Mining is essential to achieving green economies because it supplies the base raw materials for green technologies.
For instance, rare earth elements such as neodymium and dysprosium are crucial for high-strength magnets used in wind turbine generators. Without these magnets, it would be challenging and expensive to generate wind energy, a vital component of many countries’ plans to decarbonize their energy markets.
However, meeting market demand for commodities, even those required for green economies, falls short of society’s expectations for industry. As the world transitions towards a low-carbon economy, the extractive sector has a role to play in ensuring a just transition that supports affected communities in host nations. Beyond minimising negative environmental and social impacts, extractive projects must foster sustainable economic development.
This article outlines how mining investment does not necessarily lead to sustainable economic development, and highlights some key ways extractive firms can ensure they do contribute.
Extractive investment in developing economies is not a guarantee of sustainable economic development. The boom-and-bust cycles associated with extractive industries have led to volatility in economic growth and government revenues, making it difficult for governments to plan and invest in sustainable development. Furthermore, when natural resources run out, countries are often left with sizeable gaps in their tax base and employment markets. To address this issue, governments and mining companies must work together to promote economic diversification and shift towards more sustainable and inclusive forms of development.
Economic diversification is essential for maximising the benefits of extractive revenues. By diversifying their economies, countries can avoid the volatility associated with commodity-dependent economies. Diversification helps to create a resilient economy that can better withstand external shocks, such as commodity price swings, and generate new sources of growth and job creation. Critically, this approach also contributes to more impactful sustainable economic development by promoting the growth of higher productivity sectors and industries, such as manufacturing, services and innovation. This ensures that when mineral or hydrocarbon resources run out, revenues have helped form a well-structured economy that can continue to be successful under its own steam.
There are three central ways that the extractive sector can contribute to economic diversification and sustainable economic development in host nations.
Infrastructure investment
Extractive projects often require investment in infrastructure, such as transportation networks, energy supply, communications networks, and water systems, due to their location remote and rural areas.
Infrastructure investment can play a crucial role in enabling economic diversification by providing a foundation for higher productivity and value-added sectors. For example, improved transportation infrastructure can facilitate the movement of goods and people, enabling businesses to access new markets and expand their operations. Similarly, investments in energy infrastructure can provide a reliable and affordable source of power to businesses, reducing production costs and increasing competitiveness. Investments in digital infrastructure can also help businesses leverage technology to improve efficiency and competitiveness. These are key to attracting investment into value-added manufacturing and services sectors and facilitating domestic innovation. Overall, infrastructure investment can help to create a supportive environment for economic diversification and the growth of investment into higher productivity sectors.
The most impactful form of infrastructure investment comes through in-country beneficiation. By hosting the refining and production of final market products in country, extractive projects ensure that a higher portion of the value-added profits are made, and taxed, in the host country. Furthermore, production of raw materials will help make domestic manufacturing sectors more competitive. Crucially, the skills and infrastructure required will outlive extractive projects, constituting long-term gains towards a more productive and sustainable economy.
In addition, infrastructure investment can have a positive impact on local communities by improving access to basic services, such as water and sanitation, and reducing transportation costs for individuals and small businesses. By prioritizing sustainable infrastructure investment, the mining sector can contribute to more inclusive and sustainable economic growth that directly benefits host communities.
Local procurement and employment
By sourcing goods and services locally, mining companies can support local economies, create jobs, and provide opportunities for local businesses. Any firm’s supply chain is likely to support many more jobs than the firm would ever employ themselves. National policies that support local procurement and employment are an important way for governments to ensure that the benefits of mining activities are shared with local communities.
Moving beyond the traditional ‘trickle down’ understanding of multiplier effects caused by job creation, employment of local people will often require investment in training and skills development. This ensures local workers are equipped with the skills and knowledge needed to benefit from other employment opportunities in the mining industry.
Critically, investment in human capital is a key driver of economic diversification. By improving the skills and knowledge of the workforce, national labour markets can better compete in higher productivity, value-added sectors. A well-educated and skilled workforce is also more adaptable to technological change and innovation, which can further contribute to economic diversification. Human capital investment also provides individuals with opportunities to access better-paying jobs and can help reduce income inequality, leading to more sustainable and inclusive economic growth. When projects refine final products in country, this affect is amplified.
Revenue sharing
Revenue sharing is ensuring that profits are distributed equitably between firms, governments and host communities. Revenue sharing can take various forms, including taxes, royalties, or other payments made by mining companies to the government, which can then be used to fund public services, infrastructure, and other development projects.
Revenue sharing does not only mean sharing the financial benefits of mining but also creating opportunities for enterprise development in local communities, using funds generated by the mine. This is a key element of legacy approaches to corporate social responsibility. Enterprise development programs can provide host communities with the skills, resources, and support needed to start or grow their businesses, creating new jobs and driving diversified economic development and the local scale. Critically, this helps drive sustainable development for the stakeholders who are most impacted by extraction activities.
In conclusion, for the mining sector to contribute to sustainable economic development in host nations, it must prioritize local procurement and employment, infrastructure investment, and revenue sharing. By doing so, the mining sector can help create more inclusive and sustainable economic growth that contributes a just transition towards green economies.
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