Transcript Reforming Distorted Political Economies

BENEFITING FROM MINERAL
ENCLAVES
Richard Auty (Lancaster University)
1. Resource Curse, Growth Collapses and
Economic Distortion
2. Economic Reform Needs a Political Strategy for
its Implementation
3. Dual Track Strategy to Protect Reforms from
Rent-Recipients
4. The Mining ‘Enclave’ can be a Catalyst for
Reform in a Dual Track Strategy
5. Mines as Early Reform Zones
6. Conclusion
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1. Resource Curse, Growth Collapse +
Economic Distortion (A)
1. High Rent Can Destabilise the Political Economy
 a) Natural resource rent = residual revenue after
deducting all production costs including a risk-related
return on investment.
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b) Identify three forms of rent in all, each tens of % GDP
i) Resource rent typically 10-20% GDP in 1994 and
inversely related to PCGDP growth 1985-97
Ii) Geopolitical rent (foreign aid) can be 5, 10, 20% GDP
iii) Contrived rent (derived when government changes
relative prices) can be similar in scale
c) Total rent can be 15-30% of GDP or more. Rent is
detached from the activity that generates and becomes a
destabilising stream of ‘funny money’
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SHARE OF RENTS IN GDP 1994
AND 1985-97 GDP GROWTH
Resource
endowment
PCGDP
growth 198597 (%)
Total rent
(%GDP)
Pasture &
Cropland
rent (%
GDP)
Mineral
rent (%
GDP)
Resource Poor
Large
4.7
10.56
7.34
3.22
Small
2.4
9.86
5.41
4.45
Large
1.9
12.65
5.83
6.86
Small, nonmineral
0.9
15.42
12.89
2.53
Small, hard
mineral
-0.4
17.51
9.62
7.89
Small, oil
-0.7
21.22
2.18
19.0
15.03
8.78
6.25
Resource Rich
All Countries
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1. Resource Curse, Growth Collapse +
Economic Distortion (B)
2. Rent Impacts Government Incentives and the
Economic Trajectory
 a) Low rent motivates governments to create wealth by
providing: (a) infrastructure and
(b) incentives for efficient investment
 b) High rent motivates governments to extract rent now
and distribute it to maintain political support, which:
 i) distorts the economy;
 ii) depresses investment efficiency; and
 iii) triggers a growth collapse that undermines longterm wealth creation, absent reform.
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Median GDP per capita (constant 1995 US$)
resource-rich and resource-poor developing
countries
1200
1000
800
600
400
200
0
1960
1965
1970
1975
Resource-rich
1980
1985
1990
1995
Resource-Poor
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2. ECONOMIC REFORM REQUIRES POLITICAL
STRATEGY FOR ITS IMPLEMENTATION
1. Rent Insulates Elite from Macro Shocks
a) EG: Angolan oil rent in the 1990s mainly maintained
army + subsidised elite (1%) + middle class
professionals, whose demands outstripped the rent
stream in 1990s and destabilised the economy
 b) Elite used IFI reforms to capture privatised state firms
to insulate their income from macro instability, which
rendered the elite indifferent to economic reform
c) Real exchange rate appreciated 3X from 1993 (when
farming last competitive) to 2005: manufacturing +
farming ¼ expected GDP share (Dutch disease effect),
but 70% of workers depend on farming

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3. DUAL TRACK STRATGEY TO PROTECT
REFORMS FROM RENT-RECEIPIENTS
1. China (+ Malaysia + Mauritius + now UAE) used
dual track reform:
 a) Track 1 = stimulate dynamic market sector to absorb
surplus labour + diversify economy + diversify taxes
 b) Track 2 = slow reform of the rent-distorted sector to
limit elite backlash while Track 1 builds a pro-reform
political constituency to neutralise elite + sustain growth
2. MNC mines are often ‘enclaves’ of well-managed
economic activity within rent-distorted economies.
 a) MNC mines can play a key role in reviving collapsed/
distorted economies within a dual track strategy
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4. RE-EVALUATING THE MINING ENCLAVE
1. Re-orientate corporate social policy from mines
being mini welfare states to promoting enterprise
formation (at micro, SME and large scales):
2. When mines are underpinned by tight contracts
like PSAs they can serve a new corporate social
responsibility policy that nurtures new firms in
related + unrelated activity in early reform zones
a) Current social spending policy by mining firms
increases community dependence on finite mining
projects + permits governments to neglect their duty of
service provision
 b) Better policy for mining firms is to promote new
enterprise formation to reduce the long-term dependence
of the local economy on the mine + build business skills
+ social capital.
c) New local enterprises can be mineral-linked or
unlinked, with the latter important from an early stage in
mineral projects with short/ uncertain operational
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longevity or in remote areas
5. MINES AS BEST PRACTICE EARLY
REFORM ZONES
1. Three conditions immediately apply in ERZs:
 a) World class infrastructure
 b) Competitive incentives (not subsidies)
 c) Enabling environment/institutions (provided by
either an adequately remunerated civil service or a
reputable international private firm)
2. Successful ERZs benefit national economy via:
 a) Demonstration effect of efficient market-driven
investment, like China’s ERZs c.f. state enterprises
 b) Build pro-reform political constituency
IFIs continue work to improve economic infrastructure,
banking + skills of local business in wider economy.
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6. CONCLUSIONS
1. The resource curse is part of a broader loose
revenue curse whereby high rent encourages
political contests for its capture at the expense of
investment in sustained wealth creation. Such rent
cycling distorts the economy and triggers a growth
collapse, from which recovery is protracted (because
rent recipients become powerful + oppose reform).
2. Analysis of rent cycling patterns suggests
 a) Effective economic reform requires a political
strategy to facilitate its implementation, like China’s
dual track reform strategy
 b) A mining ‘enclave’, bolstered by a tight legal
contract (eg a PSA) can be catalyst to promote the
dynamic market economy (Track 1) of a dual track
policy to reform the distorted economy (Track 2)
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