How Mining Could Become the Engine of Development

Mining has a reputation problem. The popular image of mining conjures up phantasms of dark forces, neo-colonial domination, the trampling of local populations, environmental destruction and the exploitation of labour forces.

For those in the mining industry, it must seem a cruel twist of fate. However, this bad reputation has historical and political roots. From the turn of the century and, particularly, in the post-World War II period, the image of mining as a source of foreign exploitation has been constructed and reinforced.

The "dependency" perspective, which became the predominant way in which developing countries' intelligentsias looked at the world from the 1960s on, suggests that poverty in the world is based on inequality between regions. That inequality, in turn, is based on "unequal exchange." Developing countries ("the South") exchange raw materials, including minerals and agricultural products, or unskilled labour, for manufactured goods and finance. Reliance on importation of finance, technology and foreign direct investment through multinational corporations, in turn, means that the North becomes richer over time while the South becomes relatively poorer. More widely, analysts suggest that the "commodity trap" or "resource curse" holds developing countries back. Even mainstream economists, such as Jeffrey Sachs, point to the paradox that natural resource rich countries, such as Myanmar, also tend to have low levels of development.

The developing countries' response throughout the 1960s and 1970s was often one of expropriation and nationalization of mining resources. In some cases, multinationals were compensated but, in others, they were not. Either way, the move was strongly popular among the domestic populations.

However, from the early 1980s on, the trajectory took a different course. The international debt crisis and collapse of commodity prices, as well as the fact that expropriation is only likely to occur once, led to a re-assessment by many developing countries. Their need for technology and investment in their mining sectors led them to start to open up their mining sectors to foreign involvement, although in a different way from earlier in the century.

foreign-investmentCurrent Climate

Mining companies often go to the most difficult, risky, dangerous places and engage in technologically complex, extremely expensive and highly risky activities in order to provide the basic materials for the world's economy to run.

Mining revenues provide lifeblood to a large number of developing countries' government revenues. In recent years, many companies have made extraordinary efforts to create a new image through activities in corporate social responsibility. They have expended great efforts to learn this "new line" of their business model, engaging with local communities and investing time in mitigating environmental effects. Yet there are many indications that the new model is not enough to create the stable, mutually successful atmosphere that mining companies hope for.

By their nature, mining companies are in a difficult position vis à vis host countries, particularly in the developing world. Many countries view subsoil rights as part of their natural state endowment, which creates a necessary injection of public purpose for any of the sector's activities.

The current climate is one in which foreign investment is pushed to work handin- hand as a subcontractor or in joint ventures with national companies. Therefore, while the expectations for corporate social responsibility have placed infinitely greater demands on multinationals, their scope of action is more delimited than ever before. The development of new insurance instruments such as MIGA by the World Bank is designed to cushion the risk for multinationals, so that they can make the longterm investments needed for a productive sector. This is particularly true now, when the long-term demand for minerals, due to the explosive demand of India and China, is likely to continue to soar once the current global recession fades.

Stabilizing Mining Investments

Political risk insurance is clearly not enough to stabilize investments in mining. A recent industry report, conducted by the American Scrap Coalition, states that governments across the globe- particularly China, Russia, Ukraine and India- are "increasingly participating in this race for raw materials and are intervening in commodity markets in order to protect their domestic industries and sustain economic growth. These governments have enacted a variety of trade-restrictive measures that severely distort trade in raw materials." The barriers include export, foreign investment and subsidisation of raw materials acquisitions internationally. The study notes that even though WTO restrictions are in place, there is no enforcement. Therefore, we can conclude that one key problem with mining is the lack of a global regulatory regime.

While it might seem unrealistic to think that a global agreement on mining could be made in the foreseeable future, the same view existed in regard to trade in manufactured goods and services before the GATT, GATS and WTO agreements.

The most important thing a global mining compact could accomplish is to reduce mining companies' risk that if they do not enter into an agreement, another other company will. This "collective action" problem is at the heart of mining's global black eye.

When companies such as Canadian Talisman pull out of the energy sector in Sudan because of public pressure at home, Chinese companies come in quickly to fill the vacuum. From pirates in Somalia, who seize oil supertankers, to company employees kidnapped in Nigeria, the mining sector pays a heavy price for the lack of collective global governance.

