1 BENEFITING FROM MINERAL ENCLAVES Richard 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

2 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 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 ’

3 SHARE OF RENTS IN GDP 1994 AND GDP GROWTH Resource endowment PCGDP growth (%) Total rent (%GDP) Pasture & Cropland rent (% GDP) Mineral rent (% GDP) Resource Poor Large Small Resource Rich Large Small, non- mineral Small, hard mineral Small, oil All Countries

4 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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6 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

7 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

8 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

9 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 China’s 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.

10 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 China ’ s 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)