Managing Commodity Lifecycles, Mining

5. Impacts of commodity price volatility – government revenues

A key issue for the management of revenues is how they are spent. There are inevitably strong pressures when commodity prices are high to increase government spending on consumption, for example on wages, healthcare programmes, welfare provision and pensions. This spending ensures that the benefits of a commodity boom are widely spread, and seen to be widely spread. However, such a policy has a disadvantage in that it is difficult and politically unpopular to reduce budget provision on these items when commodity prices fall and government revenues decline.

Strong practical and economic reasons exist for ensuring instead that the larger part of revenues arising from the taxation of mining is directed towards investment. While there are good reasons why some of this investment should be in overseas assets, as discussed in the next section, much of the investment should be directed towards the country itself. Such investments might include the construction of hospitals, transportation facilities and power plants as well as education and agriculture. 

This makes sense from the point of view of a country’s broader economic development but it is also easier to ramp up and ramp down investment projects than it is welfare programmes when a fall in commodity prices forces an adjustment, as inevitably is the case. Another option is to use an increase in revenues to pay off national debt or to establish government deposits at the central bank.

A focus of revenue spending on investment is also important for sustainable development.  Government revenues from natural resources are unlike those from other industries, since natural resources are non-renewable and finite. They are, in effect, part of a country’s capital stock. Accordingly, it is logical that a substantial part of the rent from the drawing down of this capital stock should be deployed in investments which replace, and ideally augment, the nation’s capital stock. This principle, encapsulated in what is known as ‘Hartwick’s rule’ after the economist who originated it, “states that mining countries, to behave sustainably, must ensure that the aggregate value of all the assets they are passing on to future generations does not decline."

Key to the success of managing revenue effectively is public transparency. It is important that the revenues derived from mining, as well as fluctuations in these revenues, are visible to the interested public. In some countries, this issue is already being addressed through schemes such as the Extractive Industries Transparency Initiative (EITI). 

Accounting for revenues paid to governments from mining projects has become an important issue of governance.  The ‘Publish What You Pay Campaign’ launched by a group of NGOs and the ‘Extractive Industries Transparency Initiative (EITI)’, sponsored by the British government, are notable initiatives which are currently keeping this matter in the forefront of the international agenda. Many governments, multilateral agencies, companies and civil society groups now support both. 

African Union, Africa Mining Vision, 2009.

Many large companies now openly publish payments to government. However, it is equally important that there is transparency in the distribution of the revenues derived from mining. This is not only an important factor for the achievement of social cohesion, but it is easier for governments to justify the hard decisions they will inevitably have to make when revenues from mining decline if the distribution of these revenues is seen to be fair and in the best interests of the economy overall.