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Extractive IndustriesThe Management of Resources as a Driver of Sustainable Development$

Tony Addison and Alan Roe

Print publication date: 2018

Print ISBN-13: 9780198817369

Published to Oxford Scholarship Online: November 2018

DOI: 10.1093/oso/9780198817369.001.0001

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Conclusions

Conclusions

Chapter:
(p.695) 33 Conclusions
Source:
Extractive Industries
Author(s):

Tony Addison

Alan Roe

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198817369.003.0033

Abstract and Keywords

The extractive industries have invariably occupied a somewhat uncomfortable position in development debate and practice. The very word ‘extraction’ conjures up images of forceful (and painful) removal. The media image is frequently one of despoiling nature, sometimes abusing and destroying the environment, including the resources (water, forests, soils etc.) essential to human life. Nor does mining infrastructure offer the same attractive photo opportunities for local politicians or for visiting ministers from aid-donor countries. In some cases there can be an imbalance of power between large extractives companies and host governments, and corruption and non-transparency are still to be found. This chapter lays out the framework of a book which certainly does not seek to present a rose-tinted view of the development benefits of extractives. Nor does it subscribe to the most negative manifestations of the resource curse thesis.

Keywords:   extractive industries, development, environment, aid, resource curse, host governments, corruption

33.1 Challenges

The extractive industries have invariably occupied a somewhat uncomfortable position in development debate and practice: they might be likened to a rich but somewhat bossy relative who must be invited to the family parties but whom no one really wants to talk to. The very word ‘extraction’ conjures up images of forceful (and painful) removal. The media image is frequently one of despoiling nature, sometimes abusing and destroying the environment, including the resources (water, forests, soils etc.) essential to human life. Nor does mining infrastructure offer the same attractive photo opportunities for local politicians or for visiting ministers from aid-donor countries as do schools and clinics. In some cases there can be an imbalance of power between large extractives companies and host governments (as well as local communities)—and corruption and non-transparency are still to be found.

Donor assessments of private-sector development opportunities have often given only grudging acknowledgement (and sometimes none) to the role of extractives sectors in attracting investment, creating economic growth, and generating export earnings: even in some country cases where mining is demonstrably the largest private-sector activity. Within donor agencies and development banks, there has been a tendency to keep departments dealing with the extractives sector (e.g. providing finance to encourage investments) at arm’s length from the more ‘mainstream’ work in economic policy and poverty reduction. Some agencies find it uncomfortable to liaise with large companies in the design and implementation of community projects in some poorer economies even when they are prepared to spend large amounts on these.

Yet human history, together with the growth in living standards down the centuries, are associated with the creation of new and better (p.696) tools, derived ultimately from the planet’s renewable and non-renewable resources: this has included metals and fossil fuels. From the Stone Age through the Bronze and Iron ages and up to today’s world of advanced material sciences, human civilizations have extracted and refined metals, materials, and various fuels. In the past two decades, this has continued to be the case but now with a significant shift of emphasis. Specifically, most of those involved in some way with the extractive sectors—either as producers, regulators, or commentators—are far more concerned than ever before to reduce the environmental footprint. The task has much more clearly become one of using resource wealth well, for purposes of sustainable and inclusive development. That is an easy objective to articulate but a far more difficult one to accomplish. The world faces an immense challenge: how to sustain the expansion of living standards and reduce poverty—which will continue to involve a huge use of natural resources—while simultaneously avoiding calamitous climate change.

The demands on human ingenuity to create new solutions are unprecedented. The new technologies and ways of organizing societies that make up the low-carbon future require another leap forward in knowledge. But they also require metals, materials, and fuels—in large amounts. The extractives sector is central to creating an environmentally sustainable future of continuing and rising prosperity. Within the extractives sector, fossil fuels will eventually retire—but only after several more decades. Yet as this happens, the need for the metals and materials to construct renewable energy systems, zero-carbon buildings and new forms of transportation will grow. More recycling can meet some of the extra demand, but the challenge for the extractives sector is to ramp up production while reducing its own emissions and local environmental impact. The sector will be further encouraged to green itself by the demands of manufacturers to ensure environmentally and socially sound supply chains, in turn encouraged by increased consumer knowledge and concern, as well as socially responsible investors. Producing countries will need to adjust to the economic impact of the resulting shifts in markets implied by the transition to a low-carbon future.

