Development Problems of Mineral-ExportingCountries

SWP354

World Bank Staff Working Paper No. 354

August 1979

Prepared by: Gobind NankaniPublic and Private Finance DivisionDevelopment Economics Department

Copyright © 1979The World Bank1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

The views and interpretations in this document are those of the author Eand should not be attributed to the World Bank, to its affiliatedorganizations, or to any individual acting in their behalf. rIL E cO P Y

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The Ytews and interpretations in this document are those ot the autliou arnd

should not be attributed to the World Bank, to its affiliated organiz.'tions,or to any individual acting on their behalf.

WORLD BANK

Staff Working Paper No. 354

August 1979

DEVELOPMENT PROBLEMS OF MINERAL EXPORTING COUNTRIES

A Background Study for World Development Report, 1979

A number of structural features associated with the historical, technical

and institutional development of the mining industry distinguish the mineral-exporting countries (the mineral economies) from other developing countries,

especially the predominantly agricultural nations, and present these countrieswith a special set of development opportunities and problems. The essential

advantage of the mineral economies lies in their possession of a resourcethat is readily converted into a large financial flow, much of it in the formof foreign exchange. However, the mineral economies must contend with thefundamental fact that their mineral wealth is exhaustible. This peculiarcombination of circumstances gives rise to various problems of economicmanagement, the discussion of which forms the core of this paper. Thus,mineral economies tend to be especially characterized by technological andwage dualism; they are prone to neglect their non-mineral sectors(particularly agriculture); their export earnings are often marked by

instability; and they are subject to strong inflationary pressures.Further, to maximize their benefits they must exact the economic rentsinherent in the production and sale of their mineral resources, thusrequiring to pay special attention to mineral taxation, participation in themining industry, and negotiations with foreign mining companies. Finally,the mineral economies need to adopt a strategy which, through an efficientsequencing and sectoral distribution of investments, will create a diversifiedand growing economy before their mineral rents wither away. These problemsand objectives, the paper concludes, require a wide array of policy changesthat are largely institutional in nature, and the appropriate setting at theearliest possible stage, of two key 'prices' - 'the' mining sector wage-rateand 'the' exchange-rate.

Prepared by: Copyright @1979

Gobind Nankani The World BankPublic and Private Finance Division 1818 H Street, N.W.

Development Economics Department Washington, D.C. 20433USA

ACKNOWLUDGEMENTt

I gratefully acknowledge the helpful commentsoffered by Shankar Acharya, Vinayak 8hatt, CharlesBlitzer, Martin Wolf and Shahid Yusuf. Throughoutthe paper extensive use is made of the writtenwork of my colleagues at the World Bank. Aeran Leeprovided excellent research asgistance, MagdaleneBlair's secretarial help was outstanding, and RachelWeaving's editorial suggestions were invaluable.

TABLE OF CONTENTS

Page

Summary and Conclusions i-xii

I. Introduction 1

1. Introduction 12. The Mineral Economies 23. Conjectures Based on the Historical Record 44. Some Salient Institutional Features of the Mining Industry 8

II. The Mineral and Non-Mineral Economies in Perspective 10

1. Introduction 102. Fiscal and Foreign Exchange Ease 113. Resource-based Industrialization 134. Macro-economic Consumption-Investment Choices 195. Technological and Wage Dualism, Migration and Unemployment 266. Inflation in Mineral and Non-Mineral Economies 367. Agricultural Production and Food Imports 428. Export Earnings Instability 479. The Foreign Trade Regime and Export Diversification 51

10. An Assessment 57

III. The Mineral Economies: The Long View 61

1. Introduction 612. A Classification Scheme for the Mineral Economies 623. 'Ideal' Investment Priorities in the Mineral Economies 654. 'Ideal' and Actual Investment Priorities in the

Mineral Economies 705. Patterns in the Medium-Term Performance of the Mineral Economies 796. Long-Term Prospects in the Mineral Economies 81

IV. Economic Rents: the Distribution of Gains from Mineral Exploitationand Mineral Development Policy 86

1. Introduction 862. Rents in the Mining Industry 873. The Rate of Mineral Exploitation 884. Mineral Taxation and Development Policy 905. Cooperation among the Mineral Economies 936. A Concluding Note 96

V. Policy Recommendations for the Mineral Economies 96

1. Summary and Conclusions 972. A Policy Framework for the Mineral Economies 98

References 100Recent Papers in this Series

TABLES

Page

I The Min.--al Economies 3

II Indices of Fiscal and Foreign Exchange Ease in the Mineraland Non-Mineral Economies 12

