Economic Development and the Extractive Industries Prof. Jeffrey D. Sachs Director of the Earth Institute Columbia University For the CCSI Executive Training on Extractive Industries and Sustainable Development June 10, 2014

Countries in which Fuels or Non-Fuel Primary Commodities Account for More than 50 Percent of Export Earnings During Countries in each category.

FORTUNE 500 – TOP 10 COMPANIES

The Extractive Sector (Hydrocarbons, Minerals) Offers Distinct Possibilities and Risks for Economic Development: Most importantly, the economy earns a large RENT on its natural resource wealth. That RENT can be used to finance critical public investments, e.g. human capital and infrastructure. One can say that the central challenge of development through an extractive sector is to convert resource rents into human and infrastructure capital, without ruining natural capital

MANY SPECIAL ISSUES INVOLVED WITH AGRICULTURE AS OPPOSED TO MINERALS: Tends to be labor intensive Complexity of land rights Highly intertwined with ecosystems, climate Distinct characteristics of rural life (access to infrastructure, services, disease epidemiology, fertility, other)

The Extractives Sector is Distinct in Many Ways: First, extractives can be developed even with very low levels of economic development. Foreign investors supply capital, expertise, even infrastructure. Success does not general depend on the overall level of development, business environment, or skills of the population This is both good and bad news. Can jumpstart development, but also create an enclave economy

Some Other Distinctive Aspects of the Extractives Sector: Generally, large fiscal rents Capital intensive (few jobs or upstream linkages) Foreign capital and technology, and perhaps foreign ownership (and hence major contractual challenges Depletion (hence time horizon is crucial) High volatility of international prices (Booms and Busts) Heated politics (struggle over rents) Powerful corporate and geopolitical counterparts Lack of diversification Environmental risks Potential for complementary infrastructure Community relations may become paramount Need for year planning

At the Core of Economic Development Strategy Lies Capital Accumulation: Human capital (education, health, nutrition) Infrastructure (roads, power, water and sanitation, connectivity) Business capital (private-sector businesses) Natural capital (ecosystems, soils, fresh water) Technological capital (know-how, integration in global value chains)

A Development Strategy is Really a Plan for Multi-Sector Capital Accumulation, usually for a Period of Years Government has: Direct responsibility for Infrastructure and Natural Capital Shared responsibility for Human Capital, and Technological Capital Limited responsibility for Business Capital, other than the “business environment”

THE IMPORTANCE OF A NATIONAL DEVELOPMENT FRAMEWORK YEAR HORIZON ON EARNING, BUDGET, INVESTMENTS LONG-TERM PUBLIC INVESTMENTS TRANSPARENT RELATIONS WITH COMPANIES, FOREIGN GOVERNMENTS, INTERNATIONAL AGENCIES PRIORITIZATION OF SPENDING BY REGION, SECTOR, ETC.

Countries’ development trajectories will differ depending on their geography and resource base: Coastal or landlocked Disease patterns Agricultural potential Population to land ratio Mineral resources Location vis-à-vis world markets (for markets, tourism, processing, etc.)

Government investments must be financed, either by: Saving from a financial surplus (e.g. from mining rents) Taxation Borrowing Domestic or foreign private equity One of the key challenges of successful development is Public Finance, especially how to pay for public investments in addition to current public goods and services

PUBLIC INVESTMENT OF THE EXTRACTIVE REVENUES OIL EARNINGS CAN FUND PUBLIC INVESTMENT PROGRAMS IN: EDUCATION HEALTH CARE/NUTRITION INFRASTRUCTURE THE ECONOMIC RETURNS ON THESE INVESTMENTS MAY BE FAR LARGER THAN THE RETURNS ON FINANCIAL ASSETS

Consumption Traded Goods Non-Traded Goods Oil discovery Traditional Oil THE “DUTCH DISEASE” EFFECT

TIME EXTRACTIVE EXPORTS CONSUMPTION THE IDEA OF LONG-TERM CONSUMPTION SMOOTHING $US

AN EMERGING GLOBAL FRAMEWORK FOR THE EXTRACTIVE SECTOR: TRANSPARENCY ACCOUNTABILITY BENCHMARKING/BEST PRACTICES SPECIAL FUNDS NATIONAL STRATEGIC PLANS SUSTAINABLE DEVELOPMENT: ECONOMIC, SOCIAL, AND ENVIRONMENTAL

THE COLUMBIA CENTER CAN SUPPORT COUNTRIES WITH BENCHMARKING AND BEST PRACTICES