Revenue Distribution and Local Impact

7. Local Impact 

Extractive activities have important direct effects on households, firms, municipalities, and other subnational regions. Extraction leads to spending derived from the additional revenue that the extractive industry generates. It also leads to increased demand for inputs by mines and oil fields, arising from their capital, labour, and other operating costs.

Extraction is not an enclave activity and has real effects on the surrounding economy, generating jobs and drawing in capital from other regions and countries. The size of these effects varies by context, but much of the competition for inputs with the non-extractive private sector is on average confined to a 20km radius around the deposit. Such competition is more likely for relatively labour intensive forms of mining, such as underground mines, compared with relatively capital intensive (offshore) oil extraction and open-pit mining. It also depends on the geographical mobility of labour and capital. If labour is highly mobile, then competition for workers will not drive up wages but rather lead to an inflow of population through migration.

If extraction companies source some of their inputs locally, there are real benefits in terms of higher real income for households that live near a mine. This is conditional on the availability of local markets for goods and services.

There is less scope for this for capital and skill-intensive oil extraction and open-pit mining. However, there is also a risk that local extraction activity can fuel conflict and that it reduces environmental quality.

Governments should be aware of these effects, to consider and plan mitigating policies.

Case studies – Quantifying the local effects of extraction

Improved estimates of the impact of extraction on the local economy are now available, based on several recent studies, for example: 

The Yanacocha gold mine in Peru, one of the largest in the world, changed its local procurement policy so that it would source more goods and services from the local economy. This was made possible by the involvement of the World Bank’s International Finance Corporation (IFC) as a direct shareholder. After this change in policy, a 10% increase in the mine’s activity was found to increase real income of households that live within 100km of the mine by 1.7%. A study on Zambia also found that such positive effects depend on the direct links between the mine with the local economy.

For smaller mines in Indonesia, the positive effect is rather more localised and confined to within 20km. However, relatively little labour moves to the mining sector. More pronounced is the shift of labour from the traded sector that produces to sell for the national economy or for the international market, towards the non-traded sector that produces for the local economy only. This shift is a negative outcome if the traded sector is a country’s main source of productivity growth and its best chance of economic diversification. It is consistent with Dutch Disease, in which (local) mining drives up the cost of production for all sectors of the economy. The traded sector then shrinks because it cannot pass on the higher costs to consumers because they would lose market share to foreign or less affected producers. In contrast, the non-traded sector is able to pass on these costs because local consumers have become wealthier from either higher wages from the mining activity itself or from resource revenue transfers. Only traded sector firms thus shrink and release labour that may be hired by the booming mining sector or the non-traded sector.

Key decisions government may have to take in relation to local impact therefore include:

  • How to maximise the beneficial impact of additional mining revenue on both households and firms? Households and firms may supply the mine or well directly. Alternatively, they may compete with extraction activities for land, labour and other inputs.

  • What is the geographical reach of these impacts and what is the role of infrastructure?

  • How can extractive companies and governments build local support, avoid conflict, and minimise unproductive rent-seeking activities and corruption?

Quantifying the local effects of extraction

An analysis of a large sample of eight emerging markets (Brazil, Chile, China, Kazakhstan, Mexico, Mongolia, Russia, and Ukraine) can shed light on these effects on firms. It shows that the negative effects on the traded sector, in terms of how firm managers respond to the question of how difficult it is to run their business, are limited to 20km around mines. On the other hand, the non-traded sector indeed benefits from local mining activity.

Other studies also highlight non-monetary negative effects, mainly in terms of conflict. For example, positive shocks to capital intensive industries like extraction may increase the risk of conflict because the revenue is valuable and relatively easy to capture. There is evidence for this mechanism from mining, oil extraction, and even renewable resource production (coffee, in this case). For African mines, the evidence suggests that increases in mineral prices triggers increased riots, unrest, and even instances of conflict near mines. Access to mine revenue seems to perpetuate (secessionist) violence.  Oil can be a driver of internal conflict: new giant oil field discoveries increase the incidence of internal armed conflicts by about 5-8% points within 4-8 years of discovery, compared to a baseline probability of about 10%. Moreover, there is evidence that when coffee prices are low, it is relatively cheaper for rebel groups to fund their rebellion because coffee plantation workers have less work.

Finally, there is evidence that gold mining in Ghana affects the environment adversely which has negative consequences for agricultural production and can be as large as a 40% loss of productivity near mines.