A Policy Framework For New Mineral
Economies: Lessons From Botswana
Michael L. Dougherty, PhD
Illinois State University
Institute for
Institute
forEnvironmental
Diplomacy & Security
@
Environmental
Diplomacy
the
andUniversity
Security of Vermont
Research
C1-2011-2
James S.Series:
Mulligan
Published
October, 2011
jsmulli@umich.edu
Many developing economies have been receiving increasingly signiicant amounts
of foreign direct investment in mining over the past two decades. As mining
expands in these new mineral economies, this sector has become a signiicant
source of social and political conlict. New mineral economies must implement
savvy policies that preempt and mitigate the challenges of mineral-led economic
development. This essay is divided into three principal sections. The irst compiles
and reviews the key social scientiic literature regarding the economic, political and
social problems associated with mineral-led development strategies. The second
section draws from the case of Botswana, a mineral dependent country with high
growth and high development indices for sub-Saharan Africa. Here, Botswana
is compared with Nigeria to illustrate, in greater contrast, Botswana’s policy successes. The inal section returns to the economic, political and social challenges
of mining and puts forward a general policy framework, drawing from the example
of Botswana, for new mineral economies to leverage their mineral endowments for
substantive development while limiting the potential for social conlict and negative
economic outcomes.
The Author
Michael L. Dougherty is Assistant Professor of Sociology in the Department
of Sociology and Anthropology at Illinois State University. His interests center
broadly on the sociology of the environment, development, and rural livelihoods.
Dougherty’s most recent research explores the changing structures of the global
gold mining industry and social dynamics around resistance to gold mining in
Central America. Dougherty also conducts research on community development,
rural tourism, and the architecture of local food systems in the United States. He
has authored a number of journal articles and book chapters. Dougherty received
his PhD from the University of Wisconsin-Madison in 2011.
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Introduction
Since the late 1980s, foreign direct investment (FDI) lows have grown by several
hundred percent. FDI lows from the global north southward have increased at
a much higher rate than volume of trade during that same period. Foreign direct
investment, therefore, has become the primary vector for economic globalization
over the last twenty years. Mineral investment is a small percentage of total FDI
lows, but has become signiicant for many developing countries which have been
unable to attract FDI in other sectors. In some cases, extractive industries serve
as the primary vehicle through which developing economies interact with world
markets.
Since the 1990s, there has been a signiicant shift in the investment practices
of mining companies across the world from older reserves, largely in the global
north, to a dispersed array of developing countries. These trends have become
particularly pronounced in parts of Africa. This massive inlux of mining capital
into the developed world is a product of newly liberalized foreign direct investment
policy regimes in many of these countries (Bridge 2004, Dougherty 2011). In many
cases, these policy regimes include speciic mining laws geared towards attracting
mineral investment as the leading edge of a larger development agenda. In subSaharan Africa this new resource boom is driven by these changing patterns in
global mineral investment as well as unprecedentedly high world prices for oil and
minerals. The current resource boom began in 2003, and as prices have continued
to climb, shows no signs of abating. Australian mineral investment in sub-Saharan
Africa for example, has grown from virtually nothing in the irst years of this decade
to $20 billion today. In fact, the vast majority of Australian mineral capital in the
world today is located in sub-Saharan Africa (Donnelly and Ford 2008). This has
led to increasing mineral production, and Botswana is leading the pack (Figure 1).
Figure 1. Source: World Bank (2011) World Development Indicators [on-line].
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This newfound investment income is footloose and highly mobile—only seeking
new sites where cost structures and world prices facilitate higher risk investments—and pulling out when the climate shifts (Bridge 2004; Ferguson 2006,
Dougherty 2011). This new set of global investment patterns in the mineral sector
poses opportunities and risks for developing economies. James Ferguson has
argued, for example, that there is a connection in Africa between political institutional weakness, and the appeal of an economy to foreign investment in oil and gold
(2006). This essay is concerned with addressing these risks. Through an analysis
of the Botswana success story and a brief comparison with Nigeria, this essay
offers a policy framework to mitigate those risks. The irst section of this essay delineates the contours and contradictions of these new investment patterns in terms
of economic, political and social impacts. The second section briely reviews the
development experience of Botswana and compares it to the distinct experience
of Nigeria, extracting policy lessons from these cases. The third section of this
essay sets forth a conceptual framework that may guide countries in their thinking
as they consider taking advantage of the African resource boom without sacriicing
development prospects. The fourth section briely concludes and relects.
The Resource Curse Story
There is considerable literature documenting the various dimensions of the socalled “resource curse” thesis in mineral production (Auty 1993; Auty and Mikesell
1998; Ross 1999; Power 1996; Freudenberg and Wilson 2002). States for which
exploitation of mineral wealth is a signiicant percentage of their total economic
production tend to underperform economically and politically. Furthermore, the
mining industry is traditionally among the “dirtiest” industries. It is responsible for
major environmental degradation, negative health impacts in mining communities,
and often has negative social consequences for host communities. Nevertheless,
mineral extraction generates signiicant tax and multiplier effect revenue, and
mining projects are a source for capital introduction, job creation, and learning and
technology spillovers in poor economies. Despite the ubiquity of the resource curse
admonition, some countries have successfully leveraged their mineral wealth for
sustained and substantive economic development. Mining was a signiicant contributor to the early development of the US, Canada and Australia, for example,
and nations like Indonesia, Chile, Tanzania and Botswana have mitigated the
resource curse effects of their substantial mineral sectors and used those sectors
to achieve strong development outcomes in many areas. These conlicting stories
about the role of the extractive sector in economic development make it dificult for
nation states to sort out the optimal policy framework.
Before one can begin to design a framework for “extracting development” one
must understand the range of potential impacts of the mineral sector on society
and economy. Below I summarize the range of arguments underpinning the
resource curse thesis. For organizational purposes I categorize these arguments
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into economic, political and social impacts. While mining’s environmental impacts
are signiicant and worthy of discussion, the environmental conversation is beyond
the scope of this essay.
