Sustainable

development in mineral
exporting economies

R. Auty and A. Warhurst

Sustainable development requires that Mineral economies are defined as economies which generate at least
consumption by present generations 10% of their GDP from mining and at least 40% of their foreign
should not be at the expense of future
generations. For mineral economies exchange earnings from mineral exports. Such countries comprise about
this means substituting an alternative one-quarter of all the developing countries (DCs). They include two
income source for the depleting mineral important subgroups: oil exporters and ore exporters (ie the producers
asset and curbing environmental de-
gradation. But Dutch disease (the nega- of copper, bauxite and tin). This paper argues with reference to the ore
tive symbiosis between the mining and exporters that, despite the harsh lessons of the 1970s and 198Os, few
other tradable sectors which mutes governments of mineral economies have learned that the control of
both the rate and efficiency of econo-
mic growth) can subvert both sustaina- Dutch disease (the negative symbiosis between the mining and other
bility goals. First, Dutch disease tradable sectors which mutes both the rate and efficiency of economic
weakens the non-mining tradables sec- growth) is a prerequisite for sustainable development.
tor so that it cannot propel the economy
should mining be marginalized. Sustainable development requires that consumption by present gen-
Second, Dutch disease retards econo- erations should not be at the expense of future generations. For mineral
mic growth so that investment in en- economies this imposes two conditions. First, that investments must be
vironmental management and clean
technology is slow and environmental made in alternative wealth generating assets in order to substitute for
damage is the greater. Sustainable de- the depleting mineral asset. Second, that the environmental damage
velopment must therefore overcome caused by mining and smelting should be minimized. Yet these two
Dutch disease and this requires a
pragmatic orthodox macroeconomic sustainability goals can be blocked by Dutch disease which saps the
policy. The latter mutes the damaging competitiveness of the non-mining tradables sectors (principally agricul-
impact of fluctuating ore revenues and ture and manufacturing) and retards both economic growth and
spurs competitive diversification and
economic growth so that new invest- investment.
ment and the rapid adoption of environ- Dutch disease can be especially severe in mineral economies because
mentally sensitive technology is facili- the occurrence of high rents (ie returns in excess of those required to
tated.
earn a normal profit) on the mineral can cause the sustained apprecia-
Richard Autv is with the Department of
tion (strengthening) of the exchange rate. This reduces the competitive-
Geography, University of Lancaster, Lan- ness of the non-mining tradables and typically results in the premature
caster LA1 4YB. UK: Alvson Warhurst is shrinkage of the agricultural sector (to a share of GDP half to one-third
with the Science P&icy Research Unit,
University of Sussex, Brighton BNl 9RF,
that of a non-mining economy of similar size and level of development)
UK. and excessive protection for the inefficient manufacturing sector (with
levels of effective protection in excess of 100%).
Alyson Warhurst gratefully acknowledges
the financial support of the John D. and Sectors damaged by Dutch disease are ill equipped to generate
Catherine T. MacArthur Foundation. revenues and foreign exchange as a substitute should those from mining
Richard Auty thanks RTZ for funding data abruptly diminish. Yet such abrupt declines are characteristic of mining,
collection.
whose lumpy capital-intensive investment makes the smooth adjustment
of supply to demand especially difficult to achieve. Furthermore, an
economy damaged by Dutch disease elicits low levels of investment
which retard the switch to environmentally sensitive technologies.

14 0301-4207/93/010014-16 @ 1993 Butterworth-Heinemann Ltd

 Sustainable development in mineral exporting economies

The analysis of sustainable development in mineral economies has

mistakenly focused on compensating for the depleting ore reserves. This
has fostered complacency about the risk arising from high levels of
mineral dependence because exhaustion of the mineral reserves of most
ore exporters (and also of oil exporters whose reserves are large in
relation to their population) is far into the future; so far, in fact, that
depletion theory indicates that countries need set aside only a modest
fraction of net mining income to substitute for the wealth producing
mineral asset.’ Among the leading ore exporting economies only
Zambia and possibly Bolivia (where only a small portion of the mineral
rich zone has been explored) may have less than two decades of reserves
left.
Most ore exporting economies, however, have many decades of
reserves left so that asset depletion is not a pressing problem. But the
abrupt marginalization of the mining sector is a very immediate and
serious threat, given the volatility of mineral prices and unsound
macroeconomic management. It is especially serious for mineral econo-
mies weakened by Dutch disease. Consequently, this paper focuses on
the neglected components of sustainable development, namely Dutch
disease effects and their implications for environmental management.
As such, it offers a partial analysis of sustainable development. It shows
that resolution of the Dutch disease problem is a prerequisite both for
assuring the replacement of the depleting asset and for improving
environmental management. That is, the elimination of Dutch disease is
a prerequisite for sustainable development.
The first part of the paper examines the impact of Dutch disease on
sectoral diversification and identifies policies which mute its harmful
effects. The second part of the paper draws on a recent study by
Warhurst to identify both the cause of growing environmental degrada-
tion from mining in DCs and the potential remedies.

Mineral exporters’ economies underperform

Mineral exporters have three advantages over other DCs.” Their
mineral sectors provide an additional source of foreign exchange,
additional government revenues and also an additional route to indus-
trialization. That extra route is through resource based industrialization
(RBI), the further processing of the mineral resource into metal and
fabricated products (as well as the production of inputs for the mining
sector). RBI is only justified, however, if the natural resource yields
‘S. el Serafy and E. Lutz, ‘Environmental sufficient comparative advantage in downstream processing to compen-
and natural- resource accounting’, in G. sate for deficiencies in other inputs such as capital and technology. If the
Schramm and J.J. Warford. eds. Environ- comparative advantage is there, then import substitution (which has
mental Management and ‘Economic De-
velopment, Johns Hopkins University been very badly executed in most DCs) and competitive export manu-
Press, Baltimore, MD, 1989, pp 23-38. facturing (in which only a few countries, most Asian, have been
*A. Warhurst, Environmental Degradation successful) are not the sole options for industrial diversification in
From Mining and Mineral Processing in
Developing Countries: Corporate Re- mineral economies.
sponses and National Policies, OECD De- Yet compared with other DCs, Nankani found that, far from achiev-
velopment Centre, Paris, 1993. ing a superior economic performance, the mineral economies have been
‘G. Nankani, The Mineral Economies,
World Bank Staff Working Paper No 354, less successful. The mineral economies have slower rates of economic
World Bank, Washington, DC, 1979. growth, lower levels of social welfare and more highly skewed income
%.R. Lewis, Development Problems of the distributions than the non-mineral DCs. In fact, the superior resource
Mineral-rich Countries, Williams College
Centre for Development Economics, Re- base of the mineral economies has been more of a curse than a blessing,
search Memo 74, Williamstown, MA, 1982. a finding confirmed in a study of oil exporting countries by Gelb.4

RESOURCES POLICY March 1993

Sustainable development in mineral exporting economies

Table 1. Investment and growth rates by developing country groups (%).

