Revenue Distribution and Local Impact


8. Regional spillovers

Governments should be conscious that extraction is not a purely local activity, but that it has effects beyond the immediate vicinity of the mine or well and on other sectors of the economy. As explained later in this section, local booms may result in migration from other regions (which mitigates the effects of Dutch Disease) and increase production costs for other local non-mining sectors of the economy, if they compete for these inputs with the extraction companies.

In the case of the United States, there is evidence that migration mitigates the effects of competition for inputs and that local non-mining employment increases after a boom. Sectors that supply mining or use mining output in their production processes benefit. This supports the case for investing in such supplying activities, as opposed to importing mining equipment. The US labour market is flexible and migration across states allows the potential negative effects of Dutch Disease to be limited. However, wages may increase in regions that do not experience the boom because some of their labour migrates to the booming region. The net effect for those sending regions is nevertheless positive, because they sell more products to the booming region as well.

A similar effect is found in Canada. Over time, there is a risk, even in the US, that coal mining draws in heavy industry which may reduce entrepreneurial activity in the long-run which would make it harder for a local economy to diversify.

For emerging markets, there are also positive spillovers to the wider region (20-150km from mines). If more mines are active within this range, firms report positive effects and fewer constraints to running their business. These positive effects may derive from the spending of resource revenues which lead to more aggregate income and consumer demand and/or the provision of public goods. Again, the latter relies on good governance to transform resource revenues into productive public goods.

Infrastructure

Investing in infrastructure is one way to mitigate the negative effects of extraction. Building more roads and railways alleviates congestion caused by the export of minerals themselves. Moreover, there is evidence that the right kind of infrastructure can benefit all sectors of the economy and facilitate diversification. The United States experience shows that investment in infrastructure has been higher in oil rich countries, which may have led to positive effects on all sectors of the economy. For example, for rural extraction regions, infrastructure investment has improved the ability of the agricultural sector to export to other regions and countries. In other words, a local boom can be sustained if revenues are turned into investment in public goods such as infrastructure.

Care should be taken to invest not only in roads and railways that facilitate the export of raw materials. This can lead to the side effect that too little is invested into other regions of the country. It may even reinforce a country’s specialisation in the export of raw materials. Other regions should also receive more investment to help the diversification of the economy. This should include building infrastructure that connects other neighbouring countries as opposed to placing too much emphasis on connecting mines to dedicated mining ports. The former requires close cooperation between countries to ensure an equal level of investment on both sides of the border. One important insight is that coordination is required to make international infrastructure a success, but also sharing of any revenues or costs. Effectively, this prevents sections of road or rail from being split into a series of monopolies, each charging too high a price.

For example, Guinea proposes to build a new railway that exclusively connects a new deposit to a dedicated export port. Clearly, this option will not benefit other sectors of the economy or trade with neighbouring countries much, because it does not reduce the cost of trade with them.