Minerals for growth and development

[maniiminhas]

Pakistan has one of the world’s largest copper and coal deposits​

By Humayun Akhtar Khan

Recent global experience shows that minerals have driven high economic growth in many low and middle-income countries. With the right approach, they can be equally useful in Pakistan, to drive high growth and reduce foreign dependence.

For years, Pakistan has sat atop large mineral resources. It has one of the world’s largest copper and coal deposits. Yet, its stated efforts to realise gains from mining have not met with success. Change may be afoot, as the SIFC has mineral development as one of its priorities. The government of Pakistan would also have a dedicated mining ministry.

Estimates for Pakistan’s mineral reserves vary. Copper deposits are said to be between 1.4 billion and 3.5 billion tons. Iron ore is 1.5 billion to 3.0 billion tons and coal is 165 billion tons. In addition, Pakistan has large reserves of chromite, bauxite, manganese, and salt as well as gold and silver. At present, the sector employs about 300,000 workers. The US’s Energy Information Administration places Pakistan as one of the top ten countries in shale oil and gas resources, which is a subject for a separate focus. The sector brims with promise. There is a lot for the government and private companies to do.

The idea of developing minerals for overall prosperity is centuries old. In the 19th century, the US, Canada and Australia relied on minerals to great success. Minerals still play a role in the latter two economies. More recently, mining yielded rapid GDP growth in Chile, Peru, Botswana and Indonesia. Government revenue grew. That in turn went to building the economy’s capacity. Human resource quality and infrastructure improved, raising overall welfare. In Chile especially, minerals stimulated downstream and supply-side industries. Such progress did not happen through market forces alone. Government policies promoted these links.

Critics emerged by the 1950s, finding flaws in relying on mining wealth. And in the 1990s, another set of researchers coined the term the ‘resource curse’. They argued that mineral resources caused inequality, a rentier class and took attention away from the efficient use of resources.

The last 20 years have revived faith in minerals as a source of broad-based growth – albeit this happened during a period of rising commodity prices. In 2014, World Bank experts McMahon and Moreira studied the economic progress of five mining-dependent low or middle-income economies – Chile, Ghana, Indonesia, Peru and South Africa. Their research showed these economies outperforming non-mining economies across many indicators. Active government policies caused these gains. Their governments used tax revenues for investment in public goods. These policies linked the mining sector with other industries. Chile and Indonesia built value-added industries such as copper-based electronics and battery production. They also put quotas on the export of raw minerals. These policies took shape gradually.

In addition to GDP growth, they saw a better quality of human capital. Their infrastructure improved, especially in the mining regions. Businesses diversified. Mining firms needed a host of services from machine repairs to construction to industrial clothing. Firms and workers learned these skills and transferred them also to other industries. Contrary to the ‘resource curse’ idea, governance too improved along most indicators. Local firms became competitive through a policy that linked them with foreign investors.

In the past, Chile imported most goods and services for the mining industry. In a few years, it became a regional supplier of these goods and services, with 720,000 workers. Soon Chile began exporting these goods globally. This became possible as the government and large mining firms joined hands to upgrade about “250 Chilean-based firms into world-class suppliers” (McMahon and Moreira).

Chile’s port city of Antofagasta is a good example of how to build an industrial cluster around mining resources. Prodded by the government, ten large mining firms and two universities formed a JV “to provide support services for the productive and technological growth of small and medium enterprises” in the region. Early support included long-term credit and cofinancing by the Chilean development agency. Foreign firms that became part of the programme received subsidies, with a sunset. They were also made in charge of “training and integration of local suppliers”.

Such policies make a success of mineral development for the whole economy. Otherwise, the economy could end up with the ‘resource curse’. Drawing lessons from experience, the government must make mining FDI firms true partners in the country’s development. They must commit to sharing infrastructure costs, CSR, and training of workers and to gradually move into the processing of ores.

The country would lose if we attracted FDI merely on the basis of generous tax incentives or profit guarantees. Remittance of profits by these firms would further stress the external account. Tax holidays and profit guarantees would burden taxpayers and consumers. Not committing them to processing or developing local suppliers would lead to exporting raw goods. If profit for the investor comes mainly from government support and not the market, firms will have no incentive to use new technology or to improve production efficiencies.

It is a delicate balance that the government must strike. It must ensure the profitability of the investment but be aligned with national goals.

On its part, the government too must make key reforms. Rather than focus on solving problems for each investment, it must have a strategic focus on developing of minerals. It must broaden the reach and quality of geological surveys. It must also lead to meeting the infrastructure gap, help firms access local financing and upgrade human resources. Permit processing times must be reduced, gradually moving the process online. The royalty law must optimise between attracting FDI and revenue growth for the state. Through tax or other policies, the government must encourage the use of technology to make the sector more productive and environmentally friendly. Firms may be nudged into using solar power or recycled water. They must also adopt better waste management practices.

The state must ensure transparency in dealing with the private sector. Also, the government may commit to the long-term stability of tax policy. There should be no surprises for the investor. Strengthening of public finance is a laudable goal. But the increase in revenue must be for citizens to build human and physical inputs for the country and the mining area. Revenue growth must not fall into the deep abyss of public finance that mostly pays for interest and subsidies. The added revenue must be earmarked for public goods.

In the past, mining investors in Pakistan have met with capricious treatment. This caused losses to both sides. Also, Pakistan’s reputation took a hit. Dealing with investors must be in the spirit of cooperation and partnership. The government may take time to firm up an agreement ensuring that the economy’s interest is paramount. Once agreed, though, both parties must go full speed for the success of the project.

Pakistan can unlock the potential of its mineral wealth to drive growth and inclusive development. It must revisit its approach to public policy in which transparency and cooperation with the private sector. It must do so while giving priority to national goals.