MINING ANDDEVELOPMENT - World Bank

1 MINING ANDDEVELOPMENTT reasure or Trouble? MINING IN DEVELOPING COUNTRIESM iningWORLD BANK AND international FINANCE CORPORATIONG lobalGLOBALMININGOUR MISSIONTo work with passion and excellence with our clients to promote a vibrant MINING sector in developing vision is a MINING sector that, by attractingresponsible private investment,creates a foundation for economic and social publication is printed on recycled paper(100% post-consumer waste) with soy World BANK GROUP S MINING DEPARTMENTA joint service of the World Bank and theInternational Finance CorporationTo find out more about the World BankGroup s MINING Department, visit our websites at the cover:A detail of Arizona AND DEVELOPMENTMINING ANDDEVELOPMENTT reasure or Trouble? MINING IN DEVELOPING COUNTRIESWORLD BANK ANDINTERNATIONAL FINANCE CORPORATION2002 MINING AND DEVELOPMENTiiACKNOWLEDGMENTS MINING and development is published by the WorldBank Group s MINING Department.

2 Treasure or Trouble? MINING in Developing Countries was written by Monika Weber-Fahr, Senior Economist in theDepartment. The paper has benefited greatly from comments by current and former colleagues in theMining Department and the Oil and Gas Department ofthe World Bank Group, most notably John Strongmanand Charles McPherson, as well as Craig Andrews, CliveArmstrong, Heinz Hendriks, Gary McMahon, Felix Remy,and Peter van der Veen. We are also grateful forcomments by Richard Auty. Valuable ideas and assistance were provided by Madani A. is the first in a series of short papers that the WorldBank Group s MINING Department will publish to sharesome of the experience and knowledge gained throughdaily work with developing country policymakers, themining industry, and MINING communities and theirorganizations.

3 Over the coming years, as the sectorexpands, governments, businesses, and communities inmany developing countries will face more and morecomplex issues and difficult trade-offs. We hope to seethe MINING and development series inform a widerange of interested parties on the opportunities, as wellas the risks, the sector views expressed are those of the author and do notnecessarily represent those of the World Bank and the World Bank do not guarantee the accuracyof the data included in this publication and accept noresponsibility whatsoever for any consequence of theiruse. Mention of a proprietary name does not constituteendorsement of the product and is given only for 2002 international Finance Corporation2121 Pennsylvania Avenue, , AND DEVELOPMENTiiiCONTENTSF oreword, by James Bond MINING and development : A Key Question for Billion PeopleWhat s So Special about MINING ?

4 The MINING Is Good Hypothesis The MINING Is Bad Hypothesis What Do the Data Tell Us?Emerging Lessons from Best and Worst PerformersStrengthening MINING Countries Economic and Fiscal Management: Emerging PrioritiesIf All Goes Right: Does MINING -Induced Growth Contribute to Poverty Reduction?The Challenge of Getting It Right Box 1:What Can Policymakers Do to Improve Their MINING Sectors?Appendix A:Why Look at MINING Separately from Oil, Gas, and Other Natural Resources? Appendix B:The Relevance of MINING in 51 MINING Countries, 1990-99 Appendix C:The Regional Dimension of MINING Countries Growth, 1990-99 Appendix D:On Data Quality and Research DesignAppendix E:Research on the Relationship betweenExtractive Sectors and Economic GrowthReferencesv12346912131415161718192 122 MINING AND DEVELOPMENTvCan countries consider their mineralwealth an asset, to be used tostimulate or enhance their economicgrowth potential, or are there reasons to steer an economy away from the development of the mineral sector?

5 Reviewing the cases of 51 MINING countries in the developing World , threeconclusions can be drawn: "First, in more cases than not, MINING countries appear to fare better than othercountries in their respective regions."Second, where they do fare well, their good performance appears to be associated mostly with institutional stability and overall good economic management, particularly that relating to the management of revenues from the MINING sector and the management of the sector itself. "Third, the need to build institutional stability and improve economic management is most urgent in countries where the MINING sector dominates an economy and where poor economic management and weak institutions are persistent features. FOREWORDIn contrast to some analyses, this papercan find no reason to assume a causalrelationship between a dominant miningsector and overwhelming economic , it acknowledges the need to take special steps to prevent vested interests from expropriating MINING and mineral resources that could otherwise beused to create economic assets for futuregenerations.

