Mining foundation of wealth for poor countries

World leaders had the opportunity to keep the spotlight on tackling global poverty at the UN World Summit in New York last week and this includes continuing to encourage the private sector to engage in this process.

Wherever they are living, the poor need investment and they are going to get it only if there is effective co-operation between governments and the private sector. This has been a key challenge for the International Council on Mining and Metals (ICMM).

The resources sector is the only significant source of foreign direct investment in many of the world's poorest countries. If a mining company sets out to develop operations in countries like Tanzania, Ghana or Peru, it pays for the privilege and then makes substantial further investments as a project progresses.

By operating where other industries frequently find the challenges too great, ICMM members have taken the initiative in making a contribution towards meeting the Millennium Development Goals. All member companies have signed up to ten exacting principles as part of their commitment to sustainable development.

These principles cover corporate governance, socio-economic development, human rights, health and safety, and environmental and biodiversity protection.

Various economic studies have shown that a significant number of countries that are rich in natural resources have lower economic growth rates than those with little or no mineral resources. This paradox of resource riches coinciding with low economic growth is known as the "resource curse". However, mineral resource endowments have been beneficial for the economic development of many countries, as illustrated by the records of nations such as South Africa, Australia, Canada, Chile, Botswana and Malaysia.

ICMM began its Resource Endowment project late in 2004. This study examines the experience of a number of developing countries (Ghana, Tanzania, Peru and Chile) that have benefited from recent growth in their mineral resource sectors and aims to identify policy lessons that could be applied more broadly.

In all four countries, initial findings have shown that economic and policy reforms have led to significant national economic growth and mining has played an important role in this. For example, in Peru since 1992, $US8.9 billion ($A11.6 billion) has been invested in mining, the industry now pays 29 per cent of income tax to the national government, it employs some 350,000 people directly and indirectly, and mining accounts for 6 per cent of GDP. Similar stories were found in Ghana, Chile and Tanzania.

But in terms of social and poverty-alleviation outcomes, the results have been more mixed. In Ghana, the national poverty head count has been reduced by 12 per cent [from 52 per cent to 40 per cent] over the eight years to 1999, while poverty rates in sub-Saharan Africa generally remained stagnant (at about 46 per cent).

In Chile, an even greater fall has occurred, with an impressive 41 per cent reduction in the 14-year period to 2003.
However, poverty alleviation has not occurred in all countries: both Peru and Tanzania are showing no significant changes over the period of growth in mining activity (although limited local reduction occurred in areas around mines).

Improvements in national economies have also led to progressive improvements in governance. This is best illustrated by reference to the World Bank's six widely quoted governance indicators. In the 1970s, governance scores for the four countries were all near the bottom end of the range (minus 2.5) but by 2002, most had moved to around zero (out of a possible maximum of 2.5). Though this is still not good it is nonetheless a substantial improvement, and the experiences of Chile and Ghana, in particular, show that governance improvements can evolve with mineral-related economic growth.

The overall conclusion is clear - mining investment can be one of the first instruments to produce economic growth when basic policy and institutional reforms occur, and effective policies are needed to ensure these investments and additional revenues foster economic and social development. The answer must lie in a more co-ordinated approach between governments, industry and international agencies. In a similar vein, ICMM is supporting the Extractive Industries Transparency Initiative, which aims to increase transparency in transactions between governments and companies in the mining, oil and gas sectors. In this case the onus is on ensuring that revenue, such as taxes, royalties, signature bonuses and other payments, should be an engine for economic growth and social development in areas of greatest need. Here again, the partnership between public and private sectors is all-important.

Sustainable development includes ensuring that investment benefits local communities in the form of employment, education, training and higher living standards. It means working with governments to encourage greater transparency in financial flows so that investment becomes a ratchet for wider economic development.