Johan Fourie's blog

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A small-town story of the resource curse

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Kathu

Boom town: This Google Earth image demonstrates the spectacular town growth over the last decade.

A decade or so ago, Kathu in South Africa’s Northern Cape province was little more than a quaint mining town with a fantastic golf course. Supported almost entirely by the nearby Sishen iron ore mine, no one had expected that the town would change remarkably in the coming decade. But a surge in the global price of steel encouraged Anglo American, the majority owner of Kumba Iron Ore, to expand production, rapidly increasing employment. The town boomed. House prices went through the roof, further strengthened by a lump sum bonus to all employees in 2011. (Not all investments were sensible, though: one story goes that upon receiving the bonus, an employee drove to a neighbouring town to purchase a new luxury car, only to crash it on the way back.) The people of Kathu saw their disposable incomes and living standards increase. Two new malls opened in a town with less than 15000 people.

And then it all came tumbling down. A few weeks ago, Anglo announced that, based on weak prospects in China and the low price of steel, it will cut around 4000 jobs at the Sishen mine. House prices are falling and those new developments that rose like mushrooms are going unsold. Stores are likely to close their doors soon, cutting more jobs. The future for the former quaint mining town looks bleak.

Kathu is a microcosm of the problem with development based on natural resources. Oxford University economist Anthony Venables investigates this conundrum in the most recent edition of the Journal of Economic Perspectives, asking ‘Using Natural Resources for Development: Why Has It Proven So Difficult?’. Venables explains that the successful use of natural resources requires multiple stages. First the deposits have to be discovered and extracted. Then the revenues need to be divided between the government, investors and other claimants (like the local community). What is important is how these revenues are split between the different claimants, and what it is used for. Finally, the indirect, negative effects to the rest of the economy must be allayed.

Dividing what can often be large gains can be difficult. Discovery and extraction licenses are typically awarded to encourage the most efficient mining companies to operate, but can result in corrupt practices. To avoid this, auctions provide one mechanism to ensure the government maximise revenue. Auctions do not work everywhere, though: in Botswana, the government instead negotiated with the dominant De Beers to ensure a larger share of the gains from diamonds.

Once gains have been divided, deciding how to spend it can be even more difficult. Often, Venables argues, there is pressure to spend on current expenditure instead of investing in infrastructure, for example. These pressures are magnified by patronage politics, which favours spending on groups or individuals allied to the government. The worst a government can do is to use the revenues to increase its chances of staying in power, for example, by hiring supporters as public sector employees.

But even if revenues are divided fairly and invested effectively, resource exports can cause what is known as ‘Dutch disease’: an appreciation of the exchange rate that hurts other exports. (The term ‘Dutch disease’ was coined after the 1959 discovery of gas fields in the Netherlands hurt the Dutch manufacturing industry.) A country that only exports one resource can become dependent on a single but volatile source of income, which can destabilise the economy during bad times. Just ask Angolans or Nigerians. Or the mayor of Kathu.

The future for natural resources dependent economies will not get better soon. Resource prices, notably oil, are unlikely to rise rapidly in the face of continued weak demand combined with the growing popularity of alternative energy sources, from fracking to renewables. That means that resource-rich countries, like many African countries including South Africa, will have to come to terms with the negative shocks on its public finances and balance of payments. The silver lining is that this may stimulate economic activity in other, more sustainable sectors of an economy. But even then, political pressure to protect the status quo may cause additional pain.

Perhaps Kathu will revive the golf course to its former glory, attracting tourists who want to enjoy affordable Kalahari hospitality, and allow the town to develop at a more sustainable rate. But not before many of its inhabitants have suffered the consequences of the natural resource curse.

*This article first appeared in Finweek magazine of 3 March.

Written by Johan Fourie

March 21, 2016 at 09:08

10 Responses

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  1. Firstly, I don’ t think the mayor of Kathu has noticed or knows.
    A big part in the bloom of Kathu certainly WAS Sishen. The bonuses for the most part was not spent INSIDE Kathu.
    To my mind one of the biggest boom factors was the 20 or so small mines that sprang up in the area – thanks to Iron and Mananese resources. Their cumulative effect was HUGE. They also shrank to just above zero, and some below zero at the first sign of trouble in the market. Even though the market is recovering somewhat to safer levels, an exodus has started, workers who wants to out – seemingly quite rattled.