Other middle income Other low income

Hard mineral exporters Oil exporters countries countries
Measure 1960-71 1971-83 1960-71 1971-83 1960-71 1971-83 1960-71 1971-83
Investment/GDP: Mean 0.21 0.23 0.21 0.28 0.20 0.24 14.3 17.2
0 0.06 0.05 0.10 0.10 0.05 0.05 4.1 6.1
Gross IOCR” Mean 0.28 0.07 0.34 0.12 0.32 0.17 0.26 0.17
0.05 0.02 0.06 0.05 0.02 0.01 0.03 0.04
Growth of GDP per Zfean 2.5 -1.0 2.9 1.9 3.7 2.0 1.3 0.7
capita (%) 0 1.1 1.2 1.7 3.7 1.8 2.3 1.4 2.2
Number of countries 10 IO 10 10 29 29 20 20

Terms of trade indices

(relative to unit value of manufactures imported by developing countries)
Metals and
hard minerals Petroleum Agriculture
1960-62 100 100 100
1970-72 104 92 91
1980-82 78 636 84

a Incremental output/capital ratio.

Sources: World Bank, World Tables database. Commodity Price Forecasts; A.H. Gelb, Oil Windfalls: Blessing or Curse?, Oxford University Press, New
York, 1988, p 34

Gelb examined the response of six such countries to the oil shocks of
1973-74 and 1979 and found that political pressure for rapid domestic
windfall use was the reason why, in most cases, the potentially favour-
able resource endowment impaired the economic performance of the oil
exporting countries. Table 1 is taken from Gelb and shows that the
economic growth rate of both basic types of mineral economy (the oil
exporters and the ore exporters) was disappointing and actually de-
clined through the oil booms. It also shows that the mineral economies
tended to have higher rates of investment than other DCs, so it was the
efficiency of that investment which was disappointing, especially
through the post-1960s period of heightened global economic uncertainty.
Lewis’ argues that the predominant linkage from minerals is tax-
ation (unlike the linkage from many soft commodities), which requires
skilled government management if the revenues are to be deployed
constructively. Gelb found that prudent use of the boom windfalls
was the exception rather than the rule. Even the strongest govern-
ments, like that of Indonesia, found political pressures for overrapid
domestic windfall absorption difficult to resist. In addition, govern-
ments have rarely been able to prevent mine workers from capturing a
fraction of the rents in terms of high wages whose demonstration effect
has then pushed up wages in the non-mining sectors, eroding their
competitiveness.
The overrapid absorption of the oil windfalls led to inefficient
investments and unsustainable patterns of consumption. These proved
damaging when oil prices fell because the non-mining tradables sectors
could not replace the lost resources at anything like the scale and speed
required. Rather, when oil revenues declined, both cuts in real incomes
and prompt corrections of the real exchange rate were resisted, thereby
intensifying the subsequent adjustment required.h
The supply-side rigidity during mineral downswings partly reflected
5A.H. Gelb, Oil Windfalls: Blessing or the disappointing diversification away from the depleting oil resource
Curse?, World Bank Oxford University into RBI which rarely generated sufficient revenues to service RBI
Press, New York, 1988. debt, let alone to make a positive contribution to exports and govern-
%M. Auty, Resource-Based Industrializa-
tion: Sowing the Oil in Eight Developing ment revenues. But a more damaging factor was the inadequate
Countries, Clarendon Press, Oxford, 1990. sterilization (ie overrapid domestic absorption) of the windfall during

16 RESOURCES POLICY March 1993

 Sustainable development in mineral exporting economies

Table 2. Trends in key economic parameters 197048: Bolivia, Chile, Jamaica and Peru.

1970-73 1974-78 1979-82 1983-88

GDP growth (%)

Bolivia 4.2 4.4 (1.2) ug)
Chile 1.7 1.9 1.9
Jamaica 4.6 (3.2) (1.4) 0.9
Peru 5.0 3.2 3.8 0.5
Terms of trade (1980= 100)
Bol~a 56 81 96 76a
Chile 202 113 93 81b
Jamaica 116 119 100 99
Peru 137 113 93 77a
Real effective exchange rate (1965= 100)
Bolivia 86.6 101.3 128.1 212.3
Chile 88.2 64.6 83.1 65.0b
Jamaica 87.2 96.5 72.8 77.9c
Peru 87.0 73.6 76.8 70.2
Balance of payments (% GDP)
Bollvia (0.3) (4.8) (10.4) (11 .O)
Chile (2.5) (3.9) (9.4) (7.4)a
Jamaica (11.6) (6.0) (9.9) (11.3)
Peru (0.6) (6.4) (2.9) (2.9)a
Fiscal gap (% GDP)
Bolivia (3.1) (2 8) (6.2) (10.5)
Sources: World Bank, World Tables 7988, World
Chile (10.2) (1 .O) 3.0
Bank, Washington DC, 1988, except for ex-
Jamaica (3.6) (11.4) (13.9) I:::;” b
change rates: A. Wood, Global Trends in Real
Peru (2.1) (7.3) (4.8) (5.9)
Effective Exchange Rates 1960 to 1984. World
Debt/GDP (%)
Bank Discussion Paper 35, World Bank,
Bolivia 0.50 0.59 0.87 1.29b
Washington DC: fiscal gap, Interamerican De-
Chile 0.29 0.43 0.46 0.94a
velopment Bank, Social and Economic Progress
Jamaica 0.66 0.53 0.61 1 .26b
in Latin America, IADB, New York, 1988.
Per11 0.35 0.40 0.39 0.52a
a 1983-87; b 198>84; ’ 1983-86.

the boom which caused an appreciation of the real exchange rate and
triggered Dutch disease effects. This sapped the competitiveness of the
non-mining tradables, resulting in either a fall in output (typical of
agriculture and tourism) or an intensification of excessively high levels
of protection (typical of manufacturing). Adjustment to the oil price
downswing was therefore painful and its costs more than offset the gains
made during the booms. In some cases per capita incomes fell below
pre-boom levels. The response of the ore exporters to the mineral price
swings 1972-90 reported here confirms Gelb’s conclusion about the
resource being a curse.

