By Jill Leyland
Economics Consultant

The economic benefits that a well-run mining sector can bring to some of the poorest countries in the world are not widely enough known. NGOs and others are all too willing to point out the shortcomings, real or imagined, of the industry.

The theory of the “resource curse”, which postulates that countries with rich natural resources do worse in the development stakes than those with less, has gained many supporters, particularly as the 1970 to 1990 period, unusually in history, did indeed see comparatively natural-resource-poor countries in East Asia develop more rapidly than many better-endowed countries.

As a result, the capacity of the mining industry to make a substantial economic contribution to pushing back the frontiers of poverty is often paid less attention by policy makers than it should be. Indeed, sustainability and social issues have tended to dominate the agenda whenever policy makers and economists have turned their attention to the industry in recent times. While these are clearly important concerns, so too are economic considerations. Jessica Cross’s article in the last edition of the Alchemist looked at the benefits of the social responsibility programmes that gold mining companies run. This article will look at the other economic advantages the industry delivers.

The Importance of Gold Mining

Why is mining so important for development? Speaking in 2002, Peter Woicke, Executive Vice President of the International Finance Corporation, summed it up: “Mining companies are ‘frontier’ companies. They are usually the first to invest in politically unstable or recently reformed countries. By creating jobs and economic growth, they help catalyze other private investment at the local and regional level, and they have a huge demonstration effect. And, from our standpoint, they tend to go where they are needed the most. Half of the 50 or so countries with large mining sectors are ‘low-income countries’ – where people have to scratch out a living on less than two dollars a day – in Asia, Latin America and, especially, Africa.”

It was not until 1999, when the World Gold Council published its first report on the importance of gold mining to developing countries(1), that gold’s particular importance to some of the poorest countries in the world was recognised. An update to that work, published earlier this year(2), showed that gold mining had become even more important to lower income countries.

Table 1 shows how lower-income countries have taken an increasing share of gold mine production over the past decade. The table uses the four income classifications (low income, lower middle income, upper middle income and upper income) into which the World Bank divides countries. This classification is based on Gross National Income (GNI) per head and is updated annually(3).

1. A Glittering Future? Gold mining's importance to sub-Saharan Africa and Heavily Indebted Poor Countries, World Gold Council, June 1999.

2. A Touch of Gold: Gold mining's importance to lower-income countries, by Jill Leyland,World Gold Council, May 2005.

3. The data in Table 1 differ from those in A Touch of Gold, as the classification of some countries changed in the latest annual review. In particular, South Africa and Russia, both previously classified as lower-middle-income countries, are now classified as upper middle income.

Moths hatching from silk worm cocoons. Silk worms feed on the leaves of cassava and mulberry trees being planted as part of Sepon Trust Fund activities. Photo courtesy Oxiana

Currently, low-income countries are those that in 2004 had GNI per head of under $825 per year, lower-middle-income countries are those from $826 to $3,255, while upper-middle-income countries go up to $10,065 per head (these three groups are considered as developing countries). In 1996 the additional classification of Heavily Indebted Poor Countries (HIPCs) was created to identify those whose debt burden was considered unsustainable. These latter countries have been the focus of debt relief efforts of recent years. Between 1994 and 2004, low-income and lower-middle-income countries saw their gold output increase by over 60% and their combined share of the global total rise from 31% to 46%. The growth in HIPCs’ output was even faster – over 80%.

Just one medium-sized mine – we will see an example later – can make a noticeable improvement to a poor country’s economy. Why is this?

The very poorest countries in the world tend to have certain economic characteristics. First of all, their economies are very small. The median 2004 GDP of the 38 HIPCs, for example was around $4.2bn – less than Italy generates in one day. A few tonnes of gold can make a noticeable difference to an economy of such small size.

Table 2 compares the value of gold produced by a number of low- and lower-middle-income countries to their GDP. In nine countries the ratio is over 5% and in some it is in double digits (the ratio may be exaggerated in some cases if informal economic activity is not fully included in GDP measurement).

A Significant Export

Low-income countries struggle to find goods to export to pay for import needs. Frequently they run balance-of-payments deficits and can incur debt or require assistance to finance the imbalance. Possibilities for developing manufacturing industries are typically constrained by a lack of skills, investment, and transport and other basic infrastructure; this is particularly true for sub-Saharan Africa, where most countries are far from richer countries that could act as markets for manufacturers.

Fluctuations in prices of the commodities on which they are obliged largely to depend add to countries’ problems. While the gold price is not immune to fluctuations, it has two advantages over many other commodities: over the long term its real price is stable, whereas the price of most commodities de-clines; and the price is less volatile than that of most other commodities since the large stocks of above-ground gold and the behaviour of many holders act to dampen price fluctuations.

There is a further substantial advantage to countries with operating metals mines. Unlike agriculture, metals mining, at least at the crude or semi-refined stage, is largely free of the subsidies often given by developed countries to their own agricultural production – subsidies which distort world trade and can act to the detriment of farmers in developing countries.