III Share of Mining Revenues in Government Revenue in SelectedMineral Economies 14

IVa Gross National Saving Rates in the Mineral and Non-MineralEconomies 1968-76 21

IVb Incremental Gross National Saving Rates in the Mineral andNon-Mineral Economies 1968-76 22

V Deviations of Actual from "Norm" Gross National Saving Ratesin the Mineral and Non-Mineral Economies 24

VI Typical Capital Investment Requirements for Mining and Pro-cessing Facilities 27

VII Ranking of Two-Digit Manufacturing Industries by Index ofCapital-Intensity 29

VIII Wage Differentials, Unemployment and the Share of Mining inthe Labor Force for Selected Mineral Producing Countries 30

IX Index of Relative Wages in Mineral and Non-Mineral Economies 32

X Relative Income Shares of the Bottom Twenty Percent of Income-Recipients in Selected Mineral and Non-Mineral Economies 34

XI School Enrolment in the Mineral and Non-Mineral Economies 35

XII Inflation Rates in Mineral and Non-Mineral Economies 1960-76 37

XIII Growth of Agricultural Production in the Mineral and Non-Mineral Economies 43

XIV Share of Food Imports in Total Imports of Mineral and Non-Mineral Economies 46

XV Indices of Export Earnings Instability in the Mineral and Non-

Mineral Economies 48

XVIa Ratio of External Debt to GNP in the Mineral and Non-Mineral

Economies 50

TABLES

Page

XVIb Export Diversification in the Mineral and Non-MineralEconomies 52

XVII Classification of Mineral Economies by Index of Long-TermCapital Stock Per Capita 63

XVIII Classification of Mineral Economies by Index of MineralExploitation Stage 63

XIX Comparative Advantage Characteristics of the MineralEconomies 66

XX Medium-Term Performance of Sub-Groups of Mineral Economies 80

SUMMARY AND CONCLUSIONS

This paper is designed to provide a perspective on the developmentproblems of the mineral economies 1/ and to offer recommendations on policychoices to confront these problems. In a more conjectural vein, an attempt ismade to assess the long-term prospects of the mineral economies.

The major working hypothesis of the study is that the mineral economiesshare enough common characteristics to have economic advantages and problems thatset them apart from other developing countries. These differences arise in thefirst place because the mineral economies differ from the non-mineral economiesstructurally. In the second place, there is evidence to suggest also that theeconomic performance of the mineral economies, along various dimensions, alsodiffers from that of a control group of non-mineral economies. These differencesof structure and performance suggest the elements of a policy framework thatcould remedy the major development problems of the mineral economies.

The number of mineral economies has been growing in recent years, andthere is reason to expect many more developing countries to become mineralexporters in future. An additional concern of this study has therefore been tooffer informed conjectures on the development prospects of the mineral economies.

More specifically, this paper permits the following propositions, eachof which is dealt with in greater detail below:

Proposition 1: The mineral economies differ structurally from otherdeveloping countries, and in particular, from other primary-exporting (i.e.,agricultural) developing countries.

Proposition 2: These structural differences, and the typical policyresponses to them, tend to render the mineral economies more prone to a numberof economic problems as compared to non-mineral economies.

Proposition 3: The recent economic performance of the mineraleconomies suggests that their long-term prospects are moderately favorable, butdepend critically on the ctioice of policy objectives and instruments.

Proposition 4: To sustain vigorous economic growth and diversifytheir economies as their mineral reserves are depleted, and to increase employ-ment, will require: (a) a wide array of changes that are largely institutionalin nature, and (b) the appropriate setting of two key 'prices' - 'the' miningsector wage rate and 'the' exchange rate.

1/ The term 'mineral economies' is meant to capture those developing countriesin which the high share of mineral production in GDP and of mineral exportsin total exports render the mineral sector the keystone of the economy;some discretion is used in the choice of countries but the guiding thresholdsare: 10 percent or more of GDP in 1967-75 and 40 percent of total merchandiseexports in 1973-76. The countries considered are Algeria, Angola, Bolivia,Chile, Congo P.R., Ecuador, Gabon, Guinea, Guyana, Indonesia, Iran, Iraq,Jamaica, Kuwait, Liberia, Libyan A.R., Mauritania, Morocco, Nigeria, Peru,Saudi Arabia, Sierra Leone, Syrian A.R., Togo, Trinidad and Tobago, Venezuela,Zaire, Zambia. Minerals are defined to include bauxite, copper, iron ore, lead,Manganese ore, petroleum, phosphate rock, tin and zinc.