Diverging economic performances 1970-90

The governments of the ore exporting countries, like those of the oil
exporting countries, were overly optimistic about future mineral rev-
enue streams. When ore prices fell after the first oil shock, most of them
borrowed from abroad in order to adjust to the revenue loss rather than
shifting resources into non-mining exports (manufacturing and agricul-
ture) which would have entailed slowing their economic growth. They
also misadjusted to the second oil shock because they assumed that it
would be associated with a strong boom in metals. When that boom
failed to materialize, most mineral economies found it difficult to
service their accumulated foreign debt, which typically more than
doubled from the early 1970s to early 1980s to match or even exceed
their total GDP (Table 2).
In many cases, the cumulative disadjustment not only weakened the
non-mining tradables sectors (reversing any progress in substituting for
the depleting asset), it also starved the mining sector of resources. This
meant that investment in mining was insufficient to maintain output, let
alone to incorporate new techniques in order to curb environmental

RESOURCES POLICY March 1993

Sustainable development in mineral exporting economies

Table 3. Trends in mineral dependence 1970-88 (%).

1970-72 1979-81 1986-88”

Bolivia
Share of GDP: 20.1 15.8 13 2
Exports 77.0 87.6 82.2
Revenue 44.0 23.7 47.7
Mineral dependence index 47.0 42.2 47.7
Chile
Share of GDP: 7.4 8.6 9.1
Exports 85.7 56.2 51.4
Revenue 6.7 12.5 7.6
Mineral dependence index 33.3 25.8 22.7
Jamaica
a 1986-87 only for Peru and Jamaica.
Share of GDP: 10.8 14.2 8.8
Sources: Banco Central de Bolivia, Memoria Exports 63.5 75.1 49.2
1988, Banco Central, La Paz; Comision Chilena Revenue 10.0 20.1 22.2
del Cobre, Estadisticas de/ Cobre, Comision Mineral dependence index 28.1 36.5 26.7
Chilena del Cobre, Santiago, 1989; Jamaica Peru
Bauxite Institute, Jamaican Bauxite andAlumina, Share of GDP: 10.1 15.2 10.6
JBI, Kingston, 1991; Banco Central de Reserva Exports 47.6 62.6 52.3
del Peru, Peru; Compendia Esfadistico de/ Sec- Revenue 6.7 13.5 3.5
tor Public0 de/ Peru, Departamento de Analisis Mineral dependence index 21.5 30.4 22.1
del Sector Publico, Lima, 1989.

degradation. This model of accelerating economic deterioration was

especially marked in Zambia, Zaire, Bolivia and Peru. Yet within the
disappointing global picture, some mineral economies (notably Bot-
swana and Chile) performed rather better.
An analysis of six ore exporting economies 1970-90 includes three
that experienced an accelerating weakening (Peru, Bolivia and Zam-
bia), two which underwent a slow strengthening (Chile and Jamaica)
and one which remained stable (PNG). The three more successful
countries adhered to an orthodox macroeconomic policy which, with its
twin commitment to fiscal prudence and a competitive exchange rate,
reduced the risk of cumulative economic deterioration.
A comparison of Peru and Chile shows why this was so. But it also
reveals an important qualification of the orthodox prescription, namely
that the doctrinaire pursuit of orthodoxy can delay recovery. Table 2
shows that the long-term economic performance of Chile from the early
1970s was one of an abrupt contraction (during the Allende populist
boom) followed by a sustained strengthening, despite the disadjustment
in 1979-82. In contrast, the Peruvian economy underwent an accelerat-
ing weakening with disastrous consequences in the late 1980s (Table 2).
Yet the preconditions to the price swings of the 1970s and 1980s
appeared to favour Peru over Chile. This is because, first, Peruvian
dependence on the mineral sector was initially less than that of Chile,
Jamaica or Bolivia (Table 3). Second, whereas Chile experienced
political weakness in the early 197Os, Peru had a strong military
government which was committed to reforms that addressed Peru’s
excessively unbalanced income distribution. Finally, overall Peru ex-
perienced milder negative external shocks through the 1970s than those
of Chile (Table 4). Yet Chilean economic growth was 1.9% pa 1974-82
(which includes the d eep 1982 economic contraction) and 4.3% in

Table 4. External shocks 1974-78 and 1979-83 (% GDP).

Trade shock 1974-78 Trade and interest shock 1979-83

Trade Interest Total
Bolivia 12.1 4.5 -1.5 3.0
Chile -10.6 -1.9 -4.2 -6.1
Jamaica 2.4 -10.2 -3.7 -13.9
Source: World Bank, World Tables, Washington, Peru -4.3 -3.2 -2.7 -5.9
DC, 1989.

18 RESOURCES POLICY March 1993

 Sustainable development in mineral exporting economies

1983-88 (on a rising trend). In contrast, the growth rate for Peru slowed
from 3.5% in 1974-82 to 0.9% in 1983-88 on a decelerating trend (Table
2).
Macroeconomic policy accounts for Chile’s superior economic per-
formance. Chile pursued orthodox policies after 1973, albeit with
important shifts in emphasis, whereas Peru swung from structuralist to
strong orthodoxy and back to a structuralist stance in the decade
1975-85. The case for macroeconomic orthodoxy rests on a number of
well established points. First, the policies of post-war DC governments
became excessively interventionist and increasingly counterproductive.
La17 has argued that it makes no sense to expect that DC governments
(which he compares to 18th century European governments) can play a
greater economic role than the more modest one pursued by modern
European governments (and with limited success at that). Others (for
example, Hughes)’ have made the argument less polemically.
The DCs’ interventionist policies captured rents (returns in excess of
those needed to keep competitive producers in operation) from the
multinational corporations (MNCs). Unfortunately those rents encour-
aged domestic industrialists to expend more effort in lobbying for state
favours than on evaluating efficient investment options. Such rents
benefited a minority of businessmen and workers at the expense of the
consumer who paid for the privileges of the rent seekers through high
prices for poorer quality goods.
Over the long term such structuralist intervention drove a negative
feedback loop which transferred resources from efficient sectors (min-
ing and export agriculture) to subsidize internationally uncompetitive
firms in the protected sectors (notably in import substitution industry -
whose inefficient implementation was a key policy error of Africa and
Latin America from 1950 to 1980). By contrast, Asian economies like
Taiwan and Korea, with much smaller resource-based sectors to exploit,
abandoned such policies sooner and encouraged from an earlier date the
efficient use of investment and labour in competitive export-oriented
manufacturing.