A) Economic Impacts of Mineral-Led Development
Overwhelming evidence suggests
that mineral-dependent economies perform worse than other,
otherwise
similar
economies
across the gamut of development
indicators. Mineral dependent
states have particularly low living
standards, high poverty rates,
and high income inequality (Ross
2001). Further, mineral-dependent
countries are more vulnerable to
Oloibiri Oil Well, Nigeria. Photo used with
economic shocks and high rates
Creative Commons license.
of inlation, and they tend to have
relatively homogeneous industry mixes. The three central economic problems that
accompany productive concentration in the mineral sector are enclave economy
effects, Dutch disease, and increased vulnerability to market shocks.
Mineral economies often function as enclave economies and tend to foster a
growth problem known as Dutch disease. An enclave economy is one which exists
within a larger economy (usually a national economy) but which has no meaningful
ties to the larger economy. This type of economic structure is considered bad for
growth because it reduces the multiplier effect. In the mineral sector this is the case
because the labor needs of mining projects are mostly highly specialized technicians and administrators, many of whom come from abroad. Also, the physical and
technological installations necessary for mineral production are often not available
in the host country and are usually imported as well. Moreover, metal mining irms
are usually vertically integrated around processing, which means that the same
company that extracts the ore also mills and processes the ore for export. Lastly,
because much mining is a capital intensive enterprise, proits are usually expatriated at a greater rate than in other industries because they go to service the capital
debt (Auty 1993).
Related to the enclave economy effect is the Dutch disease effect. This refers to
a scenario wherein a boom in some enclave sector siphons off capital investment
and labor from other sectors such as agriculture and manufacturing causing these
sectors to lose competitiveness. First, this is detrimental to economic productivity because the agricultural and manufacturing sectors typically possess more
backwards and forwards linkages within the economy than the mineral sector,
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which means shrinkage in these sectors is not compensated in macroeconomic
terms by growth in the mineral sector. Secondly, the Dutch disease effect is a
problem because resource booms are, by deinition, accompanied by resource
busts. Mineral deposits are inite, and once they are exhausted, the mineral sector
collapses leaving weakened, non-competitive manufacturing and agricultural
sectors exposed. Lastly, as revenue from the mineral windfall is absorbed into the
economy, mostly in the form of tax revenue, the exchange rate appreciates dramatically, leading to inlation.
Mineral-led economic development trajectories can also leave an economy more
vulnerable to external shocks. This happens in two ways. First, the sectoral uniformity that results from Dutch disease leaves an economy more vulnerable (Lewis
1984). Second, the tendency to liberalize capital accounts in countries that are
seeking a larger share of global FDI lows can leave the economy vulnerable to
rapid divestment from highly mobile foreign capital. This can have devastating
impacts on an economy as in the case of Thailand in 1997 and Argentina in 2002.
B) Political Impacts of Mineral-Led Development
In addition to the economic contradictions laid out in the previous section, states
face political contradictions inherent in embarking on a mineral-led market integration development strategy. These political contradictions are 1) the enabling environment dilemma, 2) weakened social contract and weakened political institutions,
and 3) strained municipal service provision.
The central political contradiction that states in this position face is the dilemma
between fostering a political environment that will be amenable to the needs of
foreign capital and upholding the rights of the citizenry and the integrity of the
natural environment. There are essentially three types of foreign direct investment: market-seeking, strategy rent-seeking, and eficiency-seeking. Marketseeking FDI (also known as tariff jumping FDI) invests in countries that protect
domestic industries with high import tariffs. Rather than incur extra costs to export
to such a protected market, many companies would rather set up shop within the
tariff boundary to produce for the domestic market. Strategy rent-seeking FDI is
common in natural resource sectors where monopoly access to stores of nonrenewable raw materials offer investors a competitive advantage over other companies (Bunker and Ciccantell 2005). Eficiency-seeking FDI seeks an investment
climate in which it can minimize costs. This type of investment tends to be concentrated in labor intensive sectors and seeks environments with cheap, abundant
labor. Eficiency-seeking FDI, because it often employs a broad swath of unskilled
workers, is a productive development engine, but there are trade-offs. Often when
states adopt new policies designed to foster an “enabling environment” for eficiency-seeking FDI, they distinguish themselves from other economies by rolling
back labor and environmental standards. This makes it less expensive for irms to
operate. When the FDI in question is from the mineral sector, state ownership of
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subsoil rights and broad eminent domain laws are also an important piece of the
policy bundle designed to attract investors. While such policies do attract investment, which is critical for macroeconomic growth, they can also worsen conditions
for workers, degrade the natural environment, and generate social and political
instability. Because mining threatens land tenure and water and soil resources in
the rural regions where it takes place, mining economies can generate more social
and political instability than economies premised on other types of FDI.
Research suggests that states with substantial mineral and oil endowments tend
to neglect their social contractual obligations to their citizenry at a greater rate
than other states (Karl 1997, Shafer 1994). This is the case because states that
experience sudden windfalls of mining revenue become less dependent upon
other, more labor intensive sectors such as agriculture and manufacturing for their
revenue. When worker productivity is necessary for the state to function, states
are incentivized to support the development of human capital in their population
through public education and social spending. But if the state no longer needs a
productive labor force to obtain the same level of tax revenue, it has less incentive
to continue investing in human and social capital (Humphreys, Sachs and Stiglitz
2007; Karl 1997). This can lead to a reduction in spending on education, health
and social programs. Terry Karl (1997) has also shown that oil windfalls weaken
political institutions not just through the tax mechanism, but because public administration is not diffused throughout the country, but rather is concentrated in extractive regions. Lastly, Karl argues that oil windfalls tend to inspire ill-advised public
spending on infrastructure mega projects.
In addition to the macro-political concerns from mineral-led development, mining
projects can also debilitate local political institutions by straining local government’s ability to provide adequate municipal services to its constituent households
or by overwhelming municipal capacity to absorb and process windfall tax revenue
(Tauxe 1993, Arellano Yanguas 2008). Most mining operations are particularly
water and electricity intensive, which can leave households under-supplied with
both. In rural areas where communities depend on water for irrigation, this can be
a particularly pronounced problem. Further, in developing countries where service
provision is uneven to begin with, the introduction of mining projects can have
severe consequences.
