Update on the Resource Endowment initiative

Report
The Mining Sector in Latin America:
supporting or undermining social and
economic development?
Aidan Davy
Program Director
Community and Social Development
International Council on Mining and Metals
Scope of presentation
 ICMM and the Resource Endowment Initiative
 ‘Mineral dependent’ economies globally and in Latin America
– historical economic and social performance
 Foreign Direct Investment in extractives in Latin America
 More in-depth discussion of economic and social performance
of two countries: Chile and Peru
 Preliminary conclusions: supporting or undermining social and
economic development?
ICMM Corporate Members
Goal: Raise Standards of Performance
Resource Endowment Initiative
 In 2004, ICMM in partnership with World Bank and UNCTAD
commenced research to better understand the socioeconomic performance of ‘mineral-dependent’ countries
 Focus on identifying and promoting ways to assist mineralrich countries across the developing world to use their mineral
resources to achieve broad-based economic growth and
sustainable development
 Not ‘resource curse’ denial – but limitations of resource-curse
literature is focus on problems rather than solutions
 Resource Endowment work attempts to understand factors
that contribute to more successful ‘mineral-dependence’
Outputs from Phases 1 and 2 (2004 - 2006)
 Toolkit which provides a systematic and consistent approach
to documenting impacts of individual mining projects on a
local, regional and national level
 Practical policy recommendations for mining companies,
governments, development institutions and NGOs aimed at
enhancing the socio-economic contribution of mining
 Country case studies for Peru, Chile, Ghana and Tanzania:
 examined the national (macro) economic impact of the
mining industry as well as poverty and social indicators
 reviewed economic and social impact of one large mine indepth in each country
 Synthesis Report which contrasts and compares similarities
and differences, and outlines recommendations
5
First step: determine some measure of ‘success’
as basis for more in-depth work
 Identified 33 mineral dependent economies globally:
 Ores and metals comprising 20% or more of merchandise
exports on average over 38 years (1965 and 2003)
 For these countries, economic and social performance
measured by looking at six variables:
 Economic growth - GDP per capita for 32 years [1970-2002]
 Economic diversification - non-mineral GDP growth [1980-2002]
 Poverty alleviation (4 variables - infant mortality rate, HDI,
minimum dietary requirements, and access to drinking water)
 Results for individual countries compared with global income
group and region [e.g. Chile compared with all “upper middle”
income countries and Latin America]
Analysis of E&S well-being of 33 mineraldependent* economies [1965 – 2003]
Economic factors: Per capita GDP growth and
non-mineral GGP growth (1980 – 2002)
Poverty alleviation: Infant mortality, human
Development Index and two selected MDGs
Generally better
Better performers






Botswana
Chile
Ghana
Malaysia
Mexico
Tunisa








Colombia
Guinea
Jamaica
Mali
Morocco
Mozambique
Namibia
Senegal
Poor performers
Weak performers










