Extractive Industries OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi UNU World Institute for Development Economics Research (UNU-WIDER) was established by the United Nations University as its fi rst research and training centre and started work in Helsinki, Finland, in 1985. The mandate of the institute is to undertake applied research and policy analysis on structural changes affecting devel- oping and transitional economies, to provide a forum for the advocacy of policies leading to robust, equitable, and environmentally sustainable growth, and to pro- mote capacity strengthening and training in the fi eld of economic and social policymaking. Its work is carried out by staff researchers and visiting scholars in Helsinki and via networks of collaborating scholars and institutions around the world. United Nations University World Institute for Development Economics Research — UNU-WIDER Katajanokanlaituri 6B, 00160 Helsinki, Finland www.wider.unu.edu OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Extractive Industries The Management of Resources as a Driver of Sustainable Development Edited by Tony Addison and Alan Roe A study prepared by the United Nations University World Institute for Development Economics Research (UNU-WIDER) 1 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi 3 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University ’ s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © United Nations University World Institute for Development Economics Research (UNU-WIDER) 2018 The moral rights of the authors have been asserted First Edition published in 2018 Impression: 1 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Some rights reserved. This is an open access publication. Except where otherwise noted, this work is distributed under the terms of a Creative Commons Attribution-Non Commercial- Share Alike 3.0 IGO licence (CC BY-NC-SA 3.0 IGO), a copy of which is available at https://creativecommons.org/licenses/by-nc-sa/3.0/igo/. It is permitted to reuse, share and adapt this work, subject to the following terms: Attribution - appropriate credit is given to the original work, the copyright holder and creator, and any changes made to the work are properly indicated. 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Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Library of Congress Control Number: 2018944297 ISBN 978 – 0 – 19 – 881736 – 9 To Lynda and Susan, for all their encouragement and support. OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Foreword For some developing countries natural resource wealth has turned out to be a curse rather than a blessing. Economic growth based exclusively on natural resources — such as oil, gas, and minerals — is often of a very narrow kind, failing to provide opportunities for much of the population. The wealth from a nation ’ s extractive industries needs to be carefully managed if inclusive and sustainable growth is to be achieved. Resource wealth has often been associated with political instability, corruption and the non-transparent use of the revenues for private gain instead of national development. Many low- and middle-income countries continue to struggle with their resource wealth, with con fl ict and civil war being the unfortunate outcome for some. This natural resource curse, and all that it brings, is a motivation for UNU- WIDER ’ s Extractives for Development project — launched in early 2016 and led by Tony Addison and Alan Roe — bringing together a network of researchers, practitioners, and policy makers, international and local, govern- ment and corporate, to share their accumulated learning. By comparing experiences of the extractive industries across countries — opportunities and challenges, successes and failures — the project has built a comprehensive body of knowledge, potentially transferable between countries when suitably adapted to local circumstances. This book will help national policy makers and their international partners in the task of creating development strategies that use resource revenues for inclusive and sustainable development, better manage the macroeconomic risks, and prepare their societies for the impact on the extractive sectors of the transition from fossil fuels to renewable energy and other low-carbon technologies. I sincerely thank the contributors for their studies which share with us their individual expertise within the fi eld, and the editors, Tony Addison and Alan Roe, for bringing this academic work to full fruition and particularly