C) Social Impacts of Mineral-Led Development
Beyond the economic and political contradictions faced by mineral rich states,
mineral rich states also tend to experience social problems linked to their mineral
endowments. On the national level mineral-dependent states report higher rates
of child mortality, lower rates of life expectancy, high incidence of malnutrition, low
school enrollment rates, and high income inequality (Ross 2001). The likely reason
for these indings is the tendency discussed above for mineral-dependent states to
reduce their educational, health and social spending.
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On the micro level, resource towns suffer unique problems. Sudden inluxes in
mineral investment often lead to the formation of economic dualism both in terms
of wages and technology (Bocoum 2000). But socially, this dualism can lead to
intense economic stratiication and maldistribution of wealth, which can bring
about crime and other social problems (see Canterbury 2003, Gaventa 1980, Gill
1991, Nash 1979, and Tauxe 1993).
Social stratiication, in turn, generates social conlict and crime, which can also
produce social instability and backlashes against mining endeavors. These backlashes can negatively impact the mining operations through sabotage and other
delinquency (Canterbury 2003). Furthermore, research also documents the increased incidence of alcoholism and prostitution that typically accompanies this
boom effect owing to immigration booms to isolated mining localities (see Gill
1990).
Argyle Diamond Mine, Australia Photo by David Gardiner. Photo used with Creative Commons license.
These adverse effects of mining-led development strategies are trade-offs. Mining
is not necessarily a negative sum game for development; if it were, it would never
be considered as a development strategy. It warrants reiteration that the capital
introduction, job creation and positive externalities can be a signiicant force for
meaningful development if the right policy preconditions are met. The next section
will draw out these preconditions for mineral-led development by examining the
starkly different outcomes of two sub-Saharan African cases of states that have
built their economies around their mineral endowments. The goal of this section is
to explore the role of a country’s policy regimes in determining how mineral endowments can become either a resource curse or a resource blessing.
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Mineral Dependency in Sub-Saharan Africa: Botswana’s Magic
Bullet or Nigeria’s Poverty Trap?
Botswana is a development paradox. This sub-Saharan African nation has had
among the highest growth rates in the world since the 1950s. Despite being a
small, landlocked country and a relatively recent democracy (independence from
the British came in 1966), Botswana has had a seven percent growth rate over
the past thirty years--higher than Singapore and Korea. Additionally, Botswana’s
success appears so exceptional because the driving force behind Botswana’s
economy has been its mineral sector, a sector which ostensibly encourages economies to underperform. Furthermore, not only has Botswana’s growth rate been
staggering, but it has also managed to attain relatively high development indices
on many counts. Primary school enrollment has grown, on average, at 4.8 percent
annually, and over ifty percent of students are women. Eighty three percent of rural
residents have access to health care facilities (Leith 2005). How is it that a small,
recently independent sub-Saharan African country largely reliant on an enclave
economy that experiences large price swings has managed such development
outcomes? The answer lies, to a large extent, in economic, iscal and social policy.
GINI (Most
recent data
available)
Poverty Gap at
Nat’l Poverty Line
(Most recent year
data available)
Namibia
74.33
13%
89%
South Africa
67.4
7%
89%
Botswana
60.96
11.7%
84%
Nigeria
42.93
22.8%
61%
Tanzania
37.58
9.9%
73%
Literacy Rate (%
total population
above 15 years
of age)
Table 1: Inequality, Poverty and Literacy Indicators for Major Sub-Saharan Mineral Economies.
Source: World Bank (2011) World Development Indicators [on-line].
Botswana’s early openness and considerable skill at attracting foreign aid and
foreign investment got its economic motor running immediately following independence. At independence the government of Botswana was cash poor. They attracted signiicant donor money from the international aid community in the irst
years of independence to develop a productive infrastructure. But unlike many
similar cases, donors didn’t just introduce capital into Botswana’s economy; they
stayed and participated in the design of Botswana’s independence infrastructure.
The system of public administration, for example, was designed by foreign consultants who lived in Botswana for extended periods of time and learned to account
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for the nuances of culture in the design of the system. A secondary source of
cash in those early years came from foreign direct investment (Harvey and Lewis
1990, Leith 2005). Early on Botswana established a competitive real exchange
rate to facilitate FDI inlows. It forgave debt to failed FDI initiatives allowing new
companies to take advantage of sunk costs from failed ventures and offered tax
relief to mineral companies for further exploration. Capital stock in the diamond
mining industry ten years after independence was greater than the government’s
capital stock. In effect, FDI ran the country. Botswana’s irst President remarked
“we should never sacriice eficiency on the altar of localization” (quoted in Leith
2005: 57). The government, however, invested returns to FDI wisely, and by 2000
the government’s capital stock was more that ive times larger than that of the
diamond industry. Botswana’s openness to foreign assistance was relected also
in their export-oriented productive structure. Initially, Botswana produced beef and
diamonds for export, but over time sought to diversify into non-traditional export
crops, mostly to South Africa. Botswana has also been particularly adept at attracting both aid money and FDI capital in part because of its commitment to thorough,
consensual development planning and the systematic execution of development
plans.
The government was able to retain a signiicant portion of the wealth generated by
Botswana’s diamond mines through a policy which, rather than retaining a ixed
percentage of sales, involved a proit-sharing agreement and a portion of equity
in the mining operation. This policy allowed for the government to retain signiicant shares of proitable ventures and fewer shares of less proitable ventures;
furthermore, such a policy did not deter new investors (Leith 2005). Botswana was
fortunate to have a productive and collegial relationship with DeBeers, the largest
mining irm operating in the country. DeBeers recognized the long-term value of
their investment in Botswana and did not seek to unduly inluence the government.
Another important consideration in the Botswana success story relates to the particular geology of the mines themselves. Botswana’s diamond deposits occur in
narrow “pipes” which can only be extracted in speciic locations. This has enabled
the government to inexpensively and effectively monitor diamond output to ensure
that their royalties match real production. This mineral geology contrasts sharply
with the alluvial diamond deposits of other parts of sub-Saharan Africa, which have
proven very dificult for governments to monitor.
