The Resource Curse? Mineral Rents and the Financing of Social Policy. Katja Hujo UNRISD Seminar Series, 6th December 2012

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1 The Resource Curse? Mineral Rents and the Financing of Social Policy Katja Hujo UNRISD Seminar Series, 6th December 2012

2 The issue UNRISD research on Financing Social Policy: How can developing countries mobilize revenues for social policy? How can governments build social policies on financial arrangements that are sustainable, equitable and developmental? What are specific opportunities and constraints in mineral-rich countries?

3 Mineral wealth: Blessing or Curse? Resource curse thesis empirical works by Richard Auty and by Sachs and Warner (1995) followed by many others dominates global debates on natural resource-led development Negative relationship between natural resource abundance and growth performance causal relationship exists that explains this negative link Main criticism methodological issues deterministic conclusions pessimistic prospects Interesting question is to identify specific challenges of mineral-led development and how to overcome these

4 The challenges of mineral-led development I Economic challenges: Dutch disease, price and revenue volatility, terms of trade, enclave nature of mineral production, limited employment creation, limited incentives for skills investment and education Political challenges: who captures rents (foreign investors, private investors, state, elites)? How are mineral rents invested, revenues spent? Rent-seeking and corruption? Distributional conflicts? Access to rents finances violent conflict or undemocratic regimes?

5 The challenges of mineral-led development II Social challenges: inequalities (income, regional, gender, ethnic/indigenous peoples rights), potential fragmentation of social systems Environmental challenges: ecological costs associated with EI: depletion; pollution and destruction of environment; climate change

6 Natural resource based sectors drive growth because Global demand/prices (India, China) Incentives for investments (portfolio and FDI) New technologies (exploration, extraction) Path dependency of growth models based on natural resources Impact of neoliberal policies and globalization on domestic production (manufacturing): reorientation towards comparative advantages: «reprimarización»

7 The long term objectives of a mineral-led growth path are Stability and sustainability Diversification, productive linkages, higher value added, exports, qualified and well-paid jobs Inclusive and democratic development

8 What role can social policy play? Positive role of social policy for mineral-rich developing countries neglected because: Focus on challenges of macroeconomic stabilization and good governance SP mainly interpreted as a threat to stability or as means to perpetuate predatory or undemocratic regimes ( populistredistributive regimes ) However, investment in social policy produces multiple benefits for the entire economy and society while specifically addressing the challenges mineral-rich countries face

9 Social Policy and the challenges of mineral-led development I Growth and sustainability: allocation of mineral rents to productive sectors (diversification through fiscal linkages) difficult; SP contributes to creating an enabling environment for investment and growth; it helps foster knowledge, skills and capabilities for times when minerals are depleted or EI not profitable anymore Stability and Social Protection: SP can combine stabilization and protection objectives (examples: Chile and Norway); social protection programmes can function as demand stabilizers in a context of high macroeconomic volatility; EI can be pioneers in setting up social protection and welfare services (positive if followed by scaling-up, harmonization, universalization)

10 Social Policy and the challenges of mineral-led development II Employment: Expansion of employment in social sectors can compensate for reduction of employment in manufacturing in case of Dutch disease effects Gender bias: Expansion of public employment in social sectors offers jobs for women and is likely to correct part of the gender bias inherent in mineral production

11 Social Policy and the challenges of mineral-led development III Social inclusion and cohesion: strengthened if SP are universal and rights-based, creating inter-class and intergenerational linkages, equalizing living conditions/wages accross sectors and regions Political legitimacy: with transparent and rights-based SP governments avoid being perceived as populist or predatory regimes that capture rents for private interest, improves state-citizen relations (and potentially tax compliance culture); can impact positively on donor relations (and potentially lead to higher aid)

12 In addition, successful mineral-led development requires Policies that foster diversification while safeguarding stability State capacity and institutions that are adapted to national contexts Consensus building on redistribution of rents and compensation of producing regions Sector strategies that minimize environmental and social costs Regulation and monitoring of foreign investors and global commodity (and related financial) markets; reduced trade barriers for more processed goods; policy space (capital controls, industrial policies etc.) Mobilization of domestic resources such as taxation and social insurance contributions

13 Interesting lessons from case studies Country context more important than resource abundance Mineral-led development has specific challenges that need to be addressed Balancing of economic and social goals and democratic politics lead to more sustainable and equitable outcomes

14 UNRISD research published as:

15 CHAPTERS Hujo, Katja. Introduction and Overview: Blessing or Curse? Financing Social Policy in Mineral-Rich Countries. Gylfason, Thorvaldur. Development and Growth in Resource-Dependent Countries: Why Social Policy Matters. Asfaha, Samuel G. Economic Policy in Mineral-Rich Countries. Hinojosa, Leonith, Anthony Bebbington and Armando Barrientos. Social Policy and State Revenues in Mineral-Rich Contexts. Dietsche, Evelyn. Institutional Change and State Capacity in Mineral-Rich Countries Mehlum, Halvor, Karl Moene and Ragnar Torvik. Mineral Rents and Social Development in Norway. Guajardo B., Juan Carlos. Mineral Rents and Social Development in Chile. Ascher, William. Mineral Wealth, Development and Social Policy in Indonesia. Pegg, Scott. Has Botswana Beaten the Resource Curse? Adésínà, Jìmí O. Social Policy in a Mineral-Rich Economy: The Case of Nigeria. Hujo, Katja. Conclusions: Harnessing the Potential of Mineral Rents for Social Development Options and Constraints.

16 About UNRISD UNRISD is an autonomous research institute within the UN system that undertakes multidisciplinary research and policy analysis on the social dimensions of contemporary development issues. Follow UNRISD work on and on