Proposition 1, which argues that the mineral economies differstructurally from other developing countries, rests on five interrelated sub-propositions arising from the nature of the mining industry. These are:Sub-Proposition 1.1: The mineral economies are characterized by an overwhelmingdominance of the fiscal linkage over production and consumption linkages; thisstructural feature underlines the importance (a) of maximizing the fiscallinkage and (b) of the state's role in transforming the economy.

Historically, export-led development has been characterized by thepresence of production and consumption linkages between the export industry andsecondary and tertiary industries. Thus, through the external effects of inputsdemanded, outputs supplied, consumer markets created, and education provided orstimulated by the export industry, development has spread through the initiallyexport-oriented economy.

Studies of the linkage effects of mining activities in numerousmineral economies such as Zambia, Chile, Zaire, Nigeria, Saudi Arabia, Iran,Venezuela and Sierra Leone unequivocally support the conclusion that mining,unlike other historical staples, has been notably deficient in production andconsumption linkages, while fiscal linkages make a strong showing. Thedifference between production and consumption linkages on the one hand, andfiscal linkages on the other hand, is that the former share an automaticitythat is glaringly absent in the latter. Production and consumption linkageswork themselves out through the market, assuming the social milieu and policyenvironment are supportive. But the success of the fiscal linkage depends onthe willingness and ability of governments to tax or otherwise participate inthe incomes originating in mining; and in addition, the ability to tax mustbe combined with an ability to invest productively. It is in this lack ofautomaticity that the major weakness of the fiscal linkage lies. The dominanceof the fiscal linkage in mineral economies implies (a) that maximizing themagnitude of the fiscal linkage is a critical problem for the mineral economiestand (b) that more than for the typical developing country, the role of thestate in the sectoral allocation of investments largely determines the directiorin which the transformation of the economy proceeds.

Sub-Proposition 1.2: The mineral economies differ from non-mineral economiesalso because the mining industry is characterized (a) by the presence of largeforeign mining companies (FMCs) and (b) by the existence of a large element ofrent in the market value of minerals. 1/ The rent element, if not tapped, tend;to migrate out of the mineral economy because of the dominant role of FMCs inthe industry and the high proportion of mining output that is exported.

1/ The concept of economic rent refers to the surplus earned by factors ofproduction over and above the minimum earnings necessary to induce theiremployment.

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The presence of large FMCs in the mining industry is a well establishedfact, despite the increasing participation of state owned enterprises in miningactivity. It is also well known that five types of rent may be distinguished inthe mining industry: scarcity, differential, quasi, windfall and monopolistic.The objective of mineral economies is simple: it is to capture all rents whileletting the investor make the return necessary to induce him to invest. Butcollecting all of rent, however desirable, is generally not possible, since itssize is not easily established. In principle the easiest way to capture allrents is to mine, process and market the mineral, but this requires largeinvestments and highly sophisticated skills.

The weakness of production and consumption linkages and the difficul-ties of capturing rents imply that mineral economies must pay particularattention to mineral taxation, participation in the mining industry and, ingeneral, to negotiations with FMCs. The complexity of these tasks sets themineral economies apart from many non-mineral economies, particularly theagricultural exporting countries.

Sub-Proposition 1.3: The mineral economies are less likely to be subject tofiscal and/or foreign exchange gaps for a reasonable range of growth rates, atleast while their mineral reserves last.

The mineral economies, as noted above, tend to reap substantial fiscalresources from the mining sector,and since minerals are internationally tradedthese are received in the form of foreign exchange. The relative ease withwhich mineral economies have access to this flow of fiscal revenue in the formof foreign exchange arises principally because (a) unlike the agriculturalprimary exporters, the mineral economies export products with high incomeelasticities of demand and (b) taxes on the mining sector, which is easilyidentified and often foreign-owned, are easier to levy and to administerrelative to taxes on agricultural or other incomes.

However, this is not an unmixed blessing. Their greater dependenceon a single sector for large shares of their fiscal and foreign exchangeresources gives rise to periodic instabilities in the levels of these resources.

Sub-Proposition 1.4: The mineral economies, to a somewhat greater degree thanother developing countries, have the option of pursuing a resource-basedindustrialization strategy.

Of the four strategies of industrialization that are being undertakenor advocated