The income from early investments by international aid agencies was reinvested
in further productive capacity and basic public infrastructure to facilitate further
productive capacity. Additionally, the Botswana government began building a comprehensive system of schools, health clinics and housing stock to accompany
electric, telecommunications, and water distribution systems which were diffuse
and interconnected throughout the country. This equitable distribution of savvy
public investment in productive and social infrastructure meant that the urbanization process, as Botswana grew, happened diffusely, which kept wealth from being
concentrated in just one part of the country (Leith 2005). There has not been a lot
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of direct employment in the mineral sector, as it is not a labor intensive industry
(Harvey and Lewis 1990). The growth that diamond mining has spurred has been
indirect, through government revenue reinvested in non-traditional export crops
and the beef industry.
Map of Botswana. Copyright 2011, Google. Image reproduced from Google Maps.
Botswana, to be sure, possessed some idiosyncratic factors which have been
inluential in generating this development success story. Most prominent among
these were the strong pre-colonial legacy of tribal political systems, which were
very participatory. Furthermore, Botswana, being arid, landlocked, and not appearing to possess any noteworthy natural amenities, was an outpost of the
British colonial empire, largely left to its own devices by the British rulers. For
this reason, the country retained a spirit of self-reliance, and cultural traditions
endured. When independence was granted in 1966, the governing coalition,
made up of economic and political elites held a set of development goals which
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fortuitously coincided with the goals of a large percentage of the population (Leith
2005). The government of Botswana, early on, was acutely aware of the potential
for ethnic conlict among the various tribes which had been grouped together within
the boundaries of the new nation state by the British. They sought to downplay
ethnic divisions, foster Botswana nationalism, and embark upon a development
trajectory that would serve their diverse constituents equally.
Although Botswana has successfully leveraged its mineral endowment for sustainable development, it is by no means, a perfect country. Botswana has a relatively high inequality index, and its economy has experienced signiicant swing
patterns corresponding to swings in the global price of diamonds (see Table 1).
Furthermore, they have experienced periods of extremely high inlation in times
when excess liquidity in the central bank forced the government to loan money
at negative interest rates (Leith 2005). Despite free and fair elections there have
been few transitions of authority in the years since independence. The president
has extensive constitutional powers, and there is a range of ways that the government controls the dissemination of information. Botswana’s system of government
was described by one author as “authoritarian liberalism” (Good 1997). Some
research also argues that the Botswana state has “prioritized other factors” over
poverty alleviation, and that the economic growth that Botswana has experienced
has not contributed to any serious poverty alleviation for the San community in
particular (Good 1999). Kenneth Good argues that the Botswana state has in fact
buttressed the elite, cattle-holding class in such a way that inequality has been
exacerbated and the chronic poor have been overlooked. Perhaps the most signiicant evidence of state failure in Botswana is its staggering HIV/AIDS rate. In
Botswana one third of the population has HIV/AIDS, which is one of the highest
HIV/AIDS rates in the world.
Nigeria shares many characteristics with Botswana, although its development
outcomes have been quite distinct. Nigeria was also a British colony, winning independence in 1960. Like Botswana, Nigeria possesses great raw material wealth.
Nigeria is among the top ten petroleum producing states in the world, and is the top
producer in Africa (see Figure 4). But unlike Botswana, Nigeria has not been able
to leverage its tremendous natural resource
Fuel Exports as a % of
wealth for meaningful development. In
Merchandise Exports (2008)
addition to being at the top of the oil producNigeria
91.7%
tion list, it is also at the top of Transparency
International’s (2007) list of the world’s most
South Africa
9.5%
corrupt countries, ranking at the 32nd most
Tanzania
2.9%
corrupt country in the world. Part of the responsibility for the Nigerian tragedy falls to
Namibia
0.48%
the dubious role of the major oil companies
Botswana
0.3%
in reinforcing bad governance to collect
greater rents, and part of the responsibility
Table 2. Source: World Bank (2011)
falls to poor management of oil revenues by
World Development Indicators [on-line].
the government itself.
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Two key differences that partially explain differential outcomes of extraction-led
development in these two cases are the differential role of the British colonial
powers in each case, and the distinct dynamics between irm and state in each of
these cases. The British colonial rule in Nigeria created a dual economy where the
economic activity of the elite did not ilter into the isolated peasant economy (Ikein
1990). The colonial British rule in Nigeria amounted to a system of “divide and
conquer” which fed ethnic divisions and rendered Nigeria incapable of establishing
political institutions that could build consensus or effect substantive economic development (Karl 1997: 206). In contrast, in Botswana, the hands-off British allowed
an egalitarian and densely integrated economy to develop. Another political structural difference between these two states is the highly concentrated political power
of the Nigerian government as opposed to the somewhat diffuse and participatory
nature of the Botswana state.
Oil companies are vertically integrated, which means that exploration, extraction
and reining are all carried out by the same company. This fact has exacerbated
the enclave effects of oil production in Nigeria, and has meant effectively no technology spillovers into the rest of the Nigerian economy from foreign investment
in oil production (Ikein 1990). Furthermore, whereas DeBeers in Botswana supported the government, Shell Oil in Nigeria has been less scrupulous. Botswana’s
political institutions were stronger early on that those of Nigeria. Botswana’s government had made an effort to overcome ethic divisions and work equitably for all
Batswana. DeBeers understood this, and thought it prudent to enter into long-term,
legitimate partnership with the government for mutual beneit. Oil irms in Nigeria
have been less transparent, manipulated proit data to consistently underpay royalties, conspired to ix prices, and have systematically sought to corrupt the Nigerian
government through bribes.
Nigeria fell victim to a classic Dutch disease story, and also conforms to Terry
Karl’s (1997) model of “capital deicient oil exporter.” As the Dutch disease model
predicts, the Nigerian economy is extremely homogeneous. Oil production accounts
for 40 percent of GDP and 98 percent of export earnings. The Nigerian government accumulated a huge international debt, and has experienced many periods
of high inlation. As its oil sector has grown, and consequently its iscal dependence on oil revenues, agriculture has declined and manufacturing has remained
stagnant. Lastly, with no industry mix to provide a safety net, world oil shocks such
as the 1979 Iranian revolution have been particularly damaging to the Nigerian
economy. So acute are the effects of Dutch disease on the Nigerian economy that
this agrarian society has become a net importer of food (Karl 1997).
