Wise Investment Helps Countries Avoid Resource Curse, McKinsey Says

By : webadmin | on 1:12 PM December 15, 2013
Category : Business, Economy

Resource-driven countries like Indonesia need to recalibrate growth models in order to maximize the value of their endowments and avoid the so-called resource curse, according to a recent report by McKinsey Global Institute.

The research unit of US-based McKinsey & Company said countries like Indonesia often falter in gaining the full benefits from their natural resources because they fail to spend revenue from resources wisely or develop the non-resources sector. Failing to introduce competition in the natural resources sector can also keep countries from getting the maximum benefit from their resources, it said.

While Indonesia may not be a textbook example of the resource curse, the paradox in which countries rich in natural resources experience less economic growth than countries with fewer resources, the Southeast Asian nation still has found it difficult to shrug off its dependence on natural resources as a source of revenue.

“Resource-driven countries need a new growth model to transform the potential resource windfall into long-term prosperity,” McKinsey said in its report produced early this month, a copy of which was made available to Jakarta Globe.

And global demand for natural resources is likely to grow, but investment is needed. “[McKinsey] estimates that $11 trillion to $17 trillion will need to be invested in oil and gas and minerals extraction by 2030,” the report said. Around 55 percent of Indonesia’s exports in still in the form of commodities. The oil and gas sector, despite being said to be spiraling downward, is expected to contribute $31.4 billion to state revenue, McKinsey said.

Some investors attitude toward Indonesia have changed.

Canada-based Fraser Institute labeled Indonesia as the world’s least attractive place for mining companies, while a report from PricewaterhouseCoopers showed that the country’s share of global mining exploration spending was shrinking which indicates that investors were becoming reluctant to take a risk. In oil and gas industry, less than 10 percent of the $26.2 billion investment this year is being funneled to exploration activities, despite the fact that much of the country’s oil fields are aging and there have been no significant discoveries since 2001.

According to McKinsey, to escape from the resource curse countries must re-evaluate the role of government participation in the resources sector, while acknowledging that “no single model of government participation works best in all countries.”

In Indonesia, in addition to taking on a regulatory role, the government participates in the natural resources sector through state-owned enterprises, which have limited scopes to expand as they are obliged to contribute to the state coffer.

Resource-driven nations must also find creative means to address the infrastructure bottleneck, the report says. McKinsey estimated that extractive companies would invest almost $2 trillion for infrastructure in resource-driven countries up to 2030, 70 percent of which “could potentially be shared among different operators.”

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