ICMM - International Council on Mining & Metals

INDUSTRY ISSUES

Mining and economic development

The economic performance of mining dependent economies is highly variable. While the policy mechanisms needed to transform mineral wealth into sustainable economic growth are better understood, international attention must now focus on applying them more widely.

Many countries, such as Australia, Chile and the USA, have driven economic and social development through mineral resource investment. However, resource endowed countries do not always enjoy this success. In this article we examine some of the factors that lead to successful development of resources.

Ensuring that mining contributes to economic development and poverty reduction is a critical issue for large swathes of the world. Over 50 countries are significantly dependent on mining, in that the sector provides at least 6% of exports or plays an important role in the domestic economy [1]. These countries are mainly developing or transition economies and are home to over 3.5 billion people, of whom 1.5 billion are living on less than $2 per day.

The recent boom in mineral exports and prices has also generated billions of dollars of extra revenues for governments of resource-rich countries, often dwarfing aid flows; and more is likely to be in store in this respect: global demand for minerals is expected to grow significantly in coming decades, whatever the fluctuations in the short term. (China’s demand for different metals, for example, could grow 2-4 times current levels over the next 25 years, according to the World Bank).[2]

The essential role played by minerals and metals as inputs to nearly all industries, whether manufacturing, construction, or energy production, is also important – albeit the particular focus of this article is how and whether mining contributes to economic development in host countries.[3]

From mineral wealth to national wealth?

Past experience has certainly demonstrated that – under the right conditions – mining can provide an important, even critical, contribution. In past centuries, exploitation of mineral wealth provided part of the springboard to broader development for some of the world’s most successful economies, including the US, Canada and Australia. This potential continues today.

Chile, for example, has become South America’s most successful economy while relying significantly on mining. Between 1990 and 2003 poverty in Chile fell by almost half – and by more (60%) in the key mining region of Antofagasta. Similarly, diamond mining has helped drive the transformation of Botswana over the last 20 years from one of the world’s poorest to among Africa’s most prosperous and peaceful countries.

ICMM has undertaken research in this area as part of its Resource Endowment initiative - this was launched in 2004 in partnership with UNCTAD and the World Bank Group, with the goal of understanding and enhancing the contribution of mineral wealth to economic growth and poverty reduction.

It showed that in a number of mineral rich countries just emerging from periods of chronically poor economic performance, such as Ghana and Peru, mining has provided an important kick start to growth. For such countries, foreign investment is often easier to attract in mining than in other sectors.

Challenging agenda

Significantly however, ICMM’s research also showed that about an equal proportion of mining dependent countries have underperformed relative to their peers. Clearly, the mining industry offers great potential to developing economies, but there is a long way to go in achieving this potential universally.

There are a number of well-documented challenges associated with translating mineral wealth into national wealth. Too often, for example, mining revenues have been squandered by governing elites or exacerbated corruption, while in fragile states competing claims over such revenues have sometimes fuelled conflict (this was the case, for example, in the Democratic Republic of Congo and Sierra Leone).  

Some economists have argued that natural resource abundance is, on balance, more of a hindrance than a driver of development. A direct correlation has been sought between mineral-resource abundance and poor macro-economic performance, corruption and authoritarianism. The so-called ‘resource curse’ thesis encompasses a variety of different risks faced by resource-rich countries, including significant damage to non-resource sectors of industry and instability caused by fluctuations in resource prices.

Among the various interesting recent explorations of ‘resource curse’ problems – and potential ways out of them –  are ‘The Bottom Billion’, a book by Oxford University’s Paul Collier,and also ‘Escaping the Resource Curse’, edited by Macartan Humphreys, Jeffrey Sachs, and Joseph Stiglitz.

Encouragingly, however, just as problems associated with mineral wealth are now widely documented, solutions to these challenges are increasingly understood.

There is now a broad consensus regarding the macro-level policies and approaches needed to avoid the potential adverse effects faced by resource-dependent economies. These include sound macro-economic policies (for example, careful management of exchange rates and of volatile tax income), transparency in how mineral revenues are reported and spent (for example through implementation of the Extractive Industries Transparency Initiative, or EITI), improvements in State governance, public investment focused on development priorities, and also companies giving priority to local employment and procurement in order to increase the linkages between their core businesses and local economies.

Ways forward

The main challenge now is not so much to debate potential policy prescriptions, but rather to develop practical mechanisms to ensure that those good policies which are already proven are more widely implemented – whether by governments, companies or other actors.

For its part, ICMM is helping lead the mining and metals industry’s efforts in this area by advocating collaborative approaches involving companies, governments, inter-governmental organizations, NGOs and communities. Together, these organizations can address development priorities and ensure that public revenues from mining are used to enhance overall socio-economic development.

At a practical level, efforts are underway to catalyse new partnerships in some of the mineral-rich countries that have previously been studied as part of ICMM’s Resource Endowment initiative. Among its other initiatives in this area, ICMM has also developed (in partnership with the World Bank) a Community Development Toolkit for use by mining firms, government authorities and communities around mining operations.

Beyond the industry, a variety of other organizations are driving important initiatives in this area, including the World Bank Group and the Extractive Industries Transparency Initiative (EITI). Recent research has also added to the debate - Professor Paul Collier, for example, has called for an international ‘Charter for Natural Resources Revenues’.

Debate is still evolving on how best to structure the detail of such initiatives in the future. The stakes are without doubt high: if these initiatives succeed over the long-term, they will help improve the economic situation of the billions of people living in mineral-rich countries.