for their analytical and authorship skills, evidenced so clearly in this fascinating book. UNU-WIDER gratefully acknowledges the support and fi nancial contribu- tions to its research programme by the governments of Finland, Sweden, and the United Kingdom. Without this vital funding our research and policy advisory work would be impossible. Finn Tarp Director, UNU-WIDER Helsinki, June 2018 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Preface This book is an output of the UNU-WIDER 2014 – 18 work programme, entitled ‘ Transformation, Inclusion and Sustainability: Creating and Sharing Know- ledge for Development ’ . The topic of extractives and development touches almost every aspect of development, and is relevant to each of the three themes of the UNU-WIDER programme. It is also highly relevant to the United Nations ’ Sustainable Development Goals (SDGs), and especially to UN member states which are looking to strengthen the contribution that the extractive sectors can make to national development. Transforming the structure of economies to achieve higher rates of eco- nomic growth and greater resilience to shocks has proven to be more dif fi cult in resource-rich countries than was expected in the early years of development thinking and practice from the 1950s onwards. Many such countries are today more dependent on the extractive industries despite, in many cases, having achieved higher levels of per capita income. Other countries have seen their living standards slide as political instability and con fl ict have taken hold. While some countries have managed to use the revenues from extractive resources to advance social inclusion by investing in education, healthcare, and development infrastructure, many resource-rich countries have seen social exclusion rather than greater inclusion. Today there is an additional challenge. Extractives sectors in all countries need to reduce both their own environmental footprints and especially their greenhouse gas emissions. Countries and extractive companies (both minerals and oil and gas) need to prepare for the accelerating shift now underway from fossil fuels to renewable energy, and for the multiple revenue and other eco- nomic consequences of a global transition to low-carbon pathways for econ- omies and societies. In sum, the subject of extractives and development has an undoubted and increasing relevance for the goals of transformation, inclusion, and sustainability — the three pillars of UNU-WIDER ’ s work programme. In addition to this book, the extractives for development project at UNU- WIDER has many other outputs, and we plan to add further to these in the coming years. Over more than thirty years, UNU-WIDER ’ s research projects and conferences have generated a very large amount of knowledge on a wide range of development policy issues. This knowledge is shared via our website OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi www.wider.unu.edu. There you can also fi nd links to many other research papers, policy briefs, and blogs, as well as to the videos that UNU-WIDER increasingly produces. These include interviews with many of the contribu- tors to this book, giving readers the opportunity to learn more about the topic. The website also provides users with ample opportunities to engage with UNU-WIDER through our social media outlets and to keep up-to-date with our work, including that on extractives and development. In its more than thirty years of existence, UNU-WIDER has engaged with a very large number of researchers and practitioners. This book has enlarged and deepened our network further. It has been excellent to work with Alan Roe as the project ’ s co-leader, and the book ’ s co-editor. He brings long-standing expertise on the subject, very clear insight into the ways that development policy works, and has been central to the design, construction, and process of preparing this UNU-WIDER book. There are few subjects as important as development policy — getting it right can lift millions from poverty. At the same time, development in all its dimensions is the subject of a continual conversation with many actors across our world, offering many different perspectives and experiences. We at UNU- WIDER believe that this book offers a useful contribution to that debate, drawing as it does on a large amount of expertise and experience. Tony Addison Chief Economist-Deputy Director, UNU-WIDER Helsinki, June 2018 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Preface x Acknowledgements Many people, the UNU-WIDER