6 To these ends, the paperemphasizes the need for policymakers todesign and strengthen general economicpolicies and institutions for financial management, as well as specific frameworksand institutions for the MINING sector. The challenge is to turn the nationalendowment of mineral resources intonational wealth. In this regard, there arelessons to be learned for other miningcountries from both the worst of class and best of class performers profiled inthis study. James BondMining Department, World Bank GroupMarch 2002, Washington D. AND DEVELOPMENT1 Treasure or Trouble? MINING IN DEVELOPING COUNTRIESM ining and development : A KeyQuestion for Billion PeopleIn more than 100 countries around theworld, MINING companies and individualminers dig minerals and metals out of theground, satisfying a slowly but continuouslyincreasing demand from industrial production,agriculture, high-tech sectors, and merchandise producers.

7 Among thosecountries are more than 50 that can beconsidered MINING countries, well knownfor the sector s contribution to export earnings, including Australia, Botswana, Chile, Our definition of MINING encompassesmetals and minerals but does not includeoil or gas (see appendix A). Miningoperations include open-pit and underground MINING , and large-scaleoperations as well as activities of small-scale and artisanal , Guinea, Kazakhstan, Papua NewGuinea, Peru, and South Africa. MINING countries also include those where the sectoris highly relevant domestically, either becauseit primarily serves large domestic markets, asin the United States, or because it employsmillions of workers, such as in China or India(see appendixes B, C). Not included in thislist are a number of countries that have hadsignificant MINING activities in the past, suchas Malaysia and Thailand, or that own naturalresources with potential to move onto the MINING country list in the future, such asArgentina and Mozambique.

8 About billion people live in today s 56 MINING countries, 90 percent of them in the51 developing and transition countries onthis the billion people inthese countries, about billion live on lessthan $2 a day, making up nearly two thirdsof the World s poorest population. Theircountries have potential wealth mineralwealth and thus one of the key questions forthem is how they can turn this endowmentinto an economic asset that will help them findways out of persistent are opportunities that will be aroundfor some time. There is practically no doubtthat MINING as an industry will continue toexpand over the next 20 to 30 countries will almost certainlyplay an increasingly important role in thatexpansion on the demand side, as populationand economies grow, as well as on the supply side, given shifts in exploration andmining development ,there are concerns as to whether the development of these resources actuallybenefits the countries and their economicdevelopment, or rather poses risks andinvolves costs largely in terms of missedopportunities in other sectors, or in terms ofconflicts over the revenue flows generated.

9 1 For purposes of this study, the relevance of a countries MINING sector for the country s economy wasestimated based on exports of MINING productssuch asmetals, diamonds, and minerals, including industrial andchemical minerals (see appendix D). Countries wheremining contributes more than 6 percent to exports are considered MINING countries, as well as countrieswith large domestic MINING sectors. 2 This was a central question in the 18th, 19th, and 20thcenturies for several countries that are now among themost wealthy in the World , including Australia, Canada,Sweden, and the United States. 3 The Metals Economics Group estimates that about 29percent of exploration budgets are directed to LatinAmerica, about 14 percent to Africa, and about 7 percent to Pacific Southeast Asia ( MINING Journal,November 2001, p.)

10 353). MINING AND DEVELOPMENT2 What s So Special about MINING ?Why would a country s reliance on its MINING sector have beneficial or detrimentaleffects on the country s economic growth?A vibrant MINING sector, just as any othersector, should provide significant opportunities for a country s growth. Yet there are a number of features that distinguish MINING , at times along with otherextractive activities such as oil or gas, fromsectors such as manufacturing or tourism. "What s under the ground is a national centuries, extractive natural resources have been treated differently from other natural endowments. Many countries consider metals and minerals to be assets belonging to the public as a whole. This has resulted either instate ownership of MINING companies or in more-than-usual involvement of the state in the licensing of MINING companies, the regulation of the sector, and fiscal and financial matters, including taxation, fees, and investments in supporting infrastructure.