Convergence on doctrinaire macro orthodoxy

In the aftermath of the Allende populist boom and as copper prices
weakened, Chile in 1974-75 moved quickly to adopt orthodox policies
(including an outward oriented trade policy). The government cut
public sector expenditure from 45% of GDP to 24% 1974-78 and the
fiscal deficit shrank from 25% to 0.8% of GDP. The real exchange rate
was devalued to a competitive level and maintained in the face of
inflation by a crawling peg adjustment. Economic liberalization began
with the easing of price controls during 1973 to 1975, the freeing of
interest rates and the lowering of quotas and import tariffs.
Consistent with the resource curse thesis, the more generously
endowed country, Peru, reacted more slowly to the post-1973 economic
difficulties than Chile. Peru was under less pressure to stabilize prompt-
ly because it expected a rapid expansion of its oil production and it
attracted a sharp inflow of foreign capital. In addition, its economy was
7D. Lal, The Poverty of Development Eco- stronger than Chile’s and the negative impact of the first oil shock was
nomics, Hobart Paperback 16, IEA, Lon- smaller. When its policy proved inadequate, however, Peru resorted to
don, 1983. doctrinaire orthodoxy 1978-80. It was partly for this reason that, like
‘H. Hughes, Achieving industrialization in
East Asia, Cambridge University Press, Chile and many other mineral economies, Peru disadjusted to the
Cambridge, 1988. 1979-81 mineral boomlet.

RESOURCES POLICY March 1993 19

Sustainable development in mineral exporting economies

By the late 197Os, both Chile and Peru were pursuing doctrinaire
orthodox macro policies which responded to the anticipated inflationary
effects of the mineral boom by strenthening the real exchange rate
rather than by sterilizing capital inflows through the accumulation of
overseas assets. Their simultaneous pursuit of trade liberalization (also
adopted in part to dampen inflation) exposed domestic manufacturing
and agriculture to foreign competition under decreasingly favourable
circumstances. The resulting intensification of the Dutch disease effects
weakened the ability of the non-mining tradables sectors to offset the
mineral sector’s decline when the mineral boom evaporated as world
economic growth slowed in 1981-82. Both Chile and Peru sought IMF
assistance in the early 1980s under difficult circumstances and experi-
enced sharp recessions involving GDP contractions in excess of 10% (in
1982 for Chile and 1983 for Peru).

Chile’s reversion to pragmatic orthodoxy

It became clear that doctrinaire orthodoxy had been a mistake, but the
two countries reacted differently to this lesson. Chile responded de-
cisively and tempered its doctrinaire orthodox policy stance with more
pragmatic measures. Peru departed much more from orthodoxy,
however, and eventually reverted to dogmatically structuralist policies,
with disastrous consequences.
The Chilean government intervened in the banking system to avert its
collapse (largely due to high foreign lending to a severely weakened
manufacturing sector). The exchange rate was devalued and import
tariffs were raised to 40%, but as a temporary measure to give a
protective breathing space to the manufacturing sector - and to raise
extra public finance. In addition, and in order to offset falling average
copper prices with higher production, the policy of encouraging MNC
copper expansion was dropped and a strong expansion of the state
owned firm (SOE) Codelco was sanctioned. Meanwhile, in pursuit of
fiscal balance, the government cut public spending and stepped up
efforts to monitor the efficiency of domestic investment, both public and
private.
A further important intervention was the establishment of a mineral
stabilization fund (MSF) in 1985; this was activated when copper prices
began to rise in 1987. Basically, the MSF reduced the Chilean Treas-
ury’s access to the higher tax revenues from the booming copper sector
in proportion to the degree to which realized copper prices exceeded the
target price used in macro policy formulation. The MSF therefore
limited the extent to which politicians could spend a windfall for
short-term advantage and thereby damage the economy by amplifying
the Dutch disease effects. A further step in this direction was the
granting of greater autonomy to the central bank in 1989.
By 1985, some three years after the economic nadir associated with
doctrinaire orthodoxy, the Chilean economy was recovering rapidly.
The growth of non-mining exports - such as fruit - triggered in the
mid-1970s continued apace and helped reduced mineral dependence
substantially (Table 3). By 1989 the Chilean economy was widely
regarded as Latin American ‘best practice’. It had a sustained high rate
of economic growth, falling debt and high levels of economy diversifying
investment. The mineral sector had become only one of several
internationally competitive subsectors within the Chilean economy and
it was attracting large inflows of investment which, by virtue of

20 RESOURCES POLICY March 1993

 Suslainable development in mineral exporting economies

incorporating state of the art technology, embodied more environmen-

tally sensitive technology.