team and beyond, have been engaged in designing, developing and bringing this book to its successful conclusion. Finn Tarp, UNU-WIDER ’ s director, provided encouragement as well as valu- able guidance throughout our endeavour. Support from UNU-WIDER staff was outstanding. Lorraine Telfer-Taivainen, UNU-WIDER ’ s publications ‘ maestro ’ , drew on years of publications experience to guide this large book through to its successful completion, especially in the fi nal pre-publication stage. Thorunn Sigurdardottir and Ann-Mari Sundsten ably handled the prac- tical management of the project in its earlier and later stages. Anna-Mari Vesterinen and later Ans Vehmaanperä did great work in helping to prepare many of the studies for early exposure in WIDER Working Papers. Our thanks are also due to the UNU-WIDER support teams, including: Lay Poh Allonen, Mayra Da Silva De Gouveia, Dominik Etienne, Amanda Hajnal, Tuuli Levit, Anne Ruohonen, Sherry Ruuskanen, Paul Silfvenius, and Marian Vo. The project website, developed soon after a fi rst project meeting, has bene fi tted from excellent editing and production from the UNU-WIDER communica- tions and IT teams, including Kennedy Ambang, Anu Laakso, Bruck Tadesse, and Annett Victorero. The website will continue to be a source of much valuable supplementary information. A project meeting was held in Helsinki on 11 – 12 April 2016, to share and discuss initial ideas and early drafts of papers. Roger Williamson chaired that meeting with great skill combined with his usual aplomb. Participants at the meeting (many of whom later contributed chapters to this book) included: Dede Adzovi, Wisdom Akpalu, Sheila Agyemang, Benjamin Anang, Hernan Araneda, Toni Aubynn, Millicent Awuku, Mahamudu Bawumia, Mark Beare, Ruth Greenspan Bell, Joanna Buckley, Jim Cust, Evelyn Dietsche, Lasse Djahlin, Samantha Dodd, Mark Essex, Liesel Mack Filgueiras, Holger Grundel, Patrick Heller, Tony Hodge, Jussi Huopaniemi, Malik Iddrisu, Maja Jakobsen, Anton Löf, Neil McCulloch, Catherine Macdonald, Kathryn McPhail, Angel Mondoloka, Senia Nhamo, Robert Osei, Richard Osei, Olle Östensson, James Otto, Nadia Ouedraogo, Caroline Schimanski, Jeffery Round, Paul Stevens, Adam Swallow, Kathryn Tomlinson, Nick Travis, Rick van der Ploeg, and Sophie Witter. Bob Denham and his team from Econ Films conducted video OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi interviews with many of the meeting participants for the UNU-WIDER video series on Extractives and Development. Adam Swallow and Katie Bishop from Oxford University Press gave us very useful advice in planning and organizing the book for publication. The con- structive suggestions of OUP ’ s anonymous peer reviewers also helped to improve the book in several ways. We are delighted that the book is included in the UNU-WIDER series with OUP. Our contributing authors dealt with our numerous editorial — and no doubt occasionally irritating — interventions with great patience and have provided us with excellent co-operation throughout the process. Together they consti- tute an immense and very diverse source of wisdom and insight. We have been very fortunate to have been able to draw on such a team and we thank them most sincerely for all for their hard work and assistance in bringing this study to publication. Finally, we would like to thank Lynda Addison and Susan Roe for their great encouragement and support, and of course for their patience over the many hours when they lost us to the labours involved. This book is dedicated to them. Tony Addison and Alan Roe June 2018 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Acknowledgements xii Contents List of Figures xvii List of Tables xix List of Abbreviations xxi Notes on Contributors xxvii Part I. Overview 1. Extractives for Development: Introduction and Ten Main Messages 3 Tony Addison and Alan Roe Part II. Minerals and Oil and Gas in the Global Context 2. Dependence on Extractive Industries in Lower-income Countries: The Statistical Tendencies 33 Alan Roe and Samantha Dodd 3. Mining ’ s Contribution to Low- and Middle-income Economies 51 Magnus Ericsson and Olof Löf 4. The Role of Oil and Gas in the Economic Development of the Global Economy 71 Paul Stevens Part III. The Academic Literature and the Resources Curse 5. The Curse of the One-size- fi ts-all Fix: Re-evaluating What We Know about Extractives and Economic Development 93 Glada Lahn and Paul Stevens 6. Political Economy and Governance 114 Evelyn Dietsche 7. New Industrial Policy and the Extractive Industries 