Gabon (E&S)
Guyana (E)
Jordan (S)
Mauritania (E)
Peru (S)
South Africa (E)
Suriname (S)
Tanzania (E)
Togo (S)
Zimbabwe (S)
 Bolivia
 Central African
Republic
 D. R. Congo
 Liberia
 Niger
 Papua New G.
 Philippines
 Sierra Leone
 Zambia
* Minerals and ores exports exceeded 20% of total exports
Recent mineral dependence of LAC countries
Minerals as % of exports
(2000-2005)
Minerals as % of exports
(1990-1999)
Suriname
Peru
Jamaica
Guyana
Colombia
Chile
Brazil
Bolivia
0
10
20
30
40
50
60
Note: Mineral exports in Peru significantly increased in recent years (62% in 2006)
70
Macroeconomic outcomes in Chile:
Higher and more stable GDP growth
 Nationalisation in 1970’s followed by dominance of state ownership
until later 1980s
 Improved mineral legislation enacted in Chile during Pinochet years
(mid-1970s). But greater political and economic stability needed
before recovery of mining investment in the late ’80’s/early ’90’s
 Stability enabled significant FDI from late ‘80’s/early ‘90’s ($21.7bn
FDI & 14.5bn Codelco) and a 3-fold production increase (’90-’04)
 Substantial recovery in mining investment appears to have
contributed to improved growth performance [more notable link to
improved mineral legislation in Ghana]
 Non-mineral GDP growth has been positive. Over past 30 years
Chile’s non-mineral GDP growth has outperformed LAC and uppermiddle income countries
 Copper Stabilisation Fund (since 1985) helped smooth out
variations in fiscal income. This has made planning for long term
spending decisions easier, for example to build human capital.
GDP growth in Chile (1950 - 2003) & Ghana
10%
GDP growth
5%
0%
- 5%
- 10%
- 15%
Chile – current state of mineral dependence
 Over past 30 years Chile’s non-mineral GDP growth has
outperformed LAC and upper-middle income countries
 Mineral exports still significant, but long-term decline indicative of
value of other exports [long-term GDP decline of 8% to 6.4% ’05]
Mining and fiscal revenues - Chile
US$ millions
6000
15%
5000
4000
10%
3000
2000
5%
1000
1991 - 2002
2003
2004
2005
2006
Taxes paid by Codelco
Taxes paid by the 10 largest private mining enterprises
Codelco dividends
% of fiscal revenues derived from mining
Sources: UNCTAD (2007) World Investment Report. ECLAC (2007). Economic survey of LAC: 2006 - 2006
% of fiscal revenues
7000
Social Development/Poverty Reduction:
Outcomes in Chile
 Reduction in poverty levels have been significant at both national
and regional levels in Chile (see next slide). Region II outperformed
all others on non-monetary Human Development Indicators
 Proportion of people living below the poverty line has decreased
from nearly 40% in 1990 to about 20% in 2002. Improvements were
largely driven by increasing employment opportunities
 Region II shows unusually strong linkages between mining industry
and the local economy
 This is partly a result of deliberate targeting and fostering of local
suppliers by Escondida mine, coupled with regional government
initiative promoting industry-government collaboration to support
local suppliers obtaining ISO certifications
 Benefits of mining sector for Chile have not mainly come from taxes
Chile poverty reduction by region (1990 – 2003)
RM
XII
XI
X
IX
VIII
-9.3%
VII
VI
V
IV
III
II
I
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
-60.0%
-70.0%
Chile
Chile – Regional differences in poverty reduction
-17.6%
-24.8%
-41,4%
-41.7%
-60,0%
-47.1% -44.5%
-38.3%
-32.3%
-37.3%
-42.2%
-54.2%
-49.3%
Employment, training & local procurement:
Example of Escondida mine
 In 2004, Escondida mine (Region II) employed 2,810 directly
(8 expatriates) and 2,345 contractors
 Induced employment estimated as 8,500 - 12,800 (or 5 - 6.7%
of occupied people in Region II)
 Average annual spending on training and development was
approx $2,000.employee
 On average, procurement from within Chile is estimated as
80%:
 In 2004, of $483m of goods procured, 48% was from within
Region II, 34% from elsewhere in Chile, and 18% overseas
Macroeconomic outcomes in Peru:
greater economic stability
 Nationalisation in late ’60’s and during ‘70’s followed by dominance
of state ownership until early 1990’s
 Fujimori administration adopted policy of privatization and
encouraged FDI. After introduction of new mining legislation in 1992,
$9.8bn FDI in sector (between 1992-2004)
 Mining in Peru makes a crucial economic contribution:
approximately 55% of merchandise exports and 5% of GDP in 2006
 Between 1990-2006, Peru’s overall GDP increased by 93% whereas
mining-related GDP increased by 135%
 Mining contributed around 21% of Peru’s fiscal revenues in 2006 (a
very large increase from around 5% in 2004)
 While direct employment small ….65% of procurement from the
industry in Peru is sourced in-country
 Overall, sector employs 95,000 directly, but 380,000 indirectly (with
mining salaries averaging 7.5 times agricultural salaries)
Income taxes and extractives, Peru (2000–2006)
2000
60
1800
50
US$ millions
1600
1400
40
1200
1000
30
800
20
600
400
10
200
0
0
2000
2001
2002
2003
2004
2005
2006
Income tax revenue from mining industry
Income tax revenue from oil and gas industry
% of total income tax revenue derived from extractives
Source: UNCTAD (2007) World Investment Report
Social Development/Poverty Reduction:
Outcomes in Peru
 Official statistics show that from 1960’s to 2002, 3 key social
indicators - infant mortality, life expectancy and literacy rates - have
generally improved
 UNDP’s 2004 Report on Human Development found little progress
in reducing social inequality and disparities in income and regional
development
 More than half population lives in poverty and nearly a quarter lives
in extreme poverty – extreme poverty affects more than half of the
rural population, compared to slightly less than 10% of urban
 Social exclusion is deeply entrenched, many social needs are
unmet, and mining companies bear brunt of expectations
National level governance reforms in Peru
are not matched at regional/local levels….
 Important recent developments:
 Canon Minero: 50% of corporate income tax returned to mining
areas; this is significant contribution (over $900m in 2006)
 Mining Royalty: 1-3% value of production, 100% to mining areas
 Voluntary Support Fund (VSF): $790 million over five years to
reduce poverty and social exclusion in mining areas
 But… proactive arrangements are needed where capacity of local and
regional governments need strengthening
 Companies can support capacity building, e.g. integrating social
investment into local/regional government development plans
19
Role of/impact on governance (1996 – 2006)
100
90
80
70
60
50
40
30
20
10
0
Voice
1 &
Accountability
Political
2
Stability
Govt.
Regulatory
3
4
effectiveness
Quality
Rule
5 of
Law
Control
6 of
Corruption
LAC region (1996)
Chile (1996)
Peru (1996)
LAC region (2006)
Chile (2006)
Peru (2006)
Overall conclusions
 The contribution of FDI and mining investments to socio-economic
development and poverty reduction can be significant
 The performance of different mineral dependent countries varies
greatly, but apparent success factors include:
 A stable macroeconomic climate
 Mineral legislation supportive of FDI
 Good governance and institutional capacity – especially at local
and regional levels
 Effective partnerships between companies and governments – in
fostering local supply chains, for example, or improving local social
provision
 A mining resurgence can be associated with significant poverty
reduction…. But this is by no means an automatic outcome
How can Improved Outcomes be Achieved?
 Deeper governance reforms that improve broad-based access to
economic opportunities are critical to:
(a) help limit negative effects, and
(b) capitalise on positive growth opportunities
 This applies in particular to the local level. Strengthened
decentralised fiscal management and empowerment of local and
regional authorities are needed – capacity must be built in parallel
 Caution: Explicit revenue sharing arrangements, as found in Ghana
and Peru, do NOT seem to respond adequately to this. They
overemphasise redistribution, but contribute little towards improving
the efficiency of spending
 Institutional arrangements needed that support broad-based
economic activities in the medium and long term:
 To fill gaps, all partners (companies, governments, social
representatives and donors) need to collaborate and adapt to country
specific situations.
Way Forward
 Collaborative action is needed to capture the full potential benefits
of mineral wealth and achieve enhanced and lasting outcomes
 This requires partnership approaches between companies,
governments, social representatives (including NGO’s) and donor
agencies
 Individual partners have specific responsibilities, comparative
advantages, and contributions to make – but collaboration is
fundamental
 These principles apply to each of the five clusters of
recommendations
Resource Endowments 5 recommendations
for collaborative action focus on:
 Mining and Economic Development
 Mining and Poverty Reduction
 Social Investment and Compensation
 Dispute Resolution and Communication
 Artisanal and Small-Scale Mining