Peru’s lapse into structuralist policies

Peru’s economy diverged from that of Chile after the 1978-82 disadjust-
ment. Peru’s shift from orthodox policies began earlier than that of
Chile and went much further by adopting a strongly structural& stance
in the late 1980s. After the 1980 election, the government launched a
large public investment programme to consolidate its political position.
Fiscal balance then proved difficult to achieve (Table 2) - even under
pressure from the IMF. The trade liberalization drive was reversed - but
not temporarily, as in Chile, and regression to a highly distorting quota
system of protection occurred in 1984. Inflation remained very high and
domestic patience with (half-hearted) orthodox measures snapped,
ushering in the Garcia government.
Under a strong structuralist influence, Garcia launched a populist
boom in 1985 which resembled that of Chile (1971 to 1973) and Jamaica
(1973 to 1976). The sequence began with a sharp rise in real wages but
degenerated into an inflationary spiral with exchange rate appreciation,
growing (and counterproductive) state intervention and alarming de-
terioration in the fiscal and current account deficits.” Such policies
alienated external lenders and thereby limited recourse to foreign
finance when they failed.
Peru’s failure shows that structuralist remedies are unsound, but
Chilean experience (1979982) indicates the damage which doctrinaire
orthodox policies can inflict. That damage comes from adherence to the
principle of sectoral neutrality, which rests on the false assumption that
economic sectors can adjust smoothly to external shocks. That assump-
tion is expecially inapplicable to the mineral economies because, in
addition to the existence of overprotected and inefficient manufacturing
sectors, their agricultural sectors are invariably smaller than the norms
for non-mineral economies of a similar size and level of development
(typically by one-half to two-thirds). This makes for an especially rigid
response to mineral driven shifts in the real exchange rate, contrary to
the assumptions of doctrinaire orthodoxy.
Several recent studies confirm that rapid shifts in the exchange rate do
not bring smooth adjustments in the production of tradables within
economies at pre-NIC levels of development.‘O Wheeler analyses the
greater adjustment difficulties which mineral economies have with
reference to sub-Saharan Africa.” There is clear evidence that an
exchange rate appreciation can permanently destroy productive capac-
‘G. Sachs, Social Conflict and Populist ity leaving the economy in a very weak position to respond to a fall in
Policies in Latin America, NBER Paper mineral prices.” A mineral economy therefore requires some dilution
2897, National Bureau of Economic Re-
search, Cambridge, MA, 1989. of the doctrinaire macroeconomic orthodoxy which was increasingly
“Ft. Fiani and J. de Melo, Adjustment, adopted by Chile 1975-82. Orthodox policy, applied to mineral econo-
Investment and the Real Exchange Rate in mies, should eschew sectoral neutrality. The mineral sector should be
Developing Countries, PRE Working Pap-
er 473, World Bank, Washington, DC, viewed as an economic bonus that assists competitive diversification: it
1990. should not be used to justify relaxation of such efforts by becoming the
“P. Wheeler, ‘Sources of stagnation in backbone of the economy, as doctrinaire orthodoxy allows. The theore-
sub-Saharan Africa’, World Development,
Vol 12, 1984, pp l-23. tically grounded doctrinaire orthodoxy ignores the abrupt real world
“P. Krugman, ‘The narrow moving band, shifts in mineral revenues and the overly rigid response of the non-
the Dutch disease, and the economic con- mining tradables.
sequences of Mrs Thatcher’, Journal of
Development Economics, Vol 37, 1987, Prudent macro management calls for some limitation on mineral
pp 41-55. driven exchange rate shifts to safeguard the competitive diversification

RESOURCES POLICY March 1993 21

Sustainable development in mineral exporting economies
of the non-mining tradables sector. It requires pragmatic interventions
such as the creation of an MSF to expedite such a policy. Countries like
Jamaica with chronically immature manufacturing sectors also need a
competitive industrial policy to prevent the extinction of such sectors. l3
It is ironic that when Jamaica’s Michael Manley returned to office in the
late 1980s he overreacted to the damage inflicted by his populist boom
1973-76 and adopted an orthodox stance which was too doctrinaire.
The remedy for Dutch disease, therefore, also advances the sustain-
ability goal of establishing substitutes for the depleting mineral asset. It
does so by promoting competitive activity outside the mineral sector -
irrespective of the stage that mineral depletion has reached. This also
means that unexpected shocks arising from changes in the competitive-
ness of mining can more easily be absorbed and rapid long-term growth
more easily sustained. As the next section shows, the resulting improved
economic performance also leads to improved environmental per-
formance. Pressure for environmentally sound mineral production
may, in turn, enhance the economic efficiency of mining and mineral
processing.

Environmental degradation
The problem
Mining related activities affect the three environmental media of land,
water and air. Exploration, mine development and the dumping of
barren overburden or waste can degrade the habitats of local flora and
fauna and prohibit alternative land uses - forestry, agriculture or
leisure. Water quality may be affected by naturally occurring acid mine
drainage from mines and waste piles or leaks and spillages from tailing
dams or reagent ponds. Smelter emissions (and to a lesser extent those
from refineries) of carbon, sulphur and nitrogen compounds and toxic
metal particulates may affect air quality. Indirect emissions occur with
fossil fuel burning, and the releasing of potentially hazardous dusts and
gases related to the workplace. Such problems are likely to worsen in a
cash starved mining sector where insufficient investment has caused
technology to stagnate or even regress.
In the DC context it can be argued that the mining industry was
traditionally structured to externalize environmental costs so that profit
maximization was achieved not so much through efficiency and innova-
tion, as through the appropriation of undervalued resources and the
shifting on to others of the environmental costs of doing so. For
example, Bolivian peasants whose farmland was ruined through pollu-
tion from a tin valorization plant received small compensation payments
which covered only the loss of that particular year’s crop rather than the
potential loss of their livelihoods.
The plant in this example was state owned and there is evidence that
the severity of the pollution problem is linked to ownership patterns. In
particular, the smaller private mines and large SOEs have proved less
responsive to the need to improve environmental management than the
more dynamic MNCs. This divergence in performance-has widened as
‘%. Frischtak, Competition Policies for
/ndusfria/izino Countries. lndustrv and domestic economic conditions have deteriorated in the DCs, although
Energy Department, Policy and &search there are significant exceptions to this rule.
Series, World Bank, Washington DC,
1989; R. Wade, Governing the Market, Mine ownership and environmental response
Princeton University Press, Princeton, NJ,
1990. Small- and medium-scale mines account for at least one-quarter of DC

