Resources Policy 37 (2012) 405–407

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Resources Policy

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Editorial

Introduction

1 The articles are the result of a multi sectoral and multi country research

programme – Making the Most of Commodities – primarily funded by the IDRC of

Canada.

The second half of the twentieth century saw two spikes incommodity prices, the first during the early 1950s and the secondduring the early 1970s. Both these two periods of commodity pricesurge were short-lived in nature (two to three years), and neitheraffected all three families of commodities simultaneously (forexample, the 1950s price-boom did not affect energy prices, andthe 1970s boom saw little increase in the prices of soft commod-ities). However, since 2002 the global economy has witnessed theemergence of a more long-lived commodity price spike. The pricesurge was initially limited to hard and energy commodities, butafter 2005 also began to affect the soft commodity sectors. Althoughcommodity prices continued to be very volatile by comparison withthe prices of manufactures, and saw a sharp (albeit temporary) pricefall after the 2008 global financial crisis, they have been on asustained upward trend for a decade. This is a unique trend bycomparison with the commodity price increases in the twentiethcentury. The post-2002 commodity price boom has resulted from acombination of events – largely but not entirely a consequence ofChinas rapid growth – which make it highly likely that prices willremain high and in many cases grow for some years to come (Dobbset al., 2011; Farooki and Kaplinsky, 2012).

Coupled with intense competition in traded manufactures, theupshot of the post 2002 boom in commodity prices has been achange in the trajectory of the commodities-manufactures terms oftrade (Farooki and Kaplinsky, 2012). The persistence of the com-modity price boom and the generation of resource rents has majorimplications for development strategies in resource exporting econo-mies. Three major sets of issues have dominated the debate. The firstconcerns the governance implications of resource dependence,particularly in the case of rent-rich fixed point commodities suchas oil and diamonds, where the rents from resource extraction areeasily misappropriated leading to corrupt and ineffective govern-ment. The second relates to the distribution of rents betweengovernments, resource-extracting firms and local communities. Thethird arises from the macroeconomic management of resource rentsaddressing the inter-temporal consumption of rents, the volatility ofcommodity prices (which remain, despite rising trend prices) and theimpact of exchange-rate appreciation on other traded goods sectors.

Relatively submerged in this analytic and policy response to thecommodity price boom is the issue of linkages into and out of thecommodity sector. Despite the growth and probable persistence ofrents in many commodities, the developmental challenge of eco-nomic diversification remains an issue of critical importance. Thehard and energy commodities sectors in particular tend to verycapital intensive, with low levels of employment. Hence in thesesectors, the distribution of resource rents are primarily determinedby the nature of state power rather than as an outcome of factorutilisation. The potential linkages arising from the commodities

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sector are thus an important vector for economic diversificationand for the spread of income and capabilities through the economy.Further linkages are not subject to the same price volatility as incommodity extraction (since, characteristically, linkage firms oper-ate in more than one sector), and hence the development of linkagesfrom the commodities sector supports the expansion of a lessvulnerable economic structure. Linkages also provide the scope forpromoting incomes in areas directly adjacent to resource extraction,so that local communities are more likely to support sustainablecommodity production. Finally, the routes to industrial developmentwhich have been followed by currently industrialised economies –protectionism, industrial policy and export-oriented industrialisation– are either now foreclosed by global agreements or are much moredifficult to achieve in a global economy characterised by excessproduction capacity, the domination of Asia as a site of manufactur-ing production and the diffusion of manufacturing capabilities.

Perspectives on the commodity price boom are often suffusedwith gloom—the ‘‘resource curse’’ is the metaphor which comesto mind when commodity prices rise. Yet, as the Introductoryarticle by the co-editors (Morris, Kaplinsky and Kaplan) notes, inmany of the currently industrialised economies, the growth of themanufacturing sector and knowledge intensive services oftenoccurred through a synergistic link with the commodities sector.This suggests that there is an alternative perspective on thecommodities price boom. The policy challenge therefore is ‘‘tomake the most of commodities’’ by building productive andefficient linkages into and out of the sector.

The problem with developing an effective policy agenda to meetthis aim however is that there is an enormous knowledge gap on theextent and determinants of linkages in most low and middle incomeeconomies. This knowledge gap is particularly acute in Sub-SaharaAfrica (SSA). This is especially unfortunate given that Africa isemerging as the prime territory of expanding resource production,and also because of the acute dependence on many African econo-mies on resource exports and the underdevelopment of the con-tinent’s industrial and knowledge-intensive service sectors. Anumber of factors explain this knowledge gap, including the logis-tical difficulty of engaging with the key foreign players in the sectorand the atmosphere of hostility which pervades many economieswhere there are active disputes between governments, the privatesector and civil society on the distribution of resource rents.

