Resource-driven countries can lift 540 million people out of poverty by effective development and use of reserves, points out McKinsey.
The McKinsey Global Institute, the business and economics research arm of McKinsey & Company in its recent report titled “Reverse the curse: Maximizing the potential of resource-driven economies” points out that many resource-driven countries have failed to convert their resource endowments into long-term prosperity.
Opportunity for resource-driven countries
The report defines ‘resource-driven countries’ as those economies where the oil, gas, and mineral sectors play a dominant role, using three criteria: (a) resources account for more than 20% of exports, (b) resources generate over 20% of fiscal revenue or (c) resource rents are over 10% of economic output.
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The report points out that 69% of people in extreme poverty are in resource-driven countries. Furthermore, almost 80% of countries whose economies have historically been driven by resources have per capita income levels below the global average, and more than half of these are not catching up.
Three key imperatives
McKinsey Global Institute report points out that while there are several pitfalls facing resource-driven countries, some have managed successful transformations, establishing best practices that other nations can emulate.
The report suggests resource-driven countries should consider reframing their economic strategies around three key imperatives: (a) effectively developing their resources sector, (b) capturing value from it and (c) transforming that value into long-term prosperity.
The report recommends in each of these areas, relevant lessons from other resource-driven countries can be tailored to the local context.
As it is difficult to find appropriate measures to assess the performance of countries in each of the strategic areas, the report suggests the best available proxies to identify the ten countries that have had the highest performance in each area. The following table highlights countries performing well across the six areas of the resources value chain, by taking into account the three key imperatives:
McKinsey Resource Competitiveness Index
The McKinsey Global Institute report notes governments in resource-driven countries have tended to focus too narrowly on fiscal policy, without considering the broader competitiveness implications for their economies. Towards this, McKinsey created the McKinsey Resource Competitiveness Index, which encompasses three major elements of competitiveness: (a) production costs, (b) country risk and (c) the government take, implying the share of revenue that accrues to the government.
The report notes there are avenues available to reduce capital and operating costs, especially by focusing on regulation, supply chains, productivity and cooperation with the industry. The following graph highlights the recent McKinsey work on liquefied natural gas in Australia wherein government and industry could reduce operating costs by over 50%.
The McKinsey Global Institute report suggests that the three key imperatives highlighted above could not only transform the economic prospects of resource-driven economies but also to take over 500 million people out of poverty by 2030, which would have as great an impact as the Asian Tiger growth model.