22 RESOURCES POLICY March 1993

 Sustainable development in mineral exporting economies

mining output. The growing number of small-scale enterprises, coopera-

tives and family groups of miners increasingly create serious problems
by exploiting gold, copper or tin in alluvial deposits, rivers or the
effluent from large-scale mines and processing plants. These miners are
generally poorly educated with no forma1 technical training. Such
miners may move from plot to plot in nomadic fashion without a
long-term perspective on the negative environmental effects of their
behaviour. An example is provided by the excessive use of mercury as a
reagent in gold mining in the false belief that the more mercury used the
greater the rate of gold recovery. Such releases of excess mercury into
both streams and the atmosphere account for the fast developing and
widespread instances of mercury poisoning which are being reported in
Bolivia and Peru.14
Small-scale mining frequently occurs in symbiosis with inefficient
large-scale mines, often state owned, whose low levels of recovery yield
metal bearing effluent. For example, when Bolivia’s Comibol collapsed
in the mid-1980s, it fired all but 7000 of its 27 000 miners and triggered a
surge in activity within the small mining sector, as redundant miners set
up mining cooperatives. The state-owned enterprise buys back the
product from the small miners and so benefits from the miners’ work
without having to pay a ‘social wage’. This situation is common in
Bolivia and Brazil where SOEs employ obsolete technology in poorly
managed mines. The technology often dates from the 1950s and 1960s
and has not been modernized since nationalization.
Nationalization of mines peaked in the late 1960s and early 197Os,
reflecting efforts to prevent perceived unfair exploitation by MNCs. The
state-owned mining firms often performed poorly, however, because
political interference reduced their commercial autonomy and sapped
their ability to cope with deteriorating macroeconomic conditions.15
They have usually been given multiple objectives which blur an evalua-
tion of their performance and undermine profitability. Output is
maximized to increase government revenue leading to high grading -
the inefficient exploitation of richer reserves, reinforced by the lack of
careful mine planning and a failure to reinvest profits in exploration to
extend reserves. Ministries intervene in pursuit of political objectives,
whether overtly for macroeconomic reasons through price controls and
tax imposts which can decapitalize SOEs, or less openly for political
patronage through personnel changes. Meanwhile, the perceived ab-
sence of the risk of bankruptcy blunts the competitive spur to both
economic and resource use efficiency and corrodes worker discipline
and managerial initiative.
Large mining SOEs such as Comibol in Bolivia, Centromin in Peru
and ZCCM in Zambia have been decapitalized as a result of onerous
levels of taxation (reflecting macroeconomic policy errors), the use of
“‘CEMYD, Environmental Degradation their operations for political patronage, and a related lack of investment
from Mining and Mineral Processing (Boli- in technological and managerial change. The resulting inadequate cash
via), Mimeo, CEMYD, La Paz, 1991; A.
Nunez, Heterogeneity of Production and flow, overmanning and poor maintenance has increasingly starved such
Domestic Technological Capabilities in SOEs of the resources to buy spare parts to sustain production, let alone
Mining and Mining-related Productive and to update equipment and limit environmental damage. Management
Service Activities in Peru: Their Relevance
for an Environmental Strategy, Mimeo, also deteriorated, so that even where foreign aid provided new technol-
Peru, 1991. ogy it risked being inappropriate. It could even prove counterproductive
‘%.M. Auty, ‘Determinants of state mining to the environment, particularly if it was operated with excess capacity
enterprise resilience in Latin America’,
Natural Resources Forum, Vol 16, forth- or incorrect ore feed - as the example of the Russian-supplied Bolivian
coming. tin smelter cited earlier shows.

RESOURCES POLICY March 1993

 Suslainable development in mineral exporting economies

Even where the mining SOE is relatively well managed, as in the case
of Chile’s Codelco, the adoption of environmental measures may lag
behind that of MNCs. Chile’s environmental standards were based on
North American practice: they proved unenforceable by the relatively
untrained and insufficiently numerous administrators and were selec-
tively employed. The country’s only privately owned smelter, operated
by a subsidiary of Exxon, was forced to meet emission standards more
stringent than current US practice, while in the same valley an SOE
smelter and refinery continued operating with neither sulphur dioxide
nor arsenic removal facilities. Moreover, as Chile’s state-owned mines
expanded vigorously through the 1980s in an attempt to offset falling
copper prices with higher volumes, the government stopped reporting
sulphur dioxide levels in the air.‘”
Clearly, increased environmental damage may be one unforeseen
consequence of the wave of mining nationalizations in the decade prior
to the first oil shock. For in addition to promoting SOEs whose
declining operational efficiency mirrored and amplified the macroeco-
nomic deterioration, nationalization also deterred MNC investment,
which appears to be becoming more responsive to environmental needs.
Contrary to earlier fears, MNCs have not looked to the DCs as pollution
havens but instead have attempted to commercialize their new technolo-
gy which is generally more environmentally sensitive. Explanatory
factors for this trend include access to technology which combines
economic and environmental efficiencies developed under industrial
country regulatory constraints; fears of expropriation or retroactive
environmental penalties for ‘poor’ environmental behaviour; the condi-
tions of loan finance for new mining projects which require sound
environmental practice; stricter regulatory requirements and greater
public concern at home; and the views of the MNCs’ more environmen-
tally conscious shareholders.
In addition, recent changes in the environmental behaviour of mining
MNCs may have been as much responses to long-building economic
(cost minimizing) pressure for materials and energy conservation as to
the environmental challenges alone. *’ However, these positive factors
are emerging influences and by no means apply to all MNC operations
in the DCs. For example, even a relatively well managed mineral
economy like PNG, which eschewed nationalization and bargained hard
with the MNCs, failed to pursue adequate safeguards for mineral
effluent disposal.” Or again, the Southern Peru Copper Corporation (a
subsidiary of ASARCO) still prefers to pay a relatively small annual fee
into the ‘black hole’ of the Peruvian treasury rather than invest a greater
amount in water treatment and clean up.

‘% D Crozier, ‘Chile’s legacy - pollution’, Environmental management prospects

Min& Journal, 24 August 1990.
‘%.M. Auty, ‘Materials intensity of GDP’, Environmental regulations designed specifically for mining and mineral
Resources Policy, Vol 11, 1985, pp 275- processing have until recently been uncommon in DCs, although most
283; M.S. Bernstam, The Wealth of Na-
tions and the Environment, IEA Occasional do have in place a basic standard for water quality and, less commonly,
Paper, No 85, IEA, London, 1990. air quality. Progress may yet be delayed by a recent emphasis on the
“W. Pintz, ‘Environmental negotiations in liberalization of the investment climate in order to attract foreign
the OK Tedi mine in PNG’, in C.S. Pear-
son, ed, Multinational Corporations, En- investment, particularly in Latin America, Ghana and South-east
vironment and the Third World, Duke Uni- Asia.‘” Offsetting this, however, is the increasing environmental con-
versity Press, Durham, NC, 1987. ditionality of private, bilateral and multinational credit in new mineral
19P. Daniel and W.R. Brown, Environmen-
tal Issues in Mining and Petroleum Con- projects, which demands environmental impact assessments and best
tracts, Mimeo, IDS, Sussex. practice technology. At the other extreme, a few DCs have adopted

