Policy recommendations

 

Raw Materials Initiative

October 2009

The European Commission has set up a new strategy on raw materials, entitled Raw Materials Initiative - meeting our critical needs for growth and jobs in Europe. This unfolded strategy seems unfair with regard to developing countries interests. It could lock resource-rich developing countries in a situation where they have no choice but to remain net exporters of raw materials, instead of being given the chance to develop their own downstream industries and move up the value chain. This outcome conflicts sharply with EU obligations: European policies other than development policy should take development concerns into account, and not undermine development objectives.

For its supply of raw materials for production and industry, the European Union (EU) depends to a very large extent on imports of all principal raw materials 70 to 100 percent of all raw materials come from outside the EU, not seldom from developing countries [1]. The EU imported more than 175 million tonnes of metallic minerals in 2004, with a total value of EUR 10.5 billion, compared to a domestic production of only 30 million tonnes. The import dependency rate for these minerals ranges from 74% for copper ore, 80% for zinc ore and bauxite, 86% for nickel and 100% for minerals such as cobalt, platinum, titanium and vanadium [2]. Especially minerals and high-tech raw materials such as uranium and coltan are found in countries in Africa. A few examples: in Guinea, iron ore and bauxite are found. South Africa produces gold, rhodium, platinum and chromium. Zambia is known for its copper mines and the democratic Republic of Congo is particularly resource-rich. Copper, cobalt, tin ore, gold and coltan are found there. Some of these substances are not or hardly found elsewhere.

The Raw Materials Initiative: EUs dependence on imported raw materials

The European Commission has, in November 2008, published a new strategy on raw materials, entitled Raw Materials Initiative - meeting our critical needs for growth and jobs in Europe [3]. The document uses rather strong and aggressive language to announce the ways in which it aims to coerce countries into abolishing their market restriction measures: The EU should work towards the elimination of trade distorting measures taken by third countries in all areas relevant for the access to raw materials. The EU will take vigorous action to challenge measures which violate WTO or bilateral rules, using all mechanisms and instruments available, including enforcement through the use of dispute settlement. More generally, the EU will act against the protectionist use of export restrictions by third countries. In determining its actions, the EU will take as priority those export restrictions that pose the greatest problems for EU user industries or give their domestic downstream industries an unfair competitive advantage on international markets [4].

The Raw Materials Initiative (RMI) has to be interpreted in the context of the EUs Global Europe policy documents. These show that the rationale behind the EUs fierce liberalization efforts is the emergence of new players on the international markets, namely China and India. The increased competition from these economies is seen and felt by companies and governments in the EU as a potential threat to its sophisticated consumer goods industry. Clearly, China and the EU, not to mention big economies as the US, Japan and India, are after the same sources of raw materials for their products.

Resource nationalism versus sovereignty over natural resources

In recent years, resource-rich countries have become more and more aware of the riches they hold, and of their value to the European manufacturing industry. This rising self-awareness among resource-rich nations, among which many developing countries and their introduction of measures such as export restrictions, restrictive Foreign Direct Investment (FDI) policies and corporate taxation to limit access by European operators to their natural resources, is seen by the European Commission (EC) as a cause of concern. According to the former Trade Commissioner Peter Mandelson, this phenomenon which he calls resource nationalism is growing across the globe.

The aim of the ECs strategy on raw materials is to strive for unhindered access to third countys resources by actively pursuing a new diplomacy with regard to raw materials, aiming to eliminate the above mentioned threats to the European industrys global competitiveness (duties, restrictive FDI policies, taxes).

But what our former Trade Commissioner calls resource nationalism, is in fact a countrys sovereignty over its own natural resources. (Developing) countries do have the right to restrict trade on environmental and social grounds and their ability to process raw materials themselves [5]. Moreover, states have the sovereign right to exploit their own resources pursuant to their own environmental and developmental policies [6]. In other words, the EU has no right, under international law or under international economic cooperation, to pressure developing countries into liberalizing their raw materials markets.