The natural reaction to such an idea would be scepticism. For example, the Kimberly Diamond Process has not proven to be enforceable, which has led to disappointing results so far in terms of preventing the use of "blood diamonds" to finance many of the conflicts in Africa.

Such a compact would not be enough, however, to solve the problems mining faces. If we review the data for expropriation and long-term political risk, we see that it is not just conflict-torn countries such as Liberia or crony authoritarian states such as Equatorial Guinea that are obvious quagmires for mining's image. The same data suggest that countries such as Argentina and Ecuador, which are middle-income democracies, also present high risks. Indeed the recent moves by President Chávez against foreign oil interests in Venezuela and by his counterpart, Morales, in Bolivia, led to major multinational losses (including some by other developing country multinationals, such as Petrobrás of Brazil). Such moves have been spectacularly popular and suggest the possibility that new centre-left govern ments throughout the region could move in similar directions.

The Roots of the Problem

The problem for mining has much deeper roots. The fact is that, throughout history, mining companies have taken the approach of dealing with the government in power as the legitimate representative of the population. This is frequently not the case, and it has led to mining being associated with the corruption, greed and inequality of their host governments.

A recent United Nations World Investment Report on extractive industries suggests that it is time for the mining industry to take a wider view in regard to its interests in the quality of governance for the host governments with whom it does business.

For countries such as Chile, where 45% of exports are related to copper, or Nigeria, where 98% of exports are petroleum- based, the inescapable fact is that the mining sector sets the tone for the entire economy's performance and, in turn, for governance and the possibilities for social and economic mobility. Mining companies that ignore this fact ignore the root causes of political risk, expropriation and negative regulations.

The seeming unwillingness of the mining sector to confront this basic fact means that it trades off a short-term convenience for long-term market volatility and risk. Thus, the essential difference between investing in Chile and investing in Nigeria relates directly to the quality of governance.

Rather than passively accepting the governance dice, mining companies could become active participants with national stakeholders to work towards improvement. What steps could be taken towards reducing long-term political risk rather than simply buying always inadequate insurance? A lot of research would be needed to answer this question. The truth is that we all know good governance when we see it, but we do not know what creates it. This suggests a potential partnership between the mining sector, academics, non-governmental organizations and host country stakeholders to begin to dig out the deeper roots of governance malaise. Answers could be partly of a patterned nature, but would also have to be considerate of a given country's conditions.

By confronting the roots of instability in its state partners, the mining sector can change its negative image, working towards a more appropriate one of mutual gains and development, the truly win-win situation that most stakeholders want for the long-run.

Anil Hira is an Associate Professor of Political Science at Simon Fraser University, Canada, whose main research interest is in international technology and energy policy.

Links and References

Anil Hira

American Scrap Coalition

Argentina

Blood Diamonds and the Kimberly Diamond Process

Bolivia

Brazil

Burma: Country Profile

• Copper-driven Prosperity in Chile

• Country Classification (World Bank’s)

China and India Driving World Metal Demand

Cleaning Up the Mining Industry’s Reputation

Dependency Theory

Ecuador

Evo Morales

Beyond the Mine Mouth: The Equator Principles and IFC Performance Standards

Equatorial Guinea

Expropriation and Long-Term Political Risk

Gaining a Social License to Mine

General Agreement on Tariffs and Trade (GATT)

General Agreement on Trade in Services (GATS)

Increasing Community Involvement in Asia

Jeffrey Sachs

Liberia

Mitigating Emerging-Markets Risks in Mining Projects

Natural Resource Abundance and Economic Growth

Nigeria: Oil Industry Workers Seek Enthronement of Justice in the Oil Region

Petrobás

President Hugo Chávez

Raw Deal: How Governmental Trade Barriers and Subsidies are Distorting Global Trade in Raw Materials

Resource Curse Theory

Somalia’s Piracy Problem

Simon Fraser University

Talisman Energy

The International Debt Crisis in Historical Perspective

The Logic of Collective Action

• The Nigerian National Petroleum Corporation

• United Nations World Investment Report

Venezuela

WTO

WTO Agreements