Further, because the Nigerian government has never had to work to obtain tax
revenue from its citizenry, it has never seen it to invest in the human and social
capital necessary to promote its workforce. In contrast to Botswana, the Nigerian
government has had little foresight. It failed to take advantage of boom periods to
set up non-oil tax systems to ensure a continued revenue low from other sectors
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during bust periods. What little redistributive spending did occur, took place according to political interests. The majority of Nigerians have suffered abject poverty
and ethnic conlict while a diminutive elite has accumulated tremendous wealth.
Political strife and corruption have created an extremely unstable political system.
Karl (1997: 193) describes a “pattern of regime change or acute regime crisis”
which has been borne out in “making a transition to democracy in 1979, reverting
to authoritarian rule in 1983, beginning an uncertain transition once again between
1986 and 1991, and then suffering a military coup in 1993.”
Failure to utilize extractive windfalls for productive public goods can have the effect
of trapping the host country in a cycle of poverty. This “poverty trap” occurs when
the state is too poor to provide basic public goods. In turn, the failure to provide
public goods acts as a disincentive for foreign investment to locate in the country,
which in turn, further exacerbates poverty (Sachs 2007). Mineral revenue windfalls offer poor countries an opportunity to escape from the poverty trap, but in the
Nigerian case, the government failed to take advantage of this opportunity. Poor
investment decisions on the part of the Nigerian government further entrenched
the country in its cycle of poverty.
In sum, where Botswana pursued a
political agenda of unity, equity, industrial diversity, social and infrastructural investments in the productive
capacity of the citizenry, economic
liberalism,
“benevolent
authoritarianism,” and long-term planning;
Nigeria’s state developed into a
weak, corrupt, divisive instrument of
the oil industry, and its economy fell
prey to the classic symptoms of the
resource curse. In the next section,
the lessons from this brief case
comparison will be integrated into a
conceptual framework to guide policy-making for states pursuing mineral-led development strategies.
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Nigerian Off-Shore Oil Platform. Photo used
with Creative Commons license.
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Conceptual Framework For Achieving Optimal Outcomes From
Mineral-Led Development
Mitigating Adverse Economic Impacts
Attracting foreign direct mineral investment into an economy, given the right preconditions, can be a force for economic growth. The greater the capital stock in
an economy, the more economic productivity takes place; and the more economic
productivity that takes place, the better off consumers will be in aggregate. Also
FDI introduces learning and technology spillover effects into the economy. Foreign
irms typically bring proprietary technology with them, which gives them an advantage over domestic irms with which they are competing. Domestic irms possess
other advantages such as superior knowledge of the availability of factor inputs
(Kohpaiboon 2006). Learning and technology spillover effects arise when domestic
irms institute and learn from the advanced technologies introduced by foreign
irms. In general, the key points to consider when designing a mineral investment
policy are 1) the compatibility between FDI policy regime and trade policy regime,
2) iscal strategies, 3) the physical properties of the mineral endowment, 4) the
terms of the deal, 5) investment strategies for government revenue from mining
activities, and 6) physical and political infrastructure to distribute gains from investment evenly and in a sustained manner.
There is substantial evidence to support the Bhagwati hypothesis, which states
that learning and technology spillover from foreign direct investment is diminished in countries with restricted trade regimes than it would be under an open
trade regime. This is the case because highly protected economies disincentivize foreign irms from importing costly proprietary technology. Furthermore, in
a highly protected economy, domestic irms, rather than competing with foreign
irms with technological advantages, tend to differentiate to maintain market share.
Therefore, in a protected economy there will be less competition between foreign
and domestic irms. This means that foreign irms will operate under near enclave
conditions, and with less competition there is less information crossover between
irms (Kohpaiboon 2006). In short, the Bhagwati hypothesis suggests that for countries looking to increase foreign direct investment in the mineral sector-already an
industry which lends itself to enclave practices-it is important to have some degree
of openness in the trade regime. This will ensure that the learning and technology
spillover effects that are crucial to mineral-led growth will be maximized. Often,
liberal trade regimes accompany liberal FDI regimes. In cases where the two are
incongruent, foreign capital may be looking for access to a protected market. This
pattern is known as market-seeking or tariff-jumping FDI. It is unlikely, in smaller
economies, that mineral investment would be seeking market access. It is more
likely that mineral investment would be looking to export its product to markets
elsewhere. Therefore, in the mineral sector, the Bhagwati hypothesis may be less
relevant. Nevertheless, it is important to consider the synergy between trade and
investment policy regime when courting foreign capital in any sector.
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Botswana had high tariffs initially after independence. Although it had passed a
variety of incentives for foreign direct investment, Botswana also sought to strengthen its domestic industry early on by protecting them from imports. Nevertheless,
over time Botswana’s trade regime was increasingly liberalized, which had the
effect of maximizing the few spillover gains that accrued from its enclave diamond
sector.
In addition to synergy between trade and investment policy regimes; there are
important iscal strategies to keep in mind when embarking on a mineral-led development trajectory. These include monetization, exchange rate policy, and capital
account liberalization. Monetization of the economy, and maintaining a favorable
exchange rate, are important strategies to encourage foreign direct investment
and foreign exchange earnings. Many countries have attempted to peg their currencies to other currencies such as the US dollar. This approach, in contexts of
institutional strength, can be an effective way to encourage investment as well.
However, as Argentina experienced, in weak political institutional environments
a loating currency may be preferable. This is the case because if a government
is obligated to make good on an exchange rate in times of iscal crisis, the additional commitments will only exacerbate the crisis. Another iscal policy often
undertaken by states that wish to facilitate foreign direct investment is liberalization of capital accounts—policies that allow foreign currencies to move freely in
and out of an economy. Capital account liberalization is an effective iscal strategy
to promote development, although this approach can leave economies with inadequate institutional environments very vulnerable to economic shocks and capital
light (Humphreys, Sachs and Stiglitz 2007). The economic crashes of Thailand
and Argentina were both precipitated by signiicant capital light, the results of
iscal policy regimes designed to attract foreign direct investment, which left these
economies vulnerable to market whims.
