Reverse the curse: Maximizing the potential of resource-driven economies

Reverse the curse: Maximizing the potential of resource-driven economies



Imperatives for resource-driven countries and extractive companies
MGI’s Fraser Thompson discusses the “Resource Tiger” growth model and what countries—and companies—should do.




Resource-driven countries in the low- and lower-middle-income brackets could capture $1.2 trillion to $3 trillion of the $11 trillion to $17 trillion cumulative global investment in resources to 2030. At the high end of this range, these countries would net almost $170 billion a year, more than three times their development-aid flows in 2011. There is some potential to lift almost half of the world’s poor out of poverty. That would be more than the number of people who left the ranks of the poor as a result of China’s rapid economic development over the past 20 years.

To capture that investment, these economies should reframe their economic strategies around three key imperatives: effectively developing their resource sector, capturing value from it, and transforming that value into long-term prosperity. The research explores best practices on six fronts: building the resource sector’s institutions and governance, developing infrastructure, ensuring robust fiscal policy and competitiveness, supporting local content, deciding how to spend resource windfalls wisely, and transforming resource wealth into broader economic development (exhibit).

1. The resource sector’s institutions and governance

No single model of state involvement in the sector works best—that depends on the context. Whichever model a country chooses, three guiding principles are vital: a stable regulatory regime with clear rules, the exposure of national operators to competition from private-sector firms, and major efforts to attract and retain world-class talent.

2. Infrastructure

Resource-driven countries will together require more than $1.3 trillion of annual total infrastructure investment over the next 17 years—almost four times the 1995–2012 level—to sustain projected economy-wide growth. Given the huge need, these countries should look closely at ways of sharing the cost of resource infrastructure. We estimate that different operators could share nearly 70 percent of the investment in it, industry and other users the remaining 30 percent. Governments need to plan early, rigorously assess the costs and benefits of sharing, and pick the right model to implement it.

3. Competitiveness and fiscal policy

Countries have much to gain from doing all they can to ensure that their resource sectors are as globally competitive as possible. Instead of focusing narrowly on fiscal policy, governments should take a broader view, including production costs, country risk, and their countries’ share of the revenue pie. Resource-driven countries could boost the competitiveness of their resource sectors by more than 50 percent.

4. Local-content development

Between 40 and 80 percent of the revenue created in oil and gas and in mining pays for goods and services—exceeding, in some cases, tax and royalty payments. More than 90 percent of resource-driven countries regulate the proportion of goods and services supplied locally, but much local-content regulation is badly designed. Governments need to ensure that it doesn’t compromise competitiveness.

5. Spending the windfall

History is littered with examples of governments squandering their resource revenues through corruption or simple mismanagement. To avoid such waste, governments should ensure that the spending and benefits are transparent and keep themselves lean.

6. Economic development

To overcome the underperformance of the past, governments should remove barriers to productivity across their economies. Even in the past, tension colored the relationship between extractive companies and host governments. As resource production shifts to developing and frontier economies—often with weak infrastructures and unstable political systems—it becomes more and more vital that they adopt a new approach. Operating risks have increased ninefold.

Essentially, these companies ought to shift from a pure extraction mind-set to a developmental one. They must build a deep understanding of their host countries and rigorously assess their own contribution to broader economic development. Last, they must ensure that their efforts match the priorities of host governments and that any package of initiatives is part of a relationship with them—a relationship that will endure for any project’s lifetime, which can stretch for decades.

About the author(s)

Richard Dobbs is a director of the McKinsey Global Institute, where Fraser Thompson is a senior fellow; Jeremy Oppenheim is a director in McKinsey’s London office, where Martin Bratt is an associate principal; and Adam Kendall is a principal in the Johannesburg office, where Fransje van der Marel is a consultant.

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