Columbia International Affairs Online: Policy Briefs

CIAO DATE: 10/2013

Downstream processing in developing countries: Opportunity or mirage?

Nicolle Graugnard

September 2013

Columbia Center on Sustainable Investment


Oil, gas and mineral production are capital-intensive activities that attract foreign direct investment (FDI) and generate taxes and royalties for host governments. But they do not create as much employment or skills enhancement as manufacturing or service industries. In many lower income countries, raw or intermediate materials are often exported for processing in other parts of the globe. For example, although Africa possesses 26% of world bauxite reserves and produces 9% of world bauxite, it only produces 4% of primary aluminum. Leaders of resource-rich developing countries see lack of local processing as foregone opportunities for job creation, skills development and linkages to the rest of the economy. For decades they have tried to encourage reluctant foreign investors to invest in local processing capacity. But from an economic point of view, this may be a misguided strategy because processing of crude or ore into finished products does not directly add much value. Oil, gas and mineral processing are not very profitable businesses and their contribution to GDP is small. They can at best hope to cover long run marginal costs, with significant over- and under-shooting around its trend line. For processing to be able to overcome low profitability and consistently generate a profit, it needs to be located where there is a geographic or other advantage.