The contributions to this Special Issue – almost entirely fromscholars within SSA – seek to begin to fill this gap.1 The editors and

Editorial / Resources Policy 37 (2012) 405–407406

individual authors are aware that the largely qualitative and case-study data which is presented is some distance from the datasetrequired to undertake a systematic comparative analysis of theextent of linkages, the depth of local value added and the driversof linkages in individual countries and sectors. However, this editionrepresents a start to raising the issues and defining the requisites tofill a critical knowledge gap that will assist policy makers to ‘‘makethe most of commodities’’, and allow analysts to determine whatfactors affect the capacity of governments, producers and civil societyto ‘‘make the most of commodities’’.

The contribution of the three editors in this issue seeks toprovide a brief review of the historical links between industrialdevelopment and resource extraction in resource rich high incomeindustrialised economies. It challenges a widely-held view thathard and energy commodity production is inherently enclave innature by charting the evolution in recent decades of outsourcingpolicies in a number of sectors—now including commodities. Weargue that far from lead firms seeking to minimise linkages asmany governments unfortunately assume in SSA, there is consider-able scope for win–win outcomes and indeed a ‘‘below the radar’’process in which linkages have already emerged across the con-tinent as an outcome of market forces. The paper distinguishesdifferent types of linkages and identifies a series of intrinsic sectoralfactors and contingent environmental factors which determine thedirection and pace of linkage development. The analysis also pointsto the gap between corporate rhetoric and implemented corporatepolicy which suggests that ‘‘making the most of commodities’’ is asmuch a challenge for the private sector as for the state sector.

As the contribution by Farooki in this issue shows, there havebeen considerable changes in the global mining equipment supplyindustry in recent years. Although the traditionally dominantproducers of mining equipment (United States, Germany and Japan)increased exports during the recent mining boom, the greater gainshave been made by countries in the South (particularly China). Thedestination market for mining equipment has also begun to change,increasingly moving towards new mining sites in Africa, East Asiaand Latin America. This is reflected in SSA, where China accounts fora rapidly increasing share of mining equipment imports. Thegrowing role of China as a supplier of mining equipment and asan emerging commodity producer in SSA sets the backdrop forlinkage development in the future. Will Chinese actors in the miningand linkage sectors behave differently to those northern producerswho traditionally dominated the continent’s mining production andconsumed its commodity exports?

Fessehaie in this issue analyses the trajectory of linkages into thecopper sector in Zambia and addresses this and other related issues.She documents the thinning of linkages as the industry wasprivatised in the late 1990s, and identifies three categories ofsuppliers—those growing, those static and those in decline. Whilsta key factor explaining this trajectory of suppliers is their capacity toupgrade capabilities, this is not the only influencing factor. Growingfirms are tightly linked to value chains in which the lead commodityproducers and original equipment manufacturer suppliers assistthem to achieve the standards required to become effective localsuppliers. This turns the spotlight on the two new emerging countrycopper producers in Zambia (from India and China respectively) andtheir differential behaviour in working with their supply chains.

Corkin’s analysis in this issue of the role which Chinese leadfirms are playing in the development of Angola’s infrastructuralsectors addresses the same issue. Infrastructure is important notonly because it facilitates the exploitation of Angola’s generousbounty of commodities and reduces the costs of linkage firms, butalso because it illustrates the sourcing patterns of large state-owned Chinese firms which are increasingly likely to participatein SSA’s resource sector. The analysis shows that the entry of largeChinese firms follows from a strategic bundling of aid, trade and

foreign direct investment (FDI), the so-called ‘‘Angola-mode’’.Corkin shows that although the first-level of supply by Chinesefirms does indeed reflect the prejudice of many observers thatlead Chinese firms make intensive use of inputs imported fromChina, second and third tier Chinese suppliers often developingsignificant local production. She documents a dynamic process inwhich the stereotype of Chinese firms and their sourcing beha-viour is changing rapidly. This reinforces Fessehaie’s analysis ofChinese firm’s in Zambia’s copper industry which suggests that insome respects these firms are becoming increasingly similar tothe historically dominant northern copper producers in theirsupply chain management practices.

The widely-held prejudice that linkages are thin in SSA and,where they exist, embody low levels of technological content isbelied by the contributions in this issue of Kaplan on South Africa’smining equipment and mining specialist service producers, Blochand Owusu’s discussion of suppliers to the Ghanaian gold miningsector and Adewuyi and Oyejides’ research into suppliers of fabrica-tion and construction, well-construction and completion, and con-trol systems and ICT to Nigeria’s oil and gas sector. Each of thesethree country studies show that in these relatively long-livedindustries, there are considerable local linkages that often embodythe supply of knowledge-intensive inputs. South Africa, in particular,has developed a technologically sophisticated and globally compe-titive mining equipment and specialist services sector. While thereare significant prospects for future growth, there are, at the sametime, a number of constraints and South Africa is becoming a lessadvantageous site for both production and for innovation. Currentgovernment policy does not address these constraints and the sectordoes not feature in government’s vision for industrial or technologydevelopment. Kaplan proposes an alternative approach to govern-ment policy whereby the constraints are addressed and the com-panies supplying the mining sector that have sophisticatedtechnological competencies are encouraged to spread into newproducts and new global markets.