Just as gold production is shifting to the developing world, so it is becoming more important as an export for countries concerned. Chart 1 shows the share of gold in goods (visible) exports for certain low- and lower-middle income countries in 2003. There are 18 of these countries for which gold accounted for at least 5% and 12 where the share was in double digits. In six of these it was the leading export and in (probably) three it was the second export. For the HIPCs as a whole, gold exports doubled between 1997 and 2003. By the latter year, it accounted for 7.7% of goods exports of the HIPCs as a group and for 6.1% of exports of goods and services combined. This would make it one of the most important exports for this group of countries.

How Much of the Revenue Benefits the Host Country?

A legitimate question is the extent to which any export benefit is offset by imports needed for the mining activity, or by profits and dividends remitted by the mining company to its country of origin. Gold mining companies, as a matter of best practice, seek to source as many goods and services locally as possible and to recruit locally as far as possible. This ensures that the vast bulk of the earnings from the mining process benefits the country concerned and the local community.

The success major mining companies have in this is demonstrated from analyses done by Placer Dome. The company has broken down spending on each of its mines to show how much is spent on wages, on goods and services from the local community, on goods and services from elsewhere in the country concerned and from international sources. Combining the data from all its mines in developing countries gives the breakdown in Chart 2, which shows that nearly 90% of spending benefited the host country. To assess the situation fully, profits that are transferred out of the country should also be accounted for, but even if allowance is made for this, it is clear that an overwhelming proportion of income generated by the mines is spent in the host countries.

Other Benefits

The importance of gold as an export is the easiest benefit to quantify, but it is not the only one. Other benefits include:

Additions to government revenue: Governments in developing countries tend to have narrow tax bases. Taxation revenues or royalties from a mine are a welcome and needed addition

Employment and training: The direct number of jobs created by a modern mine may be small, but they are usually well paid and often provide training in new skills. Additional jobs are created in supplier companies and the multiplier effect will generate more. Further, one mineworker will normally support a number of other people

Foreign investment: Mining companies often provide the first major foreign investment into a country, bringing technology and much-needed expertise, as well as acting as a pathfinder for other companies

Physical infrastructure: A mining project, particularly when it occurs in a remote region, will provide roads and upgrade existing ones. This helps local economic activity – for example, it makes it easier for farmers to get their goods to market. Electricity and water supplies to the area can also be upgraded; this not only benefits the community but also provides infrastructure for other industries

Technical, legal and financial: Infrastructure associated with a major industry.

Just One Mine: A Case Study

A well-documented example of what can be achieved by just one mining project for a country is Oxiana’s Sepon project in Laos.The World Bank calls Laos “the poorest and least developed country in the East Asia region”. Its population of 5.8m had a GNI per head of just $390 in 2004. Gold was first produced at Sepon in 2003 (a copper mine has started this year). With annual production of 4 to 5 tonnes a year in 2003 and 2004, expected to rise to over 6 tonnes in 2005, Sepon is a fair-sized – but not enormous – gold mine. But Laos’s GDP is just $2.4bn (2004), so the value of 2004 production at $58m was worth nearly 2?% of GDP. World Gold Council research found that in 2003 it accounted for 15% of Laos’s exports.

A report by the Australian Centre for International Economics(4) documents the economic impact of the mine, which was the largest foreign investment project the country had received. Allowing for the multiplier effects (when employees and suppliers of goods and services spend the money they are paid by the mine, thus spurring the production of further goods and services), the CIE believes the gold and copper mines will increase Laos’s GDP by 8% in total and government income by up to 4%.

The mine has made a significant contribution to employment in the region and there has been a major improvement to road infrastructure, including the removal of unexploded ordnance from the main road into the district and the upgrading of the road that links the district to the main highway.

This is particularly important, as research has indicated that the absence of all-weather roads was the problem most cited by villagers in Laos as preventing economic development. A trust fund set up by the mining company is funding other businesses.

4. The Benefits to Laos of the Sepon Gold and Copper Mines, Centre for International Economics,August 2003.

Gold Fields Ltd’s mill at Tarkwa in Ghana, one of the mines that are helping to generate one third of the country’s exports. Photo courtesy Gold Fields

The report notes that villages in the district are growing, with many houses being renovated, and that rising income levels have enabled the number of “mechanical buffalo” (machines used in agriculture in place of the traditional buffalo) in the region to triple since the project started. Thus the mine has enabled an improvement in local agriculture and provided a major stimulus to the region’s economy – as well as the benefits it has brought at a national level.

Finally, the success of the mine and the way in which the company and the government have been able to cooperate should help to attract other major foreign investment projects to the country.

Gold Mining: A Role to Play in Development

The impact of the Sepon mine on Laos may be a particularly spectacular example of what the industry can achieve – but there are many other gold mines bringing significant benefits to the local community in other lower-income countries. Of course, the installation of a major mine in an area can generate some problems: the environmental impact and issues of social dislocation need to be managed. But economic development is rarely pain free no matter which route is taken – the start up of any major industry in an area is often disruptive even where the total impact is overwhelmingly positive. Overall there can be little doubt that gold mining is continuing to play a very positive part in the economic development of a number of countries, just as in the past it played a major role in parts of the US and Canada, in Australia and, of course, in South Africa.

Jill Leyland – adviser or staff member for the UK National Statistics Office, the Economist Intelligence Unit, the UK Department of Trade and Industry and the Financial Times, among others – is a consultant with over 30 years’ experience.