Countries must also consider the physical characteristics of the mineral endowment when designing the approach to capitalize on mineral wealth. Some mineral
endowments facilitate better growth than others (Bocoum 2000). Some features
to consider include the dispersion of the mineral in the rock, the physical location
of the deposit within the country, the particular type of mineral in question, and the
possibilities for upgrading through additional value-added production.
Bradford Barham, Stephen Bunker and Dennis O’Hearn (1994) suggest that the
scarcity, distribution and location of mineral deposits inluence the nature of the
particular extractive industry. The scarcer the mineral, the greater the scarcitybased rents that can be collected by those who control access to the mineral. High
potential for scarcity-based rents has the effect of encouraging dense, horizontal
integration around mineral production because a wide variety of actors seek to
“cash in”. While this may make collecting royalties more dificult, it also may make
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mineral production a more labor intensive process, thus serving as a vehicle for
development. Furthermore, in most cases the mining irm retains most of those
rents, but in cases like Botswana’s where the contract between state and irm
includes proit sharing and equity, the state can share signiicantly in the scarcity
rents that accrue. Therefore, a sound mineral policy will consider the particular
mineral itself and its relative scarcity or abundance when deciding whether or not,
and how to exploit.
Distribution, per Barham et al.’s (1994) framework refers to the relative concentration or dispersion of the mineral in the earth’s surface; the more diffuse a mineral,
in global terms, the greater the number of producers. In national economic terms,
dispersion has a different meaning. It can mean the possibility to attract multiple
irms to exploit multiple projects, which may mitigate, to a certain extent, the
enclave attributes of the mineral sector. Additionally dispersion within one deposit;
that is, the ratio of ore to rock, has an impact on extraction costs, the level of environmental damage, and therefore, the level of social unrest. The more disperse
the mineral within the deposit, the costlier to extract in inancial and social terms;
therefore, it is important to consider this geological feature before deciding if and
how extraction will take place.
Industrial Diamond Mine. Photograph by Esther Dyson. Used with Creative Commons
license.
Lastly, location, per Barham et al.’s (1994) framework refers to the integration of
the mine site into the national infrastructure grid. The better integrated the site; that
is, the less remote, the better the long-term investment in the sunk costs of extraction. Additional physical features to consider include the extraction practices of
the mineral at issue and the potential for upgrading within the domestic economy.
The technologies and techniques for extraction vary between minerals. Some,
such as gold, typically employ open pit, cyanide-leaching practices which can be
especially detrimental to the natural environment. Usually hydraulic and placer
techniques are quite damaging as well. Underground mines, such as the diamond
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mines of Botswana, tend to be less destructive. If an industry is very vertically integrated, such as oil production in the case of Nigeria, there are fewer possibilities
for the host economy to retain additional value through upgrading. If, however, the
domestic mining industry is marked by horizontal integration, which tends to be the
case with less abundant minerals, then domestic industry may capture part of the
production or reining of the mineral making the mining investment more productive within the economy.
Once the preliminary considerations such as synergy between trade and FDI
policies, iscal policies, and physical characteristics have been considered; and if,
on that basis, it is deemed worthwhile to pursue mineral-led development strategies, the next step is to establish the terms of the deal between the state and the
extractive company. Returning to the taxonomy of types of FDI—eficiency-seeking, market-seeking and strategy rent-seeking FDI all have different impacts in an
economy. Furthermore, these three classes of capital respond differently to regulation by the state. Therefore, the state must understand investor’s goals through the
framework of eficiency-seeking, market-seeking, and strategy rent-seeking before
it composes the terms of its contract. Foreign investment in the mineral sector
is typically either eficiency-seeking or strategy rent seeking. Eficiency-seeking
mineral capital is less likely to agree to unfavorable regulatory terms than strategy
rent-seeking capital. Understanding investor’s goals can be helpful in crafting favorable contract terms.
There are a variety of types of agreements, which the state must consider. Each
has advantages and disadvantages. The common types of agreements include
license agreements, production sharing agreements, joint ventures, and service
agreements (Radon 2007). These can be thought of along a continuum from
total privateness to total stateness. The license agreement involves selling the
complete rights to all extraction, processing and exporting, based in a particular
region, to one irm. The advantage to this agreement is that it is inexpensive for
the government. The disadvantages are that the government cedes total control
to the extraction irm, and it is likely to be a less lucrative deal in the long-run for
the state. A production sharing agreement, like those between the Botswana government and DeBeers, cede all production and exporting authority to the irm, but
usually involve an equity arrangement and higher returns to the government in the
long-run. Under two types of agreements, the government does not shoulder any
of the risk. Joint ventures include active government involvement in the operation
and management of the venture, which means the government shoulders some
of the risk as well as the gain. Finally, service agreements are those in which the
government retains effectively all the rights over the mineral deposit, but contracts
with private irms to provide particular services. Usually, in this scenario, all of the
risk accrues to the state, and the irm is paid a lat fee for services rendered independent of the extractive revenues. In most cases, the ideal type of agreement
is probably a proit sharing agreement. However, it is in the irm’s interest to push
hard for a licensing agreement. Therefore, states must be prepared to negotiate
effectively.
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Radon (2007) recommends that states spare no expense in hiring the best, most
sophisticated coaches and negotiation consultants that they can. Oil and mining
companies are savvy in the technical and inancial aspects of contract negotiations, and they are relentless. This is why it is important for the state to have
considered factors such as the physical properties of the mineral, and the type of
FDI with which it is negotiating. This helps place the state in a stronger position
vis a vis the irm during negotiations. It is important also to consider labor, human
rights, and environmental standards when negotiating, and to conduct negotiations transparently and with broad-based citizen input. Radon (2007: 96) warns
against stability clauses, which he calls, “contractual colonialism.” Stability clauses
exempt extraction irms from changes in government policies that may adversely
affect the irm’s proit structure.