This book seeks to demonstrate that no serious development scholar or practitioner can today ignore the role of extractive industries in the big debates about sustainable development (see Message 1 of Chapter 1). These industries have become far more significant to the economies of low-income countries (LICs) and many middle-income countries (MICs) over the past two decades (Roe and Dodd, Chapter 2, this volume). For reasons discussed in the book, this is only partially a consequence of the super-cycle in commodity prices during that period. The economic significance of the extractives sector is likely to increase substantially further for countries with resources vital to the technologies needed for the low-carbon future (Addison, Chapter 22, this (p.697) volume). Those countries with oil and gas will see continued demand in the immediate and medium-term future, as natural gas will most likely constitute an ‘energy bridge’—as it replaces coal—to a renewable energy future (and the transition from the internal combustion engine to electrically powered vehicles is still in its infancy). But the slippage in oil and gas prices in recent years from their historic highs of a decade ago, and the resulting pressures on the public finances of some oil and gas economies, are an early-warning signal to national leaders of the need to adjust and create new economic activities. Time is not on the side of fossil-fuel exporters.

Another theme of this book is the changing nature of the extractives industry itself and attitudes and policies towards it—especially the large improvements in practice seen since the turn of the millennium. Despite this, amongst development specialists, both practitioners and researchers, attitudes towards extractives still easily slip into a ‘them and us’ dichotomy. Mining and oil and gas companies (the ‘them’) are often characterized as exploitative and wholly disrespectful of local tax and other laws, environmental and other regulations—thereby causing harm to the communities, governments, and nations (the ‘us’).1 This is one strong manifestation of the general ambivalence towards the private sector, and especially a distrust of large businesses, that has permeated much development debate down the years.

Consequently, development debates have arguably devoted too little attention to the role of large private companies, both domestic and foreign, and their potential to generate growth and jobs. Yet, extractive sectors that work for development almost always require very large-scale private investment, and the kinds of technical and commercial knowledge provided only by large-scale mining and oil and gas companies. The resulting revenues generated by their activities will often far exceed inflows of foreign aid, while the stimulus of the extractives sector to the economy can (if managed well) deliver thousands of new jobs.2

But what might replace the ‘them and us’ mentality when we do decide to engage more actively with the extractives sectors and bring them more centrally into the development debate? The answer given in this book is that we should recognize more explicitly the wide variation in behaviours across both host governments and extractive companies (a variation discussed as well as illustrated schematically in Figure 1.2 in the introductory chapter). Some governments do have strong institutions favourable to delivering national benefits (p.698) from extractives development, while others are run for the benefit of wealthy elites (with little concern for the broader local society), just as there are differentiated companies: some good and socially responsible and some rogues.

We therefore need to be more aware of differentiation across host governments as well as across extractives companies. Many top-down policy initiatives, from both national and international programmes, are likely to fail if they do not first assess, diagnose, and factor in the large differences that do exist in the real world! This point has been underplayed in research on extractives. Econometric methods have helped to identify some broad patterns in the relationship between resource wealth and economic performance, but given the number of individual country outliers from most regression results, it is unhelpful to generalize—and worse still derive policy—from econometric studies alone (concluding, for instance, that resource wealth is inevitably disastrous and advising unhelpfully that it should invariably be ‘kept in the ground’). Equally, care must be exercised in generalizing from country experiences by, for example, majoring on failing states and downplaying the situation in better-performing countries. International policy prescriptions can easily fall into the trap of ‘one-size-fits-all’ recommendations. It is unhelpful, for example, to suggest that all resource-rich LICs and MICs should establish a sovereign wealth fund: some LICs and MICs may have plentiful high-return domestic opportunities that can productively absorb the available funds.

It is also important to acknowledge that the numerous national and international initiatives of the past two decades—one of many examples discussed in the book being the Extractives Industries Transparency Initiative (EITI)—have already improved the general performance quality of many host governments and many extractives companies (in terms of the positioning represented stylistically in Figure 1.2 in the introductory chapter), notwithstanding some regression in a few cases. We now see more reasonably enlightened companies working with reasonably effective and inclusive governments (i.e. at or near Zone B in Figure 1.2) than was evident twenty years ago. Future policy reforms and international initiatives must continue that process; more countries and companies can then achieve compliance with the high standards proposed by, for example, the NRGI benchmarks and the IFC and the ICMM corporate performance standards.