EU Development Policy

The overall goal of the EUs Development policy is to combat poverty. The European Community provides a strong legal basis for development cooperation in article 177 of the Treaty Establishing the European Community (EC Treaty). In accordance with this treaty, the purpose of the EU development policy is to foster the sustainable economic and social development of developing countries, and the smooth and gradual integration of developing countries into the world economy.

The European Development Fund (EDF) is the main instrument for providing Community aid for development cooperation in the African, Caribbean and Pacific (ACP) states and overseas countries and territories (OCTs). The tenth EDF, covering the period 2008-2013 has been allocated €22.682 billion. A new generation of Country Strategy Papers (CSPs) is being developed under the 10th EDF programming process. With its significant budget increase, the 10th EDF provides new opportunities for ACP countries to address natural resource management challenges, while at the same time eradicating poverty and stimulating economic growth.

Natural resources, such as a richness in minerals and metals, diamonds and gold, offer enormous potential for economic growth in Africa. Recent analysis of the Commission points to the sustainable exploitation of natural resources, combined with the creation of a sound investment climate as one of the central drivers of growth in Africa [7]. These are very important statements considering the fact that most African nations are currently not benefiting at all from their own richness in natural resources.

With regard to the sustainable exploitation of developing countries natural resources, the Commission considers that not only political and environmental governance, but also the protection of the rights of indigenous peoples, ownership, equity and the proper financial management of resources are key principles and targets in this process [8].

Policy Coherence for Development in the RMI

In the Raw Materials Initiative, there is much talk of coherence between EU development policy and the EUs need for undistorted access to raw materials in order to create win-win situations. Good governance, transparency of mining deals and mining revenue, a level playing field for all companies, financing opportunities, sound taxation regimes and sound development practices are beneficial for both developing countries and the EUs access to raw materials [9].

The Commission proposes to use development policies and instruments to attain this win-win situation at three levels: a) by strengthening states through the increased use of budget support [10], b) by promoting a sound investment climate that helps increase supply [11], and c) by promoting the sustainable management of raw materials.

It is of course good that Policy Coherence for Development is mentioned in the RMI and that instruments (good governance, transparency) are proposed to create win - win situations. But are these really win win situations? These nice words do not (yet) provide for clear action or translation into policy making measures or law making. The US Energy Security through Transparency Act of 2009  would require energy and mining companies to reveal how much they pay to foreign countries and the U.S. government for oil, gas, and other minerals. Such a law could also be introduced at EU level, as it would urge European companies to become financially transparent.

Nevertheless by improving transparency and good governance you still do not provide for opportunities for these resource rich countries to develop economically in terms of moving up the value chain by establishing their own manufacturing industry. Due to the strong language used in the RMI and the rather aggressive strategies proposed in terms of the trade pillar, it seems now that Policy Coherence for Development is turned upside down.

In the meaning of article 178 EC Treaty, European policies other than development policy should take development concerns into account, and not undermine development objectives. Not the other way around, as it seems the case here.

UnFair Politics

On the one hand, through European development policies and financial support provided by the 10th EDF, the EU contributes significantly to the capacity of developing countries to manage and exploit their natural resources in a sustainable manner. Even in the RMI itself it considers the concepts of transparency, good governance, the promotion of human rights, sound financial management and sustainability as crucial to the exploitation of natural resources.

On the other hand, however, the Commission, in the RMI outlines a rather aggressive strategy aimed at securing access to third countries raw materials for its own, heavily dependent, industry. The Commission proposes to achieve security of supply by preventing developing countries governments from taking measures to limit the access of foreign companies to their natural resources, and aimed at controlling the outflow of these resources. They will not be able to exert sovereignty over and control the exploitation and outflow of their own resources anymore.