Ultimately the state’s obligation is to its citizens, be that in the form of well-invested
revenues from mineral projects, or in the form of reasonable labor and environmental standards. Under neoliberal globalization these two processes may appear
conlictive, but through wise negotiations with extractive irms, both can be accomplished. Minerals, if left in the ground, do not depreciate in absolute terms. In fact,
as mineral scarcity increasingly becomes the norm, there is an ever-greater likelihood of a superior price environment down the road. Further, mineral stores are
inite, and therefore irms do not have ininite leverage in negotiations. If the terms
of the agreement are not right, states can exercise their right to leave the minerals
in the ground until another, superior offer comes along. While failing to reach an
agreement may appear to investors in other sectors as though the “enabling environment” for all FDI is poor, the more productive FDI (that which is labor intensive
with high spillover effects) tends to prefer investment environments with a strong
workforce and a stable political environment. A bad extractive agreement can undermine political stability and worker’s rights, as the Nigerian case demonstrates.
Once production is at full swing, sound investment strategies for the revenue generated by mining are crucial to leveraging this sector as a vehicle for development.
Arguably, the biggest difference between the Botswana and Nigerian cases was
the way in which each country chose to use its extractive revenue. Humphreys
et al (2007) suggest that governments conceive of mining revenue not as proit,
but as part of the principle. This is because mineral deposits are non-renewable
resources. Therefore, every dollar of revenue from the sale of minerals further
depletes the total stock of minerals. Income from the extractive sector is inite
by deinition. For this reason, argue Humphreys et al. (2007), all revenues from
mining projects must be reinvested elsewhere rather than spent down. Botswana
has put large amounts of state funds into health care, for example, in stark contrast
to Nigeria (Figure 2).
Jeffrey Sachs (2007) makes the case that because the direct beneits of foreigninanced mineral production accrue overwhelmingly to the government, the government has an obligation to invest that income in investments such as public and
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Figure 2. Source: World Bank (2011) World Development Indicators [on-line].
merit goods. Public goods, says Sachs are “goods that are under-provided by
the private sector in a market economy” (2007: 175). Public goods are generally
those that lend themselves to eficient management under monopoly ownership
structures and the enjoyment of which is distributed equally among all citizens.
Therefore, public goods are better provided by the state than left to the market.
Such goods include “national defense, rule of law, environmental protection…
and basic infrastructure networks.” (Sachs 2007: 175). Merit goods, on the other
hand, are goods that “should be for everyone in the society for the sake of social
harmony and justice.” (Sachs 2007: 175). These include health care, education,
and social security. These two types of goods, public and merit, constitute an important destination for mineral revenue. Sachs further suggests that this public and
merit infrastructure must be built gradually otherwise it will not be able to be appropriately assimilated. State of the art health clinics are of little use if there aren’t
enough trained nurses to staff them.
Botswana employed this approach effectively. This was one of the key differences between the Botswana and Nigerian experiences with extractive windfalls.
Botswana began immediately during the irst diamond boom, to invest in health,
education and infrastructure evenly throughout the country. Nigeria, which did not
capitalize on its opportunity to build a productive infrastructure of public and merit
goods early on, was never able to escape from the poverty trap.
It is further important for the state to provide these public goods with a view toward
macroeconomic stability and long-run iscal solvency. Macroeconomic stability is
accomplished by ensuring that the exchange rate is stable and that the economy
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is not exposed to shocks from price falls or capital light, and iscal solvency refers
to the ability to pay down on debt consistently without imposing dramatic austerity
measures. Lastly, Sachs contends that a mixed economy where the government
fully underwrites public and merit goods, but does so in a manner that complements private investment in the productive sectors of the economy, constitutes the
ideal environment for long-term economic development.
The inal consideration for states engaging in mineral-led development strategies
involves strategic planning about the future of the extractive region. The mineral
sector “produces” resources that are, by deinition, non-renewable. Booms in
mineral extraction inevitably accompany busts. If a mineral sector is large enough,
the bust can have devastating macroeconomic consequences. In other cases,
where mineral endowments are localized and constitute a small percentage of
total GDP, the bust is felt most sharply in the resource producing region. There are
two basic steps that a state can take to mitigate the effects of the bust for the host
region: investment in infrastructure and equitable distribution of costs and beneits.
Governments must plan to network the sunk costs of mine projects back into
the larger national infrastructure grid. To this effect, Barham and Coomes (2005:
177) write, “…the key issue lies in the degree to which existing investments in the
sector, and other ancillary activities, can be reallocated toward new activities when
opportunities change.” Doing this enables the state’s investment in the sunk costs
of mining infrastructure such as roads, water and electric networks to continue to
produce returns after the completion of the mining project. The Botswana government accomplished this with success, and it has been proven effective elsewhere
as well (Ritter 2001). Though it is tempting for states to relinquish authority for
infrastructure development to the mining irm, the state should assume at least
partial responsibility for the provision of infrastructure necessary for the mining
project and should make an effort to link that infrastructure elsewhere to mitigate
the effects of the inevitable bust. Left to their own devices, the mining irm will build
only enough to serve the needs of the mine for the anticipated time horizon. The
state, on the other hand, will build infrastructure with a longer time horizon and with
longer-term development goals in mind. Therefore, if the state partners with the
mining irm to continue the infrastructure into other nearby communities and urban
areas, the sunk costs of the mining project‘s infrastructure will remain productive
long after the mine is closed.
Governments must also take steps to ensure that the direct gains (e.g., employment, local tax revenue) and costs (soil and water degradation, adverse health
effects) from mineral projects are distributed evenly within the region. In many
cases the local economic beneits from mining projects are not distributed equally
among the communities that experience the costs. In the Siria Valley of Honduras
for example, a large gold mine was built in the municipality of San Ignacio. The
irm paid royalties to the local government of the host municipality and created a
hundred new jobs in the community. But since the contours of watersheds don’t
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conform to municipal boundaries, the downstream municipality of El Porvenir experienced environmental degradation and a dramatic reduction in its water access.
In this case, all of the economic beneits of the mine accrued to the municipality of San Ignacio while practically all of the costs accrued to El Porvenir. The
right policy package can mitigate this tendency of mining projects to distribute
beneits unequally and spur social conlict. Loyaza, Franco, Quezada and Alvarado
(2001) concur that mining royalties must be invested in communities that have
been adversely impacted by mining operations. This same research also shows
that economic beneits from mineral activity accrue disproportionately to urban
centers and bypass the rural villages which host these mines. Loyaza et al (2001:
82) write “In the case of [Bolivian gold mine] Inti Raymi…the multiplier effect in
rural communities was practically zero, while in the city of Oruro, each dollar paid
by the company became approximately 2.8 dollars circulating in the economy.”