This book has explored in detail what good policy and practice looks like, in its many dimensions (macroeconomic, environmental, taxation, local content, downstream planning, community development, gender equality, etc.). It could be argued that in many of these areas we know what ‘good policy’ looks like. However, while much improvement is evident it remains crucial to: (i) recognize the continuing failings of actual practice in specific cases (both governments and companies); (ii) advance a learning process based in part (p.699) on the experiences of better-performing countries and companies, in order to help others move into compliance with best practice; and (iii) continue to look for innovative ways of facilitating that process, especially in the most difficult situations where there is some hope of progress but where standard prescriptions have so far proven less than effective (especially Zones A and D, in Figure 1.2 in the introductory chapter). But these tasks require policy analysts more explicitly to recognize difference: that is, to assess the very substantial variations in behaviours between different host governments and different extractive companies, and to tailor their recommendations accordingly.

33.2 Articulating and Implementing a Vision

A key theme of this book is that the many dimensions of extractives policy analysed in the individual specialized chapters should not be seen—as they all too often are—as separate distinct areas of policy to be contained within their own technical silos. On the contrary, for real progress in making extractives an effective development driver, these policies need to be part of an integrated and comprehensive package. By welding the component policies together around a strongly maintained and coordinated vision, a country is far more likely to turn the promise of extractives into a genuinely better, more sustainable, and more inclusive economic future for its citizens. That is the reason why this book, in addition to its specialist policy chapters, devotes significant space to four main overarching and linking themes.

First, the book makes a strong case for what can be called an ‘all of government approach’ (especially in Chapter 17 by Kathryn McPhail). Many LICs and MICs have recently articulated ‘vision statements’ for their long-term futures. Yet in practice we rarely see a strongly coordinated approach to the management of extractive resources that gives credible substance to such statements. Indeed, individual ministries and agencies frequently find it extremely difficult to cooperate and co-ordinate over extractives activity, and often take their own individual paths. Opportunities are then missed, especially in maximizing economic benefits (such as local economic development linked to extractive operations).

Second (especially in Chapter 6 by Evelyn Dietsche), it tries to unbundle a great many ideas around the concept of ‘institutions’. While there is now an almost universal consensus that the building of ‘good institutions’ is essential if extractives are to play an effective role in converting resource wealth into sustainable and effective development, the complex nature of this process, and the true underlying meaning of the term ‘institutions’ (and its component elements), are far less commonly spelled out.

(p.700) Third, the book seeks to broaden significantly the traditional set of ideas about the impact of extractive industries on their host economies. Specifically, Chapter 18 by Anthony Hodge articulates the case for developing systematic methods to define, evaluate, and monitor the sector’s contribution to human, economic, and ecosystem well-being over the entire project and product life cycle: the author adopts the label ‘contribution analysis’ for this. Such analysis involves a more demanding test than the one used in most current practices of monitoring and evaluation (M&E) because it explicitly combines a comprehensive picture of the various impacts (thereby fitting well with the all-of-government approach); combines economic and non-economic impacts; provides a greater opportunity for the perspectives of all interest groups to be properly heard; and takes a long-term (life-cycle) perspective on extractive activity. The practical application of such an approach might be demanding relative to the capacities available to many host countries. However, the examples provided by Hodge do indicate that elements of the approach are certainly practical in at least some contexts (and capacities to deliver more should be built). Above all, because the contributions of extractives to both human and ecosystem well-being are so significant and controversial, these contributions need to be both identified, and more actively tracked over time.

Fourth, the book also seeks to fill something of a gap in the available literature by showing how extractive industries can fit within the frameworks of some at least of the new industrial economics debates (in Chapter 7 on this topic by Evelyn Dietsche).3 In this area of debate our earlier comment about the uncomfortable positioning of extractives in the development storybook is particularly pertinent. Many who write on the topic do so without engaging significantly (if at all) with the role of mining and oil and gas. In some manifestations of the literature these extractive sectors are definitely seen as inimical to the longer-term productivity gains needed to drive economic growth: manufacturing by contrast, with its potential for hosting large productivity improvements, is seen as the sine qua non of the necessary policy direction. This book recognizes explicitly that diversification must be at the centre of any long-term strategy for the use of a non-renewable resource (Message 4 from Chapter 1). However, the time horizon that defines ‘long term’ can often be very long indeed, providing innumerable opportunities to use a large extractive resource boom to help catalyse a whole range of non-extractive activity for the future.

