Key message: Managing the domestic consequences of rapidly expanding natural resource exports is a challenge for governments, but the income can be an important source of investment in human and physical capital, and in economic diversification. |
Geneva, 27 April 2007 - Rising prices for metals and fossil fuels, mainly as a result of quickly growing Asian demand, have spurred rapid income growth in natural-resource-rich countries, opening up possibilities for poverty reduction and for broader based, diversified economic development. (see figure 1)
If these goals are to be achieved, however, countries need to deal with the macro-economic imbalances that may arise from increases in mineral export revenues, particularly a tendency for domestic inflation to increase and for the real exchange rate to appreciate. This may make a country´s other exports more expensive and less competitive on international markets and thus damage other, often weaker, sectors of the economy. The phenomenon is usually called "Dutch disease" after such consequences were suffered by the Netherlands in the 1970s when revenues from natural gas exports increased dramatically. Classical remedies include a tight fiscal policy, an active exchange rate policy and the sterilization of foreign exchange inflows, keeping them from flooding the domestic economy. These steps are often taken in combination with the establishment of stabilization funds. Several developing countries now undergoing rapidly increasing exports of fossil fuels and hard minerals will need to review this array of measures.
Another challenge is that industries based on the exploitation of natural resources, particularly mining and fossil fuels production, but also forestry, usually have few production and consumption linkages with the rest of the economy and provide limited employment, meaning that careful, special efforts are needed by governments to use income from this sector -- which can be large relative to the rest of an economy -- to encourage more diversified growth and the creation of jobs in other sectors. (1)
In recent years, much of the debate has focused on how governments use revenues from mineral exports. It is usually argued that they should not be used for current expenditure, but be deployed for investment in human and physical capital, including education, infrastructure and diversification, to provide long-term sustainable growth. However, governments need to take into account the risk of their economies not being able to absorb such investment spending.
The recent price increases for most metals have resulted in high profits for mining companies and, depending on the tax regime in each country, high tax revenues for governments. To give an idea of the potential order of magnitude of profits and taxes, the table below shows some basic data for the Chilean copper company Codelco. The company, which is state-owned, is under a special taxation regime whereby its tax payments are proportionally larger than those of other, private mining companies in Chile. The relationship between sales and profits can, however, be considered to be representative of large mining companies with good deposits in general. (see table 1)
The very high profits of mining companies in recent years have focused attention on the distribution of revenue between companies and governments, as well as between national governments and local communities in mining areas. In several countries, questions are being raised about the adequacy of mining taxation regimes, and it is often argued that governments should both impose higher taxes on mining companies and share revenues with local communities to meet those communities´ development needs.
Because such revenues can be large and potentially easy to capture, they pose temptations of immediate and even illicit use that countries with weak governance have not always been able to resist. Mining revenues have been diverted to such activities as arms purchases, political patronage, and common corruption. Better transparency in the finances of mining companies and the payments made by such companies offers the best hope for improvement in this respect, and significant progress has been made in recent years.
ANNEX
Tables and figures
Figure 1. Price indices (2000=100) for copper, gold, nickel and zinc, annual averages
Source: UNCTAD Monthly Commodity Price Bulletin
Table 1. Financial data for Codelco (Million US$)
Source: www.codelco.com
Note: * Grade A cathodes, cash, US cents/lb, London Metal Exchange
