already contribute to the economic growth and exports of many developing countries.
By Paul Steele, consultant for Department for International Development (DFID), UK

Forests provide several developing countries with annual export revenue exceeding $100m, accounting for more than 15% of exports. In several cases forestry is vital to the economy, representing 25% of tax revenue in Cameroon, for instance. Forest-based enterprises employ some 17 million people, with a further 30 million in the informal sector. Almost one third of the world’s population – 1.6 billion people – depends on forests for its livelihood. Natural resources are also particularly important for local tax revenues in poor but resource-rich areas. In some developing countries wildlife tourism is an important part of travel industry revenue.

Fisheries yield annual export revenue in excess of $100m in several poor countries, bringing in more than 20% of export earnings. More than 33 million people work in fisheries in developing countries – with the vast majority in Asia – and the industry covers more than 20% of government budgets in several west African countries (e.g. Guinea Bissau and Mauritania).

However policies to maximise the economic benefits of forestry, fishery and wildlife tourism are often not designed in a way that also benefits the poor. Growth is pro-poor as long as the poor benefit from growth. This may mean a growth strategy deliberately targeting the poor is needed, so low-income growth is greater than overall growth.

Natural resources provide a safety net that prevents poor people becoming poorer - but this is not the same as durably raising the poor above the poverty line. Indeed it has been argued that in the long run this type of dependence can leave the poor in a particularly dangerous poverty trap.

Natural resources are often remote, and property rights and regulations unclear. Furthermore little is done to uphold the institutional rights of the poor. This situation can easily lead to market failures, with the poor bearing the cost of any problems. They may even lose traditional rights to important life supporting ecosystems. Such conditions are also an incentive for “boom and bust” strategies, leading to over-exploitation. In some cases the industrial use of natural resources, far from earning revenue, may be heavily subsidised by the state. Subsidies go to state firms running at a loss (typically Ghana’s timber industry) and government joint ventures (tuna processing in the Pacific). Such practices may also result in massive tax write-offs (Indonesia’s timber industry) or largescale illegal logging (Cambodia). This undermines the genuine economic benefits of such activities. Examples include Ghana’s forests (in 1960-80), the fishing industry in Peru and Chile (1970s), and groundwater in western India today.

Governments must decide whether to promote small and medium scale enterprises which are more likely to benefit the poor, or larger operators which may earn higher returns – but can in some cases impact negatively on the poor. Natural resources are often the focus of conflicting aims. A political solution must be found to reconcile calls for exports, revenue, employment, livelihoods and enterprise development. It is clearly impossible to achieve a whole range of pro-poor benefits all at the same time. In many locations, for example, there are clashes between subsistence fishers and commercial trawlers. West Africa, particularly Mauritania and Guinea Bissau, has long attracted fleets from far afield, notably the former Soviet Union, the European Union and Asia1.

Wealth from natural resources can, in the medium term, raise people above the poverty line, thanks to exports and state and private sector investment in pro-poor initiatives – informal and formal employment and activities based on natural resources of particular benefit to the poor, giving them technology, capital, and market access.

The commercial exploitation of natural resources may produce growth if industry is not subsidised. For example Cameroon’s forests are harvested by large international firms, while Namibia has developed a domestic commercial fishing industry.

Large-scale commercial exploitation can do more to help the poor, if it encourages transparent spending of revenue and links with local business. It can also provide a more positive business environment by issuing resource rights, streamlining regulations, improving access to markets and technical support, all of which helps to promote small and medium scale enterprise based on the use of natural resources. Examples of this trend may be found in timber revenues in Cameroon, certain mining projects in Latin America and the privatisation of accommodation in South Africa’s parks. To avoid a boom and bust approach to the extraction of natural riches – which is bad for poverty reduction and saps the roots of the economy – it is essential to diversify away from natural resource-based growth. At both national and domestic level natural resource profits must be well invested. So there is an apparent paradox that these profits must be used to avoid dependence on them in the future. Timing is crucial to shift from extraction to resource management and diversified income sources before it is too late and the resource collapses.

Coalitions for change are needed to drive pro-poor natural resource growth. There are many examples of such coalitions which have included civil society, private sector and international donors. Botswana is reinvesting its mineral wealth. Brazil is setting up reserves in its forests. In Kerala (India) subsistence fishers have gained more extensive rights. Bangladesh has recently seen pressure to certify shrimp farming and in western India movements have come into existence to demand the recharging of groundwater. Without such initiatives resources that could have helped achieve the MDGs would be wasted.

1. Fisheries Centre, University of British Columbia, 2005, Sea Around Us project, a five-year retrospective 1999-2004.