Chapter 7 notes several of the key characteristics of manufacturing, notably in the East Asian model that has made this sector the central focus of many of the recommendations from the new industrial economics literature. But most (p.701) of these characteristics are arguably also present in the extractive industries, including: (i) they are export-led and so do not face significant demand constraints from small domestic markets; (ii) they address the foreign-exchange problem of countries that might otherwise have been limited by that constraint; (iii) they provide a convenient basis for learning-by-doing and the absorption of new technologies from abroad, which are critical elements for discovery and learning and productivity gains; (iv) they provide relatively easily taxable revenues and so help to boost public spending capacity; and (v) being centred on a discrete number of enterprise units, they provide for a relatively natural system of accountability for those revenues, as compared to the problem of taxing a huge and dispersed set of, say, agriculture-based businesses.

So, the challenge we present to the development community is to consider these positive characteristics of extractives alongside the various negative characteristics (that are much more familiar from the huge resource-curse literature) before leaping to any final judgement about the extractive industries and their role in development. This is an agnostic position on our part. We have no illusions that in some extractive-dependent LICs and MICs (especially those in Zones C and D of our Figure 1.2 in Chapter 1) there is any early prospect of a pro-active and successful industrial policy based on the extractive resources of those countries. But in many other countries—especially those with a very long time horizon until resource depletion—there is an evident potential for a pro-active policy approach. This can encourage, for example, commercially logical local content, viable downstream activities, and more effective programmes for small- and medium- sized enterprises (SMEs)—all acting as major catalysts for successful economic diversification. The main and truly demanding challenge for host governments in this context is to somehow create a governance framework for a long-term industrial strategy and the appropriate policy interventions to support that strategy over periods of time spanning far more than one electoral cycle. But to be provocative one might even argue that to forgo this future potential—because of inadequate analysis and the failure to adopt the necessary promotional policies (including those that have succeeded in other countries)—could be as costly to the host economy as would the squandering of the government revenues from extractives through white elephant investment projects and widespread rent-seeking!

33.3 Final Words

Many of the issues covered by this book will be familiar to specialists who major on the development dimensions of the extractive industries. Still, it is impossible to be a specialist in every aspect of what is a large and fast-moving (p.702) field, and so we trust that specialists will find much that is thought-provoking in the book.

The book should also be of considerable interest to the larger number of parties (in government, academia, NGOs, and donor agencies) who have some contact with, or a degree of interest in, specific narrow issues around the topic but who might benefit from the analysis, insights, and suggestions on a broad range of component issues that extend well beyond those in their immediate fields of vision. For that audience, we hope that our aspiration to provide a well-informed and comprehensive coverage of the complex and extensive range of component issues that connect the extractive sectors with the broader development agenda will enhance their understanding of the subject and possibly provoke some marginal adjustments of their own maintained positions.

A book such as this, written by some thirty or more experienced and independent specialists, could easily have just covered a multitude of disparate and disconnected topics and still perhaps have been classed as ‘comprehensive’. But from the start of this UNU-WIDER initiative, the objective has always been to achieve ‘comprehensiveness’ in a different sense.4 Specifically, the aim has been to deliver a structured flow of the materials across the book’s eight parts—the many different angles, ideas, and policy positions of the contributors—then link them together coherently. But that structuring process did not start out, and does not finish, with any ‘maintained hypothesis’ about the benefits or failings of extractives as a contributor to the development process. The book certainly does not seek to present a rose-tinted view of the development benefits of extractives, and nor does it subscribe to the most negative manifestations of the resource-curse thesis. Rather, the editors and the contributors hope that the book will encourage its readers to explore the complexity of the real world of extractives and development, to take away an increased awareness of the huge potential for good management of the extractives sector to improve the lives of millions of people, and to be more fully apprised of the policies and actions, national and global, necessary to achieve this. It is a demanding task and we in the development community can do it much better than we have in the past!

Notes:

(1) The ‘us’ in this dichotomy is invariably characterized as having positive motives, contrary to Message 6 in the introductory chapter, which reminds us that some governments can be ineffective and divisive, with some local elites showing little concern for the interests of the nation or those of communities.

(2) Foreign aid has a vital role to play in development, and our argument here does not imply that foreign direct investment (FDI) is a substitute for aid.

(3) Or the new ‘structural’ economics as it is referred to in some parts of the literature.

(4) This book is part of the UNU-WIDER project Extractives for Development. Further papers together with blogs and links to video interviews with many of the authors can be found at: https://www.wider.unu.edu.