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Trading for peace The goal to work to ensuring that natural resource exploitation contributes to poverty reduction, through strengthened and more equitable trade. Study to examine regional trade patterns that would create opportunities for promoting peace in the troubled Great Lakes region. 2
Methodology and approach DFID working with USAID and COMESA Recruited four research organisations: Pole, INICA, PACT and Forests Monitor ToR to: Examine in detail trade in 6 main cross border corridors mine/forest to market Aim to understand the actual trade and the recorded/official trade and underlying reasons What is required to enable trade in minerals to support poverty reduction and peace Report is synthesis of research findings 3
Principal conclusions Trade in natural resources provides key means for growth, and incomes for DRC and her citizens Serious reforms are needed as trade processes linked to deep corruption and lack of clear formal structures or enforcement Improving conditions and trade supports sustainable exploitation of natural resources Key window of opportunity strengthen relative peace and benefit from strong markets 4
Context and Background DRC rich in resources but bad politics and economics mean people have not benefited Minerals and natural resources have a bad name - conflict resources - because of on going trouble Severe issues within the minerals sector (ASM) Yet: Great potential for using resources for poverty reduction, Trade is only way to realise value of the resources and so provides the means despite problems Important to look at sector reforms in wider context 5
Role of trade Trade highly important to DRC, very high proportion of GDP, very open economy, very resilient All types of goods minerals and timber but also coffee outwards and agricultural and consumer goods inwards Decades of bad governance and war have meant agriculture heavily destroyed, all basic foods imported so trade routes vital and Trade necessary to realise value of natural resources and so provides the means to poverty reduction 6
Main Findings 1 Date very weak for a range of reasons corruption and low capacity/incentives Actual value of exports likely to be at least 3 times the official level imports as well as exports Well over 60% exports from DRC not formally recorded, across the board Trading patterns profoundly corrupt consciously fraudulent Under declaration by both officials and traders; collusion on tax evasion 7
Recorded and estimated exports by commodity, 2005 Copper official exports 117,300 tonnes, but imports to Zambia 223,000 tonnes Gold total production estimated at 10 tonnes pa, but only 600kg recorded as exported Cassiterite 17,000 tonnes mined at Walikali but only 6,750 tonnes recorded as exported Timber 25,000m3 exports recorded but 50-70,000 m3 imported to Uganda, Kenya Petroleum imports 16,264m3 declared at Beni SEP, but actual import colume 25,805m3 8
Main findings 2 Total informalisation of economy means structures like banking, finance very weak Operating outside formal legal frameworks alegal gives key role to middlemen (traders, bankers) Sophisticated but informal trade networks, links direct to China, Dubai parallel exchange mkts etc Appalling infrastructure imposes high costs, bottlenecks, penalises poorest, creates opportunities for tracasseries 9
Underlying reasons Heavy taxes and charges both formal and informal Multiplicity of state agencies (24 separate charges on minerals, example of cassiterite) Avoidance of taxes at importing border (eg VAT at Rwanda 30-50% - but shouldn t be) Poor communications and ignorance by traders and officials Too much regulation not too little! Tension between customary law and state regulations scope for extortion 10
Implications does it matter? Corruption means trading chains highly vulnerable to control by elites, militias Tax revenues lost to govt local and central Macro economic data base severely undermined Lack of data and information means threat to environment Deters international and domestic investors, continuing low value added Frail business context, tracasseries Reforms in eg ASM sector difficult when trade so corrupted 11
On the positive side. Window of opportunity from: Relative peace in the area and sustained vitality of trade Successful elections and hopefully constitutional reform, sense of optimism Changes at provincial level, decentralisation Awareness by civil society growing Bouyant markets for minerals and forest products make reform easier 12
Approach what s to be done? Broad approach not just within the mining or forestry sectors (although much can be done there) Natural resource exploitation is really the only show in town insecurity, very short investment horizons so aim to make it work better Much else to be done 4 thematic areas: trade, livelihoods, economics and governance Cross cutting issues weak capacity and security run through everything 13
Livelihoods Large numbers of people, earnings at up to $6 pd, not bad but vulnerable, relatively easy money Resource losses in forests and agricultural land Low value added across all natural resources, bottom of chain gets least Need to : diversify livelihoods, reinvigorate agriculture, provide confidence for investment Increase local value added Labour markets and skills Developing markets and market access 14
Trade Large domestic markets and strong potential demand in neighbouring countries (timber) More formalised trade helps govt revenues Communities in border areas (both sides) benefit from more open trading regime Need to: Facilitate trade routes Streamline systems, don t add layers; beware too much regulation Strengthen information and data at borders 15
Economic and finance Dysfunctional economy, highly informalised Good potential for minerals, logging agriculture and fisheries Finance and banking and business environment very weak Need: Infrastructure and energy to enable local VA Work with small traders, information and trading associations (local business environment) Public finance management (local and central) 16
Governance Resource curse governance linked opportunities and potential lost Illegal behaviours by state actors drivs traders to fraudulent behaviour Decentralisation potential driver for change Need to: Simplify and streamline regulatory systems; compliance and enforcement Peace and security Information and communication 17
Trading for peace Strong potential but need to work hard for free movement of goods and people Links with other initiatives EITI, Kimberly But more controls less important than capacity building and better governance Reform of customs etc and strengthening of regional offices Political opportunity with decentralisation 18