    Tidu vd Merwe

    March 28, 2016 at 09:39

    • Dr. Tidu, the mayor is driving the development at the municipality. She saw this long time ago and she moved that a 2030 development plan which will ensure development indepedence of Gamagara from the mines.

      Protea Leserwane

      April 10, 2016 at 22:46

      • Protea,
        if that is the case – then I want you to know that I will do what I can to help the development of the town of Kathu. as with the most of us, just give me the assurance that black on white racism is something of the past?? we have a lot to offer, and we want to become part of the solution.
        T

        Dr Tidu van der Merwe

        April 11, 2016 at 11:35

    • Dr. Tidu, I think am missing you or you are missing me. Development in Kathu has nothing to do with skin pigmentation of people. I am inviting to the IDP Consultative meeting at Kathu Council Chambers on Thursday iñ the evening at 18h00. Let’s all discuss our contribution to the development of Kathu.

      Protea Leserwane

      April 11, 2016 at 21:54

  2. This call for new innovative ideas in south-africa.Creating sectors and industries, that manufacture products \ resources that makes us more sustainable. We need to be the guys that export ,not only our benificated / final products, but need to take this step futher in bigger volumes…to create demand from other countries. The mining cycles will continue, we need to prepare for th next cycle.

    andre hanekom

    March 27, 2016 at 19:54

  3. Perhaps it is not so much a ‘resource curse’ than an ‘innovation curse’. Kathu is a mining town, and mining is all what they have been focused on for the 40 years the town has been in existence.

    The growth and development of Kathu is far from over. It is time, however, to move beyond iron ore. A Harvard-published study highlighted the potential of South Africa to become the leading supplier of intermediate iron ore products to Sub-Saharan Africa, products like pig iron and HBI which compete with scrap metal on the world steelmaking market. We ask the question why can Kathu not be transformed into this hub for ironmaking in Africa? The growing demand for environmentally-friendly scrap-based steelmaking will continue to fuel the move away from iron ore – so Kathu, it is time to pivot or fade into obscurity.

    Kathu’s future in locked up in a nascent minerals beneficiation industry – one focused especially on value addition to existing mine tailings and low grade iron ore mineral resources. But this time around, let’s use this opportunity as catalyst to attract new alternative, sustainable industries to this infrastructure-rich Northern Cape town. Learn from Johannesburg, which once was a town dominated by the gold mining industry, and reshape the future economic development of Kathu.

    Hentie Fourie

    March 27, 2016 at 08:21

    • While agreeing with you on opportunities lying ahead of Kathu, it needs concerted effords from different stakeholders. This include government, business and industry. The municipality has already started engagements with the mine to unlock the potential of Kathu. Industrial park is already underway just to mention one. The municipality is working on a 2030 to 2060 development plan.

      Protea Leserwane

      April 10, 2016 at 22:42

  4. It is a pity that pur policy makers fail to learn as this is a replication of the gold boom and its decline. It is the same throughout the gold belt. The other concern in the Kathu area is water scarcity and yet national government solar projects initiatives in the name of national priorities. Communities are required to share finite and strctched underground water reaources with the washing of solar panels every 3 to 6 months. The municipality is tryimg to stall development in some areas due water availability and on the other hand solar panela and other small mines are being approved by national government without engaging municipalities. Integrated planning is required.

    Kgomodikae Leserwane

    March 25, 2016 at 14:06

  5. Great post. This sort of seems to be a Northern Cape thing. The OCC went the same route in the Nababeep-Okiep-Carolusberg area s well as De Beers in Kleinsee and Koiingnaas. Or was there something different in these cases. They seem to have had some longevity?

    Regards

    Calumet Links

    March 21, 2016 at 09:35

    • Rosh Pinah, Tsumeb and Uis in Namibia experienced similar falls when trade sanctions were lifted and it became cheaper to import the zinc, copper and tin than mine it at these towns.
      De Beers and Anglo diamonds are equally at risk with the increasing production of synthetic diamonds despite their trying to keep a hold on that market. The Russian flood also sent the diamond price tumbling some years back and De Beers were forced to take some drastic steps.

      Andrew

      March 22, 2016 at 23:50


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