African governments must have the policy space to raise taxes, implement restrictive FDI policies, and control the outflow of raw materials, in order to finance measures to mitigate the consequences of soaring commodity and food prices, and to help lift their countries out of the poverty trap. But it seems they will face strong opposition from the European Union that views these measures as a threat to its supply of raw materials and to the competitiveness of European companies and sectors.

Conclusion

By means of its development policy, the European Union, as Africas most important trading partner and donor of development aid, intends to help developing countries lift their populations out of poverty by investing in the sustainable management of their natural resources, in good governance, and in promoting sound financial management.
At the same time, however, through its raw materials diplomacy [12], pursued with a view to securing access to raw materials, the EU intends to limit these countries policy space in terms of taxation, (non-tariff) barriers to trade, and other measures it calls market distorting. While these exact measures together with the EUs development policy should give these countries the chance to carefully manage their own extractive industries. But even more importantly to take steps in order to move up the value chain and become able to develop their own manufacturing industries rather than being obliged to simply keep exporting their raw materials. The overall result of the RMI seems now to become a situation where the EUs own, long-term development policy objectives are in conflict with its short-term economic and industry interests. 

By facing the constraints put forward in the RMI by the EU, resource-rich developing countries will be locked in a situation where they have no choice but to remain net exporters of raw materials, instead of, via their own development and industrial policies, being given the chance to develop downstream industries and move up the value chain. This outcome conflicts sharply with EU development policy objectives, and conflicts with the obligation, deriving from the EC treaty, to take development interests into account in all other policy areas that might affect them [13].

 

Additional Information

Conflict resources

Over 50% of major mineral reserves are located in countries with a per capita gross national income of $10 per day or less. This creates new opportunities for these resource-rich developing countries, particularly in Africa, to significantly increase their national income since many of them are still facing poverty or slow growth. However, some of these countries are facing violent conflicts, often fuelled by competition for control of natural resources. Conflicts have even become self-financed, as the private actors in the conflicts have increasingly relied on natural resource revenues to fund military activity [14].

Many resource-rich countries have indeed experienced the negative side of mining. Armed groups have often enriched themselves through minerals extraction, doing deals with companies and using the revenues to fuel civil wars - a phenomenon called the 'resource curse'. Natural resources are exploited beyond a sustainable level, spoiling natural habitats, displacing local communities and affecting people's livelihoods. In the past and present, in many developing countries, the presence of sought-after minerals and other resources have led to armed conflicts and violence.

The European Commission identifies two chronic areas of natural resources related conflict and instability in Africa: the Mano- River region in West Africa and a line extending from Sudan and the Horn of Africa down to eastern Congo in eastern and central Africa. The two areas are dominated by a large number of countries in conflict as well as by a high proportion of fragile states that lack credible, legitimate and/or effective governance [15].

To the competitiveness of European companies, a stable and steady import flow of raw materials is indispensable. When it comes to the so-called critical [16] raw materials, this secure and undistorted supply is even more important. In a conflict-affected region, access to mines is obviously not self-evident. Foreign companies usually withdraw from a region as soon as violent conflict breaks out. Therefore, a stable and secure political situation, well-functioning political institutions, good governance and sound financial management are important criteria in determining whether a specific metal or mineral is considered critical.

Extractives Industry
Despite the current economic slowdown, an unprecedented demand for raw materials marks a trend which is generally expected to consolidate in the coming decades, partly due to a rapid increase in demand from emerging economies such as China and India. In the EU, too, demand for raw materials is not likely to decline. In Europe, such sectors as construction, chemicals, automotive, aerospace and machinery provide a total added value of EUR 1.324 billion. Employment for some 30 million people depends on access to raw materials [17].

Some extractive companies play a dubious role in this process, especially when they find themselves in situations where local rule of law and governmental institutions are weak or absent [18]. While most companies do not deliberately seek to profit from violence, their investments and operations could contribute to poverty and insecurity [19].

