BENEFITING FROM MINERAL ENCLAVES Richard Auty (Lancaster University)

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BENEFITING FROM MINERAL ENCLAVESRichard Auty
(Lancaster University)

• 1. Resource Curse, Growth Collapses and Economic
  Distortion
• 2. Economic Reform Needs a Political Strategy for
  its Implementation
• 3. Dual Track Strategy to Protect Reforms from
  Rent-Recipients
• 4. The Mining Enclave can be a Catalyst for
  Reform in a Dual Track Strategy
• 5. Mines as Early Reform Zones
• 6. Conclusion

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1. Resource Curse, Growth Collapse Economic
Distortion (A)

• 1. High Rent Can Destabilise the Political
  Economy
• a) Natural resource rent residual revenue after
  deducting all production costs including a
  risk-related return on investment.
• b) Identify three forms of rent in all, each tens
  of GDP
• i) Resource rent typically 10-20 GDP in 1994 and
  inversely related to PCGDP growth 1985-97
• Ii) Geopolitical rent (foreign aid) can be 5, 10,
  20 GDP
• iii) Contrived rent (derived when government
  changes relative prices) can be similar in scale
• c) Total rent can be 15-30 of GDP or more. Rent
  is detached from the activity that generates and
  becomes a destabilising stream of funny money

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SHARE OF RENTS IN GDP 1994 AND 1985-97 GDP GROWTH
Resource endowment PCGDP growth 1985-97 () PCGDP growth 1985-97 () Total rent (GDP) Total rent (GDP) Pasture Cropland rent ( GDP) Pasture Cropland rent ( GDP) Mineral rent ( GDP)
Resource Poor
Large 4.7 10.56 10.56 7.34 7.34 3.22 3.22
Small 2.4 9.86 9.86 5.41 5.41 4.45 4.45
Resource Rich
Large 1.9 12.65 12.65 5.83 5.83 6.86 6.86
Small, non-mineral 0.9 15.42 15.42 12.89 12.89 2.53 2.53
Small, hard mineral -0.4 17.51 17.51 9.62 9.62 7.89 7.89
Small, oil -0.7 21.22 21.22 2.18 2.18 19.0 19.0
All Countries 15.03 15.03 8.78 8.78 6.25 6.25
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1. Resource Curse, Growth Collapse Economic
Distortion (B)

• 2. Rent Impacts Government Incentives and the
  Economic Trajectory
• a) Low rent motivates governments to create
  wealth by providing (a) infrastructure and
• (b) incentives for efficient investment
• b) High rent motivates governments to extract
  rent now and distribute it to maintain political
  support, which
• i) distorts the economy
• ii) depresses investment efficiency and
• iii) triggers a growth collapse that undermines
  long-term wealth creation, absent reform.

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2. ECONOMIC REFORM REQUIRES POLITICAL STRATEGY
FOR ITS IMPLEMENTATION

• 1. Rent Insulates Elite from Macro Shocks
• a) EG Angolan oil rent in the 1990s mainly
  maintained army subsidised elite (1) middle
  class professionals, whose demands outstripped
  the rent stream in 1990s and destabilised the
  economy
• b) Elite used IFI reforms to capture privatised
  state firms to insulate their income from macro
  instability, which rendered the elite indifferent
  to economic reform
• c) Real exchange rate appreciated 3X from 1993
  (when farming last competitive) to 2005
  manufacturing farming ¼ expected GDP share
  (Dutch disease effect), but 70 of workers depend
  on farming

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3. DUAL TRACK STRATGEY TO PROTECT REFORMS FROM
RENT-RECEIPIENTS

• 1. China ( Malaysia Mauritius now UAE) used
  dual track reform
• a) Track 1 stimulate dynamic market sector to
  absorb surplus labour diversify economy
  diversify taxes
• b) Track 2 slow reform of the rent-distorted
  sector to limit elite backlash while Track 1
  builds a pro-reform political constituency to
  neutralise elite sustain growth
• 2. MNC mines are often enclaves of well-managed
  economic activity within rent-distorted
  economies.
• a) MNC mines can play a key role in reviving
  collapsed/ distorted economies within a dual
  track strategy

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4. RE-EVALUATING THE MINING ENCLAVE

• 1. Re-orientate corporate social policy from
  mines being mini welfare states to promoting
  enterprise formation (at micro, SME and large
  scales)
• 2. When mines are underpinned by tight contracts
  like PSAs they can serve a new corporate social
  responsibility policy that nurtures new firms in
  related unrelated activity in early reform
  zones
• a) Current social spending policy by mining
  firms increases community dependence on finite
  mining projects permits governments to neglect
  their duty of service provision
• b) Better policy for mining firms is to promote
  new enterprise formation to reduce the long-term
  dependence of the local economy on the mine
  build business skills social capital.
• c) New local enterprises can be mineral-linked
  or unlinked, with the latter important from an
  early stage in mineral projects with short/
  uncertain operational longevity or in remote areas

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5. MINES AS BEST PRACTICE EARLY REFORM ZONES

• 1. Three conditions immediately apply in ERZs
• a) World class infrastructure
• b) Competitive incentives (not subsidies)
• c) Enabling environment/institutions (provided by
  either an adequately remunerated civil service or
  a reputable international private firm)
• 2. Successful ERZs benefit national economy via
• a) Demonstration effect of efficient
  market-driven investment, like Chinas ERZs c.f.
  state enterprises
• b) Build pro-reform political constituency
• IFIs continue work to improve economic
  infrastructure,
• banking skills of local business in wider
  economy.

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6. CONCLUSIONS

• 1. The resource curse is part of a broader loose
  revenue curse whereby high rent encourages
  political contests for its capture at the expense
  of investment in sustained wealth creation. Such
  rent cycling distorts the economy and triggers a
  growth collapse, from which recovery is
  protracted (because rent recipients become
  powerful oppose reform).
• 2. Analysis of rent cycling patterns suggests
• a) Effective economic reform requires a political
  strategy to facilitate its implementation, like
  Chinas dual track reform strategy
• b) A mining enclave, bolstered by a tight legal
  contract (eg a PSA) can be catalyst to promote
  the dynamic market economy (Track 1) of a dual
  track policy to reform the distorted economy
  (Track 2)