Governments should incorporate strategies into their strategic plans to distribute
gains back to the rural communities which are most affected by the mines.
It is further advisable to hedge against the ill-effects of the inevitable bust by designing proactive training programs for potential mine employees. The tendency
among many extractive irms is to import a large percentage of technical personnel and virtually all management, but if the state can demonstrate that it has adequately trained a workforce equally capable of carrying out the work, then the host
country is in a better position still to capitalize on economic beneits on a regional
level. Additionally, such workforce training must be conducted in such a way that
the skill set acquired will be transferable to another industry in the event of mine
closure (McMahon and Remy 2001:33).
Mitigating Adverse Social Impacts
This essay is concerned with putting forward a conceptual framework for countries
considering exploiting their mineral endowments as a key piece of a more comprehensive development plan. The above section was principally concerned with the
negotiating the economic trade-offs, while this section is directly concerned with the
social trade-offs. Mining can be contentious, and many mineral-rich states across
the world are among the least politically stable. In recent years, broadly-based and
well-endowed social movements have emerged. Based in coalitions of peasants
and transnational activists, many of these movements have been quite effective
at embarrassing states and irms and even shutting down mines. While states
that pursue a mineral trajectory will inevitably displace and disappoint members
of the citizenry, there are steps that a state can take to mitigate the adverse social
impacts of mining on communities. These include understanding the affected communities and making decisions based on that empathy, engaging in transparent
political and iscal practices, advocating for communities during negotiations with
mining irms, and coupling mine development with community development.
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First, it is important to intimately know the communities in which the mining project
will be carried out. This can be accomplished by long-term research in the region,
collecting baseline data on development indicators in the community, and consulting the community at each stage of the mineral development process including
contract negotiation. Central governments are often not involved enough in direct
dialogue with the community. There is a tendency for the state to abdicate these
responsibilities entirely to the mining irms. This has been observed empirically
in cases such as the Inti Raymi gold mine in Bolivia (Loyaza et al. 2001) and
the Yanacocha gold mining project in Peru (Pasco-Font, Hurtado, Damonte, Font
and Salas 2001). States must assume responsibility for social outcomes in mining
communities by increasing their direct involvement in community consultations
and community development work.
As the world mining frontier moves farther into remote corners of the developing
world (Bunker and Ciccantell 2005), mining irms are increasingly encountering
combative host communities. McMahon and Remy (2001: 33) write that “a key result
of the studies [in this book] is that legal license is no longer adequate. Companies
must obtain a social license, and this depends on consultation, participation, and,
increasingly, a strong trilateral dialogue [sic].” Acquiring this social license may
assume the form of the mining irm setting up a local development organization; a
charitable foundation or a governance board to give voice to disgruntled citizens
(McMahon and Remy 2001). In many cases, the size and culture of the company
itself may inluence their social practices within the site. Larger, better established
companies are in the public eye to a larger extent than small, unknown companies.
They therefore have an incentive to prevent bad publicity. Smaller producers, or
“junior” irms, have less riding on their reputation and public image, and thus may
be less inclined to follow appropriate codes of conduct (Dougherty 2011). The state
has the obligation to encourage community development work by the mining irm,
but it also has the obligation to ensure that it complements and does not conlict
with social goods that are the traditional purview of the state such as health care,
infrastructure and education.
The state can also smooth social conlicts through transparent reporting of iscal
revenue collected and budgetary allocations for the revenue. Consider also what
percentage of the revenue will be collected at the local level and what percentage will accrue to the central government. Transparent reporting is essential to
maintain productive relational dynamics between the state and civil society. Terry
Lynn Karl (2007) suggests that state transparency regarding the destination of
raw material revenues is the single most important act to cultivate a strong statesociety relationship in a mineral state. Firms must also be transparent if they wish
to acquire their “social licenses” to operate. Compensation for land takings, for
example, can be a particularly divisive issue, which can be easily mitigated by
evenhanded practices and transparent reporting.
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Discussion
Returning to the case examples to close, Botswana and Nigeria started from
relatively similar places, and their respective policy regimes were tremendously
inluential in charting their divergent development trajectories. Botswana’s independence government was committed to governing broadly and diminishing tribal
schisms. They understood the potential and the threat embodied in their mineral
wealth, and they planned to distribute beneits evenly. They did this through two
key mechanisms; sound investments of iscal revenue from the initial diamond
boom and a strong agreement between the state and DeBeers. Botswana
invested its resource windfall immediately in diffuse, productive infrastructure, with
a view to fostering other economic sectors. Also, Botswana negotiated an agreement with DeBeers that was fair,
lexible, and which gave the government broad regulatory and
monitoring powers. Nigeria, on
the other hand, quickly became
complacent with its massive oil
revenues and did not invest in
human capital or other productive sectors. Further, Nigeria
had dubious relationships with
unethical oil irms, and thus
River in Botswana. Photograph by Frederic Salein.
Nigeria’s oil wealth has largely
Used with Creative Commons license.
wrought political and economic
weakness.
Governments should take advantage of their territories’ mineral wealth, but only if
certain conditions exist. Successful engagement with the mineral sector requires
strong political institutions. Such a state must possess an infrastructure and a
capital stock capable of providing public and merit goods evenly and thoroughly
to the citizenry. This state must also be capable of carrying out fully consensual
development planning and have the executive capacity to operationalize such a
plan. This requires responsive, representative democratic political institutions with
decentralized systems of grievance redress. Liberal FDI policy regimes, in the
successful mineral-led economy will synergize with liberal trade regimes and will
further synergize with the existing industrial mix. The state should cultivate up and
downstream industries which can establish linkages with the new mineral sector
and should invest, proactively, in a trained workforce. Lastly, the state must cultivate an enabling environment for FDI in labor and technology intensive sectors
and must consider extractive agreements as a complement to such industry mix.
Such an approach will ensure that the agreement allows the state lexibility and
authority with respect to its mineral sector. If the geology of the deposits, world
price, and other factors require relaxed cost structures for proitable extraction, it
may ultimately prove in the interest of long-term economic development to forego
extraction until the environment changes.
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