Growth, employment and distribution impacts of minerals dependency: four case studies

Abstract

Cross-country evidence on the direct and indirect impacts of minerals dependency on growth suggests that the typical effect may be negative, and the experience in some countries implies large negative effects. Countries heavily endowed with exportable natural resources cannot take it for granted that this will assist them on the path to development. This study focuses on four countries, Indonesia, Chile, Venezuela and Nigeria - and looks at how they have handled export bonanzas and focuses on the employment as well as the growth fall-out. The big policy question is: what is the best way for the country to get where it wants to go, and is there a significant role for industrial strategy or can markets do a better job relatively unimpeded? The four case studies reviewed here suggest a number of hypotheses, including that, depending on the specifics of the country, promising new comparative advantages could emerge in the primary, secondary and tertiary sectors, while the role of service tradables should not be discounted. It is intriguing that the great majority of minerals-dependent countries to achieve sustained growth have also made serious progress in manufacturing. However, in a world that now looks less positively on trade protectionism, the exchange rate can be a powerful tool to provide more neutral incentives for new tradables; indeed, one of the most striking features of the two success stories related here has been these countries - timely use of devaluations to achieve highly competitive exchange rates. The experiences of these countries further confirm the risks of focusing on capital-intensive industries in labour-surplus countries, as well as the risk of lodging such activities in the public sector.