In Ghana, gold mining is often depicted as having an enclavestatus, disconnected and isolated from the rest of the economy.However, as Bloch and Owusu show, the sector is in fact moredeeply linked into the Ghanaian economy than hitherto recog-nised particularly with regard to backward linkages. Perhaps thebiggest surprise is the extent of backward linkages in the Nigerianoil sector. Adewuyi and Oyejides’ detailed investigation of threeknowledge intensive subsectors (fabrication and construction;well-construction and completion, and control systems and ICT)shows that despite the widespread view that local content in theNigerian oil and gas industry is very low, there is clear evidencefor the existence of linkages with a considerable degree of localvalue added. Many of these suppliers are locally owned, andheaded by Nigerians with considerable education and training.As in the case of Ghana’s gold mining industry, the increasing flowof labour to and from other sectors and other regional economiesreflects historic investments in skill development. Althoughdeeper linkage development has been held back by poor waterand power infrastructure, government policies have played amajor positive role in linkage development, including throughthe growing efficiency of telecommunications and transport. Mostcritically however, linkage development in these three subsectorsfeeding into Nigeria’s hydrocarbon sector reflect government’slocal content policies.

The role which government plays in actively promotinglinkage development also surfaces as the major explanatory factorfor linkage development in Angola’s relatively young oil industry.Although wielded very bluntly (that is, government policy ispoorly informed of the technological characteristics of supplierindustries and conflates local production with local ownership),Teka’s analysis in this issue of linkages into the production of

Editorial / Resources Policy 37 (2012) 405–407 407

subsea control lines evidences the importance of local procure-ment policy. It also shows how governments can use firm-specificvulnerabilities to tempt individual firms into local supply, and toset up a process of oligopolistic rivalry which subsequently ledother TNCs to develop linkages in Angola to defend their positionas prime suppliers. However, Teka’s analysis also shows thatwhen relatively technology intensive supplier industries operatein economies with weak industrial bases, local value added isoften very low—in Angola’s case, largely limited to labour inputs.

The importance of firm-specific strategies as a determinant oflinkage development is illustrated by Hanlin and Hanlins’ analysisin this issue of ‘‘supply as experienced from below’’ in the goldmining industries in Tanzania and the Democratic Republic of theCongo (DRC). They not only evidence the gap between corporaterhetoric and corporate practice, but also show how individualmines owned by the same company often have different sourcingpatterns. These institutional differences are magnified across thespectrum of firms. These differences not only reflect differentcorporate strategies towards linkage development but often,more importantly, the manner in which corporate sourcing andsupply chain development practices are implemented in thereal world.

On the basis of these largely qualitative case studies, fourgeneral conclusions can be drawn. First, our knowledge base is inits infancy. We know that there are considerably deeper linkagesthan are often recognised, particularly in the SSA context, but thereis a great deal more to learn about the extent and determinants ofthese linkages. Second, as firms seek to maximise the outsourcing(and, indeed, the nearsourcing) of non-critical supplies, there isscope for win–win outcomes as firms, governments and localcommunities cooperate in linkage development. Third, and this is

neither unique to the resource sector or to SSA but pervadeseconomic activity globally, there is a large gap between rhetoricand actual practice. If innovation – for linkage development is atype of innovation – were so easy, all firms and all economieswould be at the production efficiency frontier; the management ofinnovation is the critical determinant of dynamic comparativeadvantage. There is thus considerable scope for policy interven-tions at the corporate and state level and in the dialogue betweenpublic and private sectors to promote deeper and more rapidlinkage development. And, finally, to the extent that the casestudies in this Special Issue evidence the pattern of linkagedevelopment in selected hard and energy commodity sectors insix SSA economies, to what extent are the conclusions of thisresearch relevant to other sectors (particularly soft commodities)and other low and middle income economies?

References

Dobbs, R., Oppenheim, J., Thompson, F., Brinkman, M., Zornes, M., 2011. ResourceRevolution: Meeting the World’s Energy, Materials, Food and Water Needs.McKinsey Global Institute, McKinsey and Co, London.

Farooki, M.Z., Kaplinsky, R. 2012. How China Disrupted Global Commodities: TheReshaping of the World’s Resource Sector. Routledge, London.

Mike Morris n, Raphael Kaplinsky, David KaplanE-mail address: mike.morris@uct.ac.za (M. Morris)

16 May 2012

Available online 1 September 2012

n Corresponding author.