Economic Development and the Extractive Industries

Prof. Jeffrey D. SachsDirector of the Earth Institute

Columbia University

For the CCSI Executive Training on Extractive Industries and Sustainable Development

June 10, 2014

Countries in which Fuels or Non-FuelPrimary CommoditiesAccount for More than50 Percent of ExportEarnings During 2008-12

28 Countries in each category.

FORTUNE 500 – TOP 10 COMPANIES

The Extractive Sector (Hydrocarbons, Minerals) Offers Distinct Possibilities and Risks for Economic Development:

Most importantly, the economy earns a large RENTon its natural resource wealth. That RENT can be used to finance critical public investments, e.g. human capital and infrastructure.

One can say that the central challenge of development through an extractive sector is to convert resource rents into human and infrastructure capital, without ruining natural capital

MANY SPECIAL ISSUES INVOLVED WITH AGRICULTURE AS OPPOSED TO MINERALS:

Tends to be labor intensiveComplexity of land rightsHighly intertwined with ecosystems, climateDistinct characteristics of rural life

(access to infrastructure, services,disease epidemiology, fertility, other)

The Extractives Sector is Distinct in Many Ways:

First, extractives can be developed even with very low levels of economic development.

Foreign investors supply capital, expertise, even infrastructure.

Success does not general depend on the overall level of development, business environment, or skills of the population

This is both good and bad news. Can jumpstart development, but also create an enclave economy

Some Other Distinctive Aspects of the Extractives Sector:

Generally, large fiscal rentsCapital intensive (few jobs or upstream linkages)Foreign capital and technology, and perhaps foreign

ownership (and hence major contractual challengesDepletion (hence time horizon is crucial)High volatility of international prices (Booms and Busts)Heated politics (struggle over rents)Powerful corporate and geopolitical counterpartsLack of diversificationEnvironmental risksPotential for complementary infrastructureCommunity relations may become paramountNeed for 10-30 year planning

At the Core of Economic Development Strategy Lies Capital Accumulation:

Human capital (education, health, nutrition)Infrastructure (roads, power, water and sanitation,

connectivity)Business capital (private-sector businesses)Natural capital (ecosystems, soils, fresh water)Technological capital (know-how, integration in global

value chains)

A Development Strategy is Really a Plan for Multi-Sector Capital Accumulation, usually for a Period of 10-20 Years

Government has:

Direct responsibility for Infrastructure and Natural CapitalShared responsibility for Human Capital, and Technological CapitalLimited responsibility for Business Capital, other than the “business environment”

THE IMPORTANCE OF A NATIONAL DEVELOPMENT FRAMEWORK

20-30 YEAR HORIZON ON EARNING, BUDGET, INVESTMENTS

LONG-TERM PUBLIC INVESTMENTS

TRANSPARENT RELATIONS WITH COMPANIES,FOREIGN GOVERNMENTS, INTERNATIONAL AGENCIES

PRIORITIZATION OF SPENDING BY REGION, SECTOR, ETC.

Countries’ development trajectories will differ depending on their geography and resource base:

Coastal or landlockedDisease patternsAgricultural potentialPopulation to land ratioMineral resourcesLocation vis-à-vis world markets (for markets, tourism, processing, etc.)

Government investments must be financed, either by:

• Saving from a financial surplus (e.g. from mining rents)• Taxation• Borrowing• Domestic or foreign private equity

One of the key challenges of successful development is Public Finance, especially how to pay for publicinvestments in addition to current public goods and services

PUBLIC INVESTMENT OF THE EXTRACTIVE REVENUES

OIL EARNINGS CAN FUND PUBLIC INVESTMENT PROGRAMS IN:

EDUCATIONHEALTH CARE/NUTRITIONINFRASTRUCTURE

THE ECONOMIC RETURNS ON THESE INVESTMENTSMAY BE FAR LARGER THAN THE RETURNS ON FINANCIAL ASSETS

Consumption

Traded Goods

Non-Traded Goods

Oil discovery

Traditional

Oil

THE “DUTCH DISEASE” EFFECT

TIME

EXTRACTIVE EXPORTS

CONSUMPTION

THE IDEA OF LONG-TERM CONSUMPTION SMOOTHING

$US

AN EMERGING GLOBAL FRAMEWORK FOR THE EXTRACTIVE SECTOR:

TRANSPARENCY ACCOUNTABILITYBENCHMARKING/BEST PRACTICESSPECIAL FUNDSNATIONAL STRATEGIC PLANSSUSTAINABLE DEVELOPMENT:

ECONOMIC, SOCIAL, AND ENVIRONMENTAL

THE COLUMBIA CENTER CAN SUPPORT

COUNTRIES WITH BENCHMARKING AND BEST PRACTICES