24 RESOURCES POLICY March 1993

 Sustainable development in mineral exporting economies

extensive regulatory frameworks, sometimes based on US models which

are too stringent to be enforceable (as in Chile). In Brazil, equipment
should be operated according to the environmental norms in the country
of technology origin.
Most opposition to mining regulation comes from established firms
faced with the costs of paying for past environmental damage. Some
firms react defensively and seek to reach agreements with governments
to postpone compliance. Others, however, have adopted innovative
solutions under pressure, as in the case of Alcan’s Jamaican alumina
refineries which developed a new technique for dry-stacking the red
mud effluent. Yet a third reaction has come from firms which display
considerable dynamism in coping with pollution restrictions. Exxon’s
Los Bronces mine in Chile is one example: it developed a bacterial
leaching technique in order to circumvent government fears concerning
acid mine water pollution of rivers providing drinking water to Santiago.
The method adopted for Los Bronces had the double advantage of
extracting extra copper and avoiding government charges for water
treatment. It underlines the superiority of gains from new projects over
those from retrofitting, which often involves a higher investment with a
poorer return. Overall, dynamic mining companies are not closing,
reinvesting elsewhere or exporting pollution to DCs; rather they are
adapting to environmental pressures by innovating or by improving
their environmental practices abroad. Lobbying by mining firms in the
industrialized countries for international standards is an important
mechanism both for the transmission of improved practice worldwide
and for the commercialization of their new technologies. This is an
important reason why a high level of mining investment, which a
soundly managed economy can attract, is the key to environmental
improvement.
Opinion is shifting away from ‘command and control’ regulation as a
solution for environmental problems, in part towards market-driven
solutions. In Peru, where a long tradition of environmental lobbying has
established a complex web of environmental regulation, most cases of
environmental pollution continue unresolved.*” This is likely to persist
until improved economic management rectifies Dutch disease damage
arising from both the 1985-89 Garcia populist boom and the high
exchange rate policy of the next (Fujimori) government.*’
One regulatory problem in the DCs is the remoteness of many mining
enterprises, especially the smaller ones in the high Andes and remote
Amazonian rainforests. Regulation in DCs is of the command and
control type and usually deals with the symptoms of pollution, once
reported, and not the causes of environmental mismanagement from the
outset. It rarely imposes fines commensurate with the costs of abate-
ment or remedial treatment. Moreover, it also carries hidden costs by
creating opportunities for corruption and rent seeking.
Meanwhile, in the industrialized countries emphasis has moved away
from a ‘pollutee suffers’ principle to one in which the ‘polluter pays’,
whereby the polluter is charged for destructive use equal to the damage
caused. This was the approach recently recommended at the Earth
“01) cit. Ref 14. Summit in Rio (1992). Such market incentives allow greater scope for
“‘C:E. Paredes and J.D. Sachs, eds, companies to choose how best to attain a given environmental standard.
Peru’s Path to Recovery, Brookings In- Intervention to correct market failure rather than to substitute govern-
stitution, Washington DC, 1991.
“A.V. Kneese, Economics and the En- ment regulation for such failure may yield significantly more efficient
vironment, Penguin, London, 1977. solutions to environmental problems. ‘* Command and control regula-

RESOURCES POLICY March 1993 25

Sustainable development in mineral exporting economies
Technological frontier

Developing country
X x technology-behind
X the frontier, with
X high environmental
and low or high
x x economic costs

X X

C’ Existing technologies on the frontier

Some firms make incremental changes

which lower environmental cost at
the expense of production costs,
moving down the curve

The dynamic are

innovating pushing
B3
the technological
Figure 1. Environmental and econo- frontier to new
mic trade offs. economic and
environmental
Source: A. Warhurst, ‘Environmental man-
efficiencies
agement in mining and mineral processing jj\_
in developing countries’, Natural Re-
sources Forum, Vol 16, 1992, pp 39-48. Production costs per unit of output

tion tends to foster costly retrofitted solutions to existing technology

rather than the adoption of new technologies. The most common
market-driven measures include pollution taxes, emission charges and
deposit funded systems such as the posting of bonds up front for the
rehabilitation of mines after closure, which is now standard practice in
Canada and Malaysia. But the utility of such measures is still conditional
on effective price signals in a well managed economy.

The environmental trade off

Environmental regulation is most probably here to stay and bound to
become widely adopted, more stringent and better enforced. Therefore,
the winner in the division of shares in the metals market will not
necessarily be whichever company avoids environmental control for a
short-term cost advantage. The evaders of environmental management
are likely to be forced to internalize the high cost of having done so at a
later date. Instead, the gainers are more likely to be those companies
that were ahead of the game, those that played a role in changing the
industry’s production parameters, and those that used their innovative
capabilities to their competitive advantage.
Figure 1, drawn from Warhurst ,23 shows that for dynamic companies
23A. Warhurst, ‘Environmental manage- the traditional trade off between production costs per unit of output and
ment in mining and mineral processing in
developing countries’, Natural Resources
environmental costs is disappearing - contrary to the widespread belief
Forum, Vol 16, 1992, pp 39-48. that such a trade off exists (which presupposes a static technology).

