Mining matters: Natural resource extraction and local business constraints

Ralph De Haas, Steven Poelhekke 22 September 2016

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Do large-scale mining projects in developing countries involve noticeable spillovers to firms and households in the vicinity of these mines? Some think not, arguing that mines are simply stand-alone enclaves without much local impact (Hirschman 1958). Investors – typically foreign-owned – open, exploit, and eventually close mines while sharing the operating profits with the central government (which may or may not plough back some of these revenues to the mining region). Local spillovers, either positive or negative, are negligible.

However, others point to the potentially large negative consequences of natural resource dependence (Van der Ploeg 2011), some of which may materialise at a very local level. Mines may for instance pollute and hence threaten the livelihoods of local food producers. They typically also require vast amounts of water, electricity, labour and infrastructure, for which they may compete with local manufacturers. Yet others stress the potential for positive spillovers to firms and households as mining operators buy local inputs and hire local employees. Aragón and Rud (2013), for example, show how the Yanacocha gold mine in Peru improved incomes and consumption of nearby households. Local wealth may also increase if governments use taxable mining profits to invest in regional infrastructure or to make transfers to the local population.

In recent research, we explore the debate about the local impacts of mining activity by analysing how mining influences nearby firms across eight countries with large manufacturing and mining sectors: Brazil, Chile, China, Kazakhstan, Mexico, Mongolia, Russia, and Ukraine (De Haas and Poelhekke 2016). Our empirical analysis is motivated by the ‘Dutch disease’ model of Corden and Neary (1982), which sets out how a resource boom drives up wage costs for firms in the traded (manufacturing) sector as they compete for labour with firms in the resource and non-traded sectors. We hypothesise that mining companies and manufacturing firms also compete for other inelastically supplied inputs and public goods — such as transport infrastructure and electricity — and that this hurts tradable-sector firms (which are price takers on world markets) in particular.

We test this model by combining two datasets. First, we use data on 22,150 firms from the EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) and the World Bank Enterprise Survey. These data contain the responses of firm managers to questions on the severity of various obstacles to the day-to-day operation of their business, including access to transport infrastructure and electricity, the availability of educated workers, the cost of land, and access to finance. Second, we use comprehensive information on the geographical location and operating status of 3,793 mines producing 31 different metals and minerals in our country sample. Figure 1 shows the location of the mines and firms we analyse in one of these countries, namely, Kazakhstan. It becomes clear that even in a mining-rich country like Kazakhstan, some firms are close to active mines whereas others are not. This is the type of variation we exploit in our analysis.

Mining: A local curse but a regional blessing?

Two core results emerge from our research. First, we find that manufacturing firms that are located close to active mines report tighter business constraints (as compared with similar firms that are not close to mines). These firms compete with neighbouring mines for access to inputs, labour and infrastructure, and experience congestion and infrastructure bottlenecks. We also show that this stunts the growth of these firms – they generate less employment, sell fewer goods, and own fewer assets. The effects are economically quite large – moving a manufacturing firm from a region without mines to a region with average mining intensity would reduce its sales by 10% on average. In contrast, and perhaps not surprisingly, upstream or downstream firms in the natural resource sector itself – which sell goods and services to mines directly or use their raw materials as input – actually benefit from local mining activity. This also holds for firms in the construction and services sectors. Yet, because most local firms around mines in developing countries are small-scale manufacturers, we find that the net average effect of mining activity on businesses in the immediate vicinity is negative.

Figure 1. Mines and firms across Kazakhstan

Notes: Figure shows the geographical distribution of firms and mines across Kazakhstan. Red triangles and blue dots indicate individual firms and mines, respectively. The lower map zooms in to the red rectangle in the upper map. The circles around firms drawn in the lower map have a 20km radius.
Source: EBRD-World Bank BEEPS Surveys; SNL Metals and Mining.

There is also good news. Our second main finding is that, because mining generates revenue that is eventually spent on goods, services and public goods in the region, current mining activity improves the business environment in a distance band of between 20 and 150 kilometres around firms. This indicates that while mines can cause infrastructure bottlenecks in their immediate vicinity and crowd out local manufacturers, they may improve the business environment on a wider geographical scale.

Conclusion

Our findings contribute to a better understanding of how mining activity affects local businesses in developing countries. To minimise negative spillovers from mining, policymakers could think about ways to let local producers share extraction-related infrastructure. This may reduce the infrastructure bottlenecks and congestion effects that we observe in the data. Sufficient transport, electricity, water, and other enabling infrastructure may not only help local goods producers, but could also further stimulate local services sectors and clusters of down and upstream industries that are related to mines. Policymakers can also help firms to become ‘fit to supply’ local mining-related supply chains. These measures can help meet the preconditions for a resource boom to trigger positive long-term impacts. Lastly, the extent to which any negative effects persist depends on whether the contraction of tradable sectors during a local mining boom will be reversed once a boom ends. Tradable sectors may remain depressed for a protracted period if during the boom local residents have specialised in resource-related skills that are not easily transferable to other sectors. Policy has a clear role to play here as well.

References

Aragón, F M and J P Rud (2013) “Natural resources and local communities: Evidence from a Peruvian gold mine”, American Economic Journal: Economic Policy, 5(2): 1–25.

Corden, W M and J P Neary (1982) “Booming sector and de-industrialization in a small open economy”, Economic Journal, 92: 825–848.

De Haas, R and S Poelhekke (2016) “Mining matters: Natural resource extraction and local business constraints”, EBRD Working Paper No 190, European Bank for Reconstruction and Development, London.

Hirschman, A O (1958) The strategy of economic development, New Haven, CT: Yale University Press.

Van der Ploeg, F (2011) “Natural resources: Curse or blessing?”, Journal of Economic Literature, 49(2): 366–420.

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Topics:  Development Industrial organisation

Tags:  mining, mines, competition, business constraints, Brazil, Chile, China, Kazakhstan, Mexico, Mongolia, Russia, Ukraine, spillovers, natural resource extraction

Director of Research, EBRD

Associate Professor of Economics, Vrije Universiteit Amsterdam; Economist, De Nederlandsche Bank

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