EITI
There are, however, also good examples of industry-led initiatives. One such example is the Extractives Industries Transparency Initiative (EITI). The EITI is a process by which government revenues generated by extractive industries such as tax, profit oil and royalties are published in independently verified reports. These reports are based on information about payments made by companies, and revenue received by governments [20].

EITI aims to improve transparency in countries rich in oil, gas and mineral resources. The initiative is government-led but the private sector and civil society organisations both play significant roles in how it is implemented. The idea of the EITI was first proposed by then British Prime Minister Tony Blair at the World Summit on Sustainable Development held in Johannesburg in 2002. The aim was to combat the so-called curse of resources which is affecting developing and emerging economies.

The EITI revolves around a simple idea: companies extracting minerals in developing countries report how much money they pay as taxes, bonuses of signatures, duties, royalties and other payments. Governments do the same and all those data are compiled and audited by an independent body in accordance with international standards. The final result is published in the form of a country report and made available to a wide audience in a publicly accessible, comprehensive and comprehensible manner.

 

Notes

1. Resource-rich developing countries that have recently stepped up their exploration and extraction activities include the DRC (copper, cobalt), Zambia (copper), Zimbabwe (platinum) and South Africa (iron ore).

2. Public consultation on Commission Raw Materials Initiative, Background paper, p.1

3. COM(2008) 699, The Raw Materials Initiative meeting our critical needs for growth and jobs in Europe, Commission Communication to the European Parliament and the Council

4. COM(2008) 699, p.7

5. The UN Covenant on Economic, Social and Cultural Rights states that All peoples may, for their own ends, freely dispose of their natural wealth and resources, without prejudice to any obligations arising out of international economic cooperation, based upon the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of existence.

6. Rio Declaration on Environment and Development, UNCED, 1992, quoted in: Idem, p.v.

7. Cappelle, Jan for Fatal Transactions, From conflict resources to sustainable development Memorandum by Fatal Transactions on the EUs contribution to natural resource management in Africa, July 2008, p.9

8. http://www.eldis.org/vfile/upload/1/document/0708/DOC22992.pdf, visited on 09/07/2009

9. COM(2008)699, Communication from the Commission to the European Parliament and the Council, The Raw Materials Initiative meeting our critical needs for growth and jobs in Europe, p.8

10. One could wonder whether increased budget support is the appropriate means to strengthen states that are known to have weak political institutions and are generally considered in lack of credible, legitimate and/or effective governance (cf. note 23).

11. Idem.

12. Idem, p.6

13. The principle of policy coherence for development (PCD) as laid down in art. 178 EC Treaty

14. http://www.reliefweb.int/rw/lib.nsf/db900SID/MCOT-7LRKQ3?OpenDocument

15. Cappelle, Jan for Fatal Transactions, From conflict resources to sustainable development Memorandum by Fatal Transactions on the EUs contribution to natural resource management in Africa, July 2008, p.9

16. In the Commission Staff Working Document the following materials have been identified as critical: antimony, chromite, cobalt, germanium, gallium, indium, lithium, magnesium, manganese, molybdenum, niobium, platinum, palladium, rhodium, rare earths, rhenium, tantalum, titanium, tungsten, and vanadium.

17. COM(2008) 699, The Raw Materials Initiative meeting our critical needs for growth and jobs in Europe, Commission Communication to the European Parliament and the Council

18. Cappelle, Jan for Fatal Transactions, From conflict resources to sustainable development Memorandum by Fatal Transactions on the EUs contribution to natural resource management in Africa, July 2008, p.7

19. http://www.reliefweb.int/rw/lib.nsf/db900SID/MCOT-7LRKQ3?OpenDocument

20. This paragraph was taken from: Kaninda, John T., An overview of anti-corruption initiatives and their impact on Corporate Accountibility in Sub-Saharan Africa: analysis and perspective, Johannesburg, May 2009, p.4.

Documents

Raw Materials Initiative

From Conflict Resources to Sustainable Development

Response from the Southern Africa Resource