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Environment & Poverty Times No. 5

Environmentally sustainable mining for pro-poor growth

Politics of natural resources use

Government policies and politics can enable or hamper reasonable natural resources management creating at the same time, directly or indirectly, opportunities for economic growth that bring benefits to the poor.

By Richard M. Auty, Emeritus Professor of Economic Geography, Lancaster University

Mining can limit environmental damage and achieve sustainable growth at both local and national levels. The principal obstacle to this outcome remains the elite’s abuse of political contacts to siphon mine revenue to enrich themselves. 

Critics of the mining industry have argued that developing countries might be best served if their minerals were left in the ground. They claim mining is not sustainable because it entails a once-for-all depletion of environmental capital. Moreover, most mines are highly capital-intensive so they generate little direct employment per unit of investment and much of the export revenue goes abroad to service foreign capital. In addition, local mining communities claim that while they have to bear the environmental, social and economic costs of mining, the cash benefits flow out of their region. 

The mining industry’s recent history would seem to support these views in some respects: using rent1 as a measure of the capital generated by mineral exploitation, World Bank figures available for 1994 only show that mineral economies generated the highest rent as a share of GDP, but achieved the worst economic growth, and the higher the rent the worse the outcome. 

In fact, mining can and should substantially benefit developing economies – including the poorest – if host governments effectively deploy mining revenues. On the broader macro-economic front, mineral exports can generate extra revenue for investment, which if efficiently applied can accelerate the national economic growth rate, plus the inflow of foreign exchange increases the capacity to import goods required to build the infrastructure of a modern economy. The depletion of the resource can also sustain increases in per capita welfare if a fraction of the rent is invested in alternative forms of capital like education, infrastructure and production goods. 

At a more local level, benefits to local communities in the area are maximised if companies switch their corporate social responsibility policies from supporting or building up social infrastructure – a role which should be fulfilled by national governments – concentrating instead on encouraging the formation of new enterprises, whether linked to mining (supplying goods and services or processing the ore prior to export) or to activities outside the sector. The mine infrastructure facilitates accessibility to national and global markets and the mining firms can assist local people to establish businesses by providing loans, skills training (including business management) and legal assistance. The business expansion will diversify the local economy and build human and private financial capital. It can generate employment, improve local skill levels and harness tax revenues to sustain the mining region long after mineral extraction has ceased.

To date, the main weakness of mineral-driven development has been the inability of host governments to effectively utilize mine revenue. Governments have often been over-optimistic about the duration of price booms and instead of carefully allocating financial resources, have absorbed too much revenue too quickly into the domestic economy. In many cases, such ill-advised moves have been encouraged by elites who seek to use the sudden inflow of funds to their advantage.

This not only means valuable investment funds are not used properly; sudden revenues inflows can also cause serious inflationary pressures and distort the economy – with revenues often being channelled into non-productive sectors such as the bureaucracy or protected industries and services and away from more important sectors like competitive agriculture and manufacturing. Consequently, after perhaps an initial surge in non-productive growth, the economy slows and is increasingly vulnerable to price shocks. However, despite the adverse circumstances, the elite resists economic reform because it shrinks its capacity to capture rent. Therefore governments find it politically expedient to sustain rent entitlements by extracting some of the return on capital from the mine as well as the rent, typically by nationalization. This results in under-investment, inadequate maintenance and eventually a growth collapse from which, as the case of the mining industry in Zambia shows, recovery is difficult.

Such problems can be avoided if mining companies, international financial institutions and donor governments can encourage governments to use mineral revenue to achieve solid economic growth rather than distribute revenues to the elite. This requires strengthened institutional checks and balances, such as the rule of law, stronger civil society, political accountability and budget transparency. A mineral revenue stabilization fund can help boost transparency while also slowing domestic absorption of mineral revenues and maintaining the competitiveness of agriculture and manufacturing. A fund also facilitates adjustment to trade shocks and the conversion of the once-for-all ore depletion into a revenue stream to benefit future, as well as present, generations. The elite remain the biggest obstacle to this outcome and unfortunately the current commodity boom, plus the significant growth and expansion of developing country mining companies weakens the capacity of western agencies to nurture beneficial mineral-driven growth. 

No mining projects should proceed unless they both provide an adequate return on the capital investment but also cover the environmental and social costs of their operations. The latter would include pollution abatement and appropriate restoration of the mined area when production ceases. Most leading mining companies these days embrace such world class environmental standards – if not, shareholder and bank pressures will mean they will not receive capital loans.

1. Rent is defined as the surplus after deducting from the revenue all costs of production including a risk-related return on capital and normal taxation.

  Diamonds working for livelihoods

Diamonds working for liveli-hoods – mining in Sierra Leone

In 2004, the government of Sierra Leone saw a total of USD 5.2 million in revenues from diamond related activities. This comes in the form of mining, dealer and export license fees and from export taxes. To direct some of the revenues back to poor communities, the Diamond Areas Community Development Fund (DACDF) was set up, with an annual commitment of 25 per cent of revenue from export taxes. The intention is that this money will be dedicated to community infrastructure, agricultural improvements and training, but the actual distribution of the funds has been problematic.

Mining in Botswana

Since its first diamond mine was established in 1967, Botswana experienced strong and sustained growth that led it from being one of the poorest economies in Africa to one of the rare success cases on the continent, avoiding the problems experienced by other resource-rich countries.

The recipe for this success has been a set of policy rules grounded in avoiding fiscal deficits. The government uses a Sustainable Budget Index (SBI) in order to ensure sustainability. This measures the ratio between consumption expenditures and non-resource revenues. As long as the SBI is less than one, the government can be sure that natural-resource capital is not being consumed.

This achievement has not been easy. Public investment has often gone into low-growth sectors, such as defense and agriculture, while it has crowded out private investment slowing economic diversification. However, the overall fiscal strategy has worked. The government has avoided excessive spending in the good times and drastic spending cuts when diamond prices have fallen, as in the early 1980s and 1991.

Source: World Bank 2006. Environment Matters.

Did you know?

At the global level, 84 per cent of forest lands and 90 per cent of other wooded lands are publicly owned. The area of forests owned and administered by communities doubled from 1985 to 2000, reaching 22 per cent in developing countries – and that is expected to further increase. 

Source: FAO. 2007. State of the World’s Forests 2007.