26 RESOURCES POLICY March 1993

 Sustainable developmen in mineral exporting economies

Indeed, new technology is being developed which lowers both environ-

mental and economic costs and pushes forward the frontier of leading
technology. Figure 1 summarizes different patterns of firm behaviour
towards the internalization of the mining sector’s environmental costs
(traditionally imposed on the pollutee or absorbed by the state). DC
firms appear in a generalized group behind the technological frontier
(there are obviously exceptions to this general pattern), and their
behaviour is associated with high environmental costs but wide ranging,
generally lower, production costs (linked to their ore grade and the
efficiency of their operations).
The technological frontier in Figure 1 is a generalized band within
which most mining companies operate, to a greater or lesser extent
absorbing the environmental costs resulting from their activity. Those
less dynamic firms with high sunk costs in existing facilities tend to
experience environmental regulatory pressures as a cost burden. This
pushes them down the curve (B’-B2-B3) as they respond incrementally
to successive regulation with generally expensive add on controls
(emission gas scrubbers, water treatment plants, dust precipitators and
acid neutralizing plants).
The more dynamic firms innovate by building into the new generation
of technology lower costs of both production and pollution control. In
the process they avoid having to undertake costly add on incremental
technological change and clean up at later stages in their operation.
Thus, they push forward the technological frontier (A’-A2). There are
also cases where well planned incremental innovations reduce environ-
mental costs at no extra cost to production (Cl-C’) or overall efficiency.
But imposing too strict a regime too fast may lead a plant with high
sunken costs in equipment to close down, in some situations without a
legal need to accept liability for subsequent clean up and waste
management programmes.
Growing evidence suggests, however, that improving a mine’s en-
vironmental management may not be detrimental to economic perform-
ance, and in some cases may provide considerable economic benefit.24
New and flexible scale, low cost and less hazardous hydrometallurgical
(leaching) alternatives to conventional smelting may be of added
advantage to the DCs, improving the competitiveness of their mineral
production. For example, processing right up to the final saleable metal
product can be undertaken at the mine site - whereas in conventional
process routes a smelter requires feed from at least 10 large mines and
ore may have previously been exported to overseas smelters.
But investment in such improvements is unlikely to occur unless
macroeconomic management improves. Firms must be able to respond
to effective market signals without fear that their viability will be
eliminated by arbitrary taxation levels which bear no relation to
profitability, or by massive shifts in the exchange rate. A key environ-
mental challenge is therefore how to keep the industry sufficiently
dynamic for it to be able to afford to invest in environmental
management.

Conclusions
Planned mines (and some planned expansions) in DCs will increasingly
be implemented by the more dynamic MNCs, often in partnership with
240p tit, Ref 2. rejuvenated SOEs, rather than by inefficient SOEs. In many instances

RESOURCES POLICY March 1993 27

Sustainable development in mineral exporting economies

these investments will be partly financed by credit which will be

conditional on demonstrable good environmental practice, including
environmental impact analysis. The new technology should benefit the
DCs by allowing them to reduce the trade off between higher environ-
mental costs and lower production costs.
Improving on past performance can be facilitated through the design
of country specific regulatory frameworks which deal with the potential
causes of environmental mismanagement and not just with the symp-
toms (ie pollution). It would also help to include the social costs of
mining in future project evaluation, 25 because this would raise the price
of the mineral and slow extraction. To the extent that the levels of
exports would be lowered, it would also reduce the Dutch disease risk.
But an important prerequisite for achieving environmental efficiency is
improved productive efficiency and that requires sound macroeconomic
management.
An economy experiencing rapid growth and sectoral diversification
can expect to absorb environmentally sensitive technology faster. But
rapid growth has proved difficult for mineral economies to sustain. The
mineral sector differs from most other economic sectors. The existence
of sizable mineral rents means that it is frequently the repository of a
strong comparative advantage that generates large foreign exchange and
tax revenues which dominate the entire economy. Such a resource is a
double-edged weapon because its main economic contribution (taxes
and foreign exchange) is volatile.
DC policies have all too often exacerbated such volatility, intensifying
the Dutch disease effects so that economic growth has been slow and
mineral dependence has become excessive. The non-mining tradable
sectors (agriculture and manufacturing) become uncompetitive as a
result of Dutch disease. They require subsidies from the mining sector
and respond inflexibly to exchange rate shifts, contrary to the assump-
tions of doctrinaire orthodoxy. In extremis, the transfer of resources
from mining to the feeble non-mining tradables may persist during a
mineral downswing. This decapitalizes the mining sector where low
autonomy SOEs are dominant, as in Zambia, Bolivia and (to a lesser
degree) Peru. All tradable sectors therefore become weak.
Dutch disease slows economic growth, retards competitive diversi-
fication and perpetuates a risky dependence on mining. The resulting
weak economic performance threatens economic, welfare and environ-
mental goals alike. The sustainable development of a mineral economy
therefore requires that the mineral sector should be seen not as the
backbone of the economy but as a bonus with which to accelerate
competitive diversification. In this way the emergence of competitive
non-mining sectors, especially manufacturing, will be encouraged long
before the theory of resource depletion dictates it. This reduces the risk
of economic deterioration arising from abrupt revenue losses which
many ore exporters experienced in the 1970s and 198Os, for example.
Such abrupt losses might arise from excess global mining capacity or
‘% F Mikesell, ‘Project evaluation and
sustainable development’, paper pre- materials substitution. Not only is the damage from such events reduced
sented to the Western Economic Associa- by competitive diversification but, consistent with sustainability criteria,
tion international meeting in Seattle, June
asset substitution is facilitated as the resource finally nears exhaustion.
1991; FL Repetto, ‘Natural resource
accounting for countries with natural The macroeconomic policy needed to mute the potentially harmful
resource-based economies’, Mimeo, effects of the mineral sector and thereby successfully harness it for
UNDPAVorld Bank Workshor, on Environ-
mental Accounting, World Bank, Washing-
sustainable development is one of pragmatic orthodoxy. Such a policy
ton DC, 1986. stresses adherence to fiscal prudence and current account equilibrium

RESOURCES POLICY March 1993

 Sustainable development in mineral exporting economies

but, unlike doctrinaire orthodoxy, sanctions state intervention to mute

‘%.M. Auty, ‘Mismanaged
pendence: Zambia 1970-90’,
Policy, Vol 17, 1991, pp 17&183.
the damage done by mineral booms and downswings. It smooths
sectoral adjustment to shifts in foreign exchange earnings and taxation
through a mineral stabilization fund.
Other interventions may also be justified to stimulate technological
innovation, improve environmental management, train engineers and
managers and implement a competitiveness enhancing industrial policy
(where past errors have spawned an immature manufacturing sector).
Technology transfer clauses and training schemes within the newly
emerging joint ventures governing the terms of the current new round of
mineral investment projects may be one vehicle for achieving such aims.
Yet among the ore exporters, Bolivia and Jamaica shun such an
industrial policy, Peru and PNG still tolerate exchange rate overvalua-
tion, while Zambia remains torn between too little and too much
orthodoxy.26 Many governments in mineral economies have still to fully
digest and apply the harsh lessons of the 1970s and 1980s. The rise of the
mineral de-
Resources environmental imperative may force them to confront such potential
problems earlier rather than later.

RESOURCES POLICY March 1993 29