MONGOLIA “dangerously vulnerable to resource curse”

An Oxford Policy Management study of mineral dependent countries finds more than 20 low- and middle-income countries “have become dangerously dependent on the exports of minerals such as metals and hydrocarbons...leaving the countries highly vulnerable to a global economic downturn.” About 75% of all mineral-dependent countries are now low- and middle-income countries, while the number classed as mineral-dependent has increased by 33% since 1996 from 46 to 61 nations, according to the OPM report, “Blessing or curse? The rise of mineral dependence among low- and middle-income countries.”

Overall, 45 countries depend on fuel-based minerals and 40 depend on non-fuel minerals, nearly half of the nations are in Africa. “We found a strong negative correlation between non-fuel mineral dependence and GDP per capita,” said the report’s author Dan Haglund. The study attempts to assess the vulnerability of resource-dependent nations on the so-called resource curse, characterized by weak economic and institutional development.

Six types of minerals were considered, including: crude fertilizers, metalliferous ores [ores containing metals] and metal scrap, non-ferrous metals, pearls and semi-precious stones, non-monetary gold, and minerals fuels including natural gas. The report developed an overall measure of institutional strength of a country by combining the World Bank’s six World Governance Indicators (WGI) with two indices: an economic and institutional development index, and a mineral dependence index. The World Bank WGI includes voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption.

Mineral-dependent countries are defined as countries which rely on minerals for at least 25% of their tangible exports. In their research, Oxford Policy Management found “a significant negative correlation between overall institutional development and both non-fuel and fuel-dependence. This finding is consistent with evidence that there are many fuel-dependent countries with high levels of GDP per capita but with persistent weaknesses of democratic governance and state accountability, such as Equatorial Guinea, Libya and Russia.”

Haglund generated two matrices which defined countries most at risk from the “resource curse” due to critical reliance on minerals exports for foreign exchange earnings and therefore most vulnerable to international commodity markets. “They are also the most severely constrained in terms of economic resources and effective institutions,” he observed. “These countries have limited industrial diversification that would enable either ‘upstream’ supply industries to develop or ‘downstream’ value addition.”

The matrices identified the non-fuel, mineral-dependent countries most at risk were Bolivia, Burkina Faso, the DRC, Ghana, Guyana, Laos, Mali, Mauritania, Mongolia, Papua New Guinea, Tanzania and Zambia.
In their report, OPM identified several broad steps that all countries can take to reduce the risk of falling victim to the “resource curse”.

Understand and manage the broader macroeconomic impacts.

“An economic life cycle approach can help manage expectations and alert policymakers to the large future inflows they will need to manage. Companies, in turn, can help by proactively engaging with public finance institutions to share production and revenue forecasts.”

Use mineral receipts to invest in productive assets.

“To secure the broad benefits of mineral wealth, government should use the returns from their extractive industries to invest in productive assets such as infrastructure, rather than recurrent government expenses such as salaries or ‘white elephants’,” Haglund suggested.

Integrate mining more closely with other economic activities.

“Economic diversification is an important objective for many mineral dependent countries,” said Haglund, who noted modern mining uses large quantities of consumables. “If this demand can be met by locally owned and operated companies, the total induced employment benefits from mining may be several times larger than benefits from direct employment.To unlock the social and economic benefits, policymakers need to integrate mineral industries more closely with existing economic activities,” he observed.

Understand and communicate the local economic  and social impacts.

While mining generates jobs and provides incomes for people supplying mining-related goods and services, it can also create serious negative impacts at the local level that can easily spiral out of control, including inflation and immigration. Even if mining-related funds do reach them, local governments and communities often lack the capacity to effectively implement social projects. Companies can help build the necessary capacity because, without a strong local government, they risk being seen as de facto governments in the eyes of local communities.

Reduce potential social tensions by managing expectations.

“The fundamental mismatch between local expectations and what a mine can actually deliver in terms of benefits is a drive of much of the social tensions witnessed around resources projects,” said Haglund. “Local conflicts can easily escalate to national-level political battles, threatening the continued commitment from investors.”
He suggested companies and governments can manage such expectations “by establishing and sustaining dialogue with communities as well as local and central governmen”.

Introduce accountability mechanisms.

“The recently announced new Guinea Mining Code is the one to watch,” advised Haglund. “The code aims to apply the EITI’s [Extractive Industries Transparency Initiative] approach to multistakeholder oversight to the full spectrum of mining policies, through the establishment of a ‘Commission National des Mines’ comprising government NGOs and unions.”

In his analysis, Haglund stressed that, only by working together, can governments, companies, donor organizations, and many other actors “ensure that mineral dependence in more likely to be a blessing than a curse”.

(Dorothy Kosich’s original article was posted at Mineweb.)