The clusters in the Synthesis Report identify actions and
responsibilities for (i) companies, (ii) host governments, and (iii)
development organisations and the voluntary sector.

Of course, emphases differ by country.
For further information….
ICMM
35 Portman Square
London W1H 6LR
United Kingdom
Telephone: +44 (0) 20 7467 5580
Fax: +44 (0) 20 7467 5581
Email: [email protected]
ICMM working to translate
recommendations into reality
Example of recommendations:
on dispute resolution
From recommendations
to reality
• Pilot projects in Ghana, Peru &
Tanzania will:
• Map existing partnerships in
each country against
initiative’s recommendations
(6 areas) to identify gaps
• Convene multi-stakeholder
workshops to agree action
plan / new partnerships so
as to help fill gaps
• Also in-depth study of effect of
mining tax regimes on
development
• Additional international & national
dissemination to encourage
uptake of recommendations
Inward FDI flows to selected LAC countries
Minerals FDI (2003-2005) – US$4.7 bn
Total FDI (2003-2005)
US$ millions
-100
-10
0
10
100
1,000
10,000
0
10
100
1,000
10,000
Suriname
Peru (8%)
Jamaica (16%)
Guyana
Colombia (23%)
Chile (9%)
Brazil (9%)
Bolivia
-100
-10

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