137 Evelyn Dietsche OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Part IV. Policy Challenges in the Macro-management of Extractives 8. The Macroeconomic Management of Natural Resources 161 Mark Henstridge and Alan Roe 9. Extractive Revenues and Government Spending: Short- versus Long-term Considerations 179 Frederick van der Ploeg and Anthony J. Venables 10. The Copper Sector, Fiscal Rules, and Stabilization Funds in Chile: Scope and Limits 200 Andres Solimano and Diego Calderón Guajardo 11. Oil Discovery and Macroeconomic Management: The Recent Ghanaian Experience 220 Mahamudu Bawumia and Håvard Halland Part V. National Institutions of Extractives Management 12. The Regulation of Extractives: An Overview 245 Tony Addison and Alan Roe 13. Regulatory Structures and Challenges to Developmental Extractives: Some Practical Observations from Ghana 252 Toni Aubynn 14. The Taxation of Extractive Industries: Mining 275 James M. Otto 15. Doubling Down: National Oil Companies as Instruments of Risk and Reward 298 Patrick R. P. Heller 16. Protecting the Environment during and after Resource Extraction 318 Ruth Greenspan Bell 17. Enhancing Sustainable Development from Oil, Gas, and Mining: From an ‘ All of Government ’ Approach to Partnerships for Development 342 Kathryn McPhail Part VI. International Regulatory Concerns and Structures 18. Towards Contribution Analysis 369 R. Anthony Hodge OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Contents xiv 19. The Role of Governance and International Norms in Managing Natural Resources 395 James Cust 20. Oil and Gas Companies and the Management of Social and Environmental Impacts and Issues: The Evolution of the Industry ’ s Approach 422 Kathryn Tomlinson 21. The Role of Gender in the Extractive Industries 442 Catherine Macdonald 22. Climate Change and the Extractives Sector 460 Tony Addison Part VII. Leveraging the Direct Impacts of Extractives into Sustainable Development 23. Framework: The Channels for Indirect Impacts 485 Alan Roe and Jeffery Round 24. Local Content, Supply Chains, and Shared Infrastructure 505 Olle Östensson 25. Downstream Activities: The Possibilities and the Realities 527 Olle Östensson and Anton Löf 26. Choices for Spending Government Revenue: New African Oil, Gas, and Mining Economies 547 Sophie Witter and Maja Jakobsen 27. Donor-supported Approaches to Improving Extractives Governance: Lessons from Nigeria 568 Joanna Buckley , Neil McCulloch , and Nicholas Travis Part VIII. Capturing Economic and Social Bene fi ts at Community Level 28. The Role of Participation in Sustainable Community Development Programmes in the Extractive Industries 591 Catherine Macdonald 29. Approaches to Supporting Local and Community Development: The View from Zambia 611 Angel Mondoloka OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Contents xv 30. Approaches to Supporting Local and Community Development: Brazil and the Vale SA Model of Corporate Interaction 633 Liesel Mack Filgueiras , Andreia Rabetim , and Isabel Aché Pillar 31. Capturing Economic and Social Bene fi ts at the Community Level: Opportunities and Obstacles for Civil Society 652 Keith Slack 32. How Do We Legislate for Improved Community Development? 673 James M. Otto 33. Conclusions 695 Tony Addison and Alan Roe Index 703 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi Contents xvi List of Figures 1.1. Known reserves (2012) and per capita incomes (2011) 8 1.2. A simple taxonomy of governance and company behaviours 16 2.1. Prices for selected metals, 1995 – 2015 (index 1990 = 100) 43 2.2. Investments in oil and gas, and minerals, 1995 – 2030 47 3.1. Value of mine production by commodity (%), 2014 53 3.2. MCI-W score by country, 2014 55 3.3. MCI-W top 20, 2014 57 3.4. Value of mine production by country, 2014 58 3.5. Contribution by commodity to MCI-W top 20 LIE and MIE 59 3.6. Mining development trends, 1995 – 2015: prices, exports, exploration, value of mine production, mineral rents 60 3.7. Burkina Faso, development in export and production values, 2000 – 14 65 4.1. World primary energy consumption by region, 1965 – 2016 73 4.2. World primary energy consumption by fuel, 1965 – 2016 74 4.3. Depletion and development 75 4.4. Increases in energy consumption by region, 2010 – 35 (billion toe) 77 4.5. Increases in energy consumption by fuel, 2010 – 35 (billion toe) 77 4.6. OPEC median budgetary break-even price, 2014 86 4.7. OPEC spare capacity and oil prices, 1971 – 2014 87 5.1. The world ’ s top 60 per capita oil and gas producers in 2016 103 8.1. A chain of asset transformations 162 9.1. Managing resource windfalls according to the permanent income hypothesis (PIH): (a) fl ows; (b) assets 186 9.2. (a) Resource revenue fl ow; and (b) optimal savings rates for depletion 188 9.3. Optimal revenue management in a developing economy 192 10.1. GDP growth, investment, and real copper price, 1960 – 2015 203 10.2. Fiscal balance, 1990 – 2014 211 10.3. Sovereign wealth funds 213 10.4. GDP growth volatility (ten-year rolling window) and macroeconomic policies 214 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi 10.5. Country risk spreads (1999 – 2016, basis points) 215 11.1. Fiscal de fi cit as percentage of GDP, 2000 – 14 226 11.2. Total debt as percentage of GDP, 2000 – 14 227 11.3. Real GDP growth, 2000 – 15, % 230 12.1. The regulatory framework: a typical structure 247 13.1. Trends in total exports by key sectors 262 15.1. State-owned enterprise governance: Resource Governance Index score 304 15.2. Spectrum of NOC commercial roles 305 15.3. Key questions for NOC goal-setting 312 17.1. Typical macroeconomic contributions of mining to low- and middle-income economies 345 17.2. Vale Foundation social investment framework, Brazil 361 18.1. Conceptual framework for assessing contribution 375 18.2. Assessing contribution — hierarchy of data and information 376 18.3. The MMSD North America framework: ‘ seven questions to sustainability — how to assess the contribution of mining and minerals activities ’ 379 18.4. The mine project life cycle with indicative activity levels 380 18.5. Generic assessment cycle 382 23.1. Extractives activities and development: the main channels 488 24.1. Average distribution of spending in extractive projects 506 24.2. Shares of total procurement in mines in developing countries, per cent 509 24.3. Supplier matrix and selected supplies to mining companies 511 25.1. Iron ore and steel in India 1993 – 2015, million tonnes 540 26.1. Europe Brent spot price FOB 549 26.2. Health and education funding gaps compared with smoothed natural resource six African countries, annual average 2016 – 25 550 26.3. Natural resources revenues (baseline estimates) compared with health sector fi nancing gaps — pro fi le over time by country 552 26.4. Examples of annual costs of education sector reforms (US$ million) 556 27.1. An integrated approach to supporting reform 571 27.2. From pockets of effectiveness to strategic partner 575 29.1. A suggested framework for mediating between the mining company, the community, and other key stakeholders 631 30.1. Vale ’ s fi nancial highlights 634 30.2. Vale ’ s gross revenues 634 30.3. Sustainable development evolution 637 30.4. Carajás mining complex (Pará and Maranhão States) 642 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi List of Figures xviii List of Tables 2.1. Mineral export dependence in 2012 36 2.2. Oil and gas export dependence in 2012 37 2.3. Changes in extractives export dependence since 1996 38 3.1. MCI-W top 20, 2014 56 4.1. Factors creating the shale gas revolution in the United States 81 10.1. Annual average copper exports from Chile, 1960 – 2014 202 10.2. Parametric changes in relevant variables and effects on effective and structural fi scal incomes by sector, 2014 207 11.1. Ghana, selected economic indicators, 2000 – 8 223 11.2. Annual budget allocations to four priority areas, 2012 229 13.1. Contributions of the mining sector to domestic revenue, 1990 – 2012 260 13.2. Total mineral revenue and mineral revenue returned, 2009 – 12 262 14.1. Fiscal methods and their amenability to fi scal decentralization 279 15.1. NOC average commercial performance vs. private oil companies, 2002 – 4 302 15.2. NOC non-commercial roles 306 15.3. Public assets held by 100% NOCs, 2014 308 18.1. Forty- fi ve initiatives aimed at improving the performance of the mining and metals industry over and above the formal legal system 371 25.1. Import tariff range, selected metals and countries, % 529 25.2. Vertical integration, less processed raw material transformed into more processed material within the same country 533 25.3. Processing margins, cost of turning less processed material into next stage as % of more processed price 534 26.1. Price variations in smoothed resource revenue projections in relation to the combined health and education fi nancing gaps 551 26.2. Price variations in revenue projections in relation to the health fi nancing gap 554 26.3. Price variations in revenue projections in relation to the education fi nancing gap 555 OUP CORRECTED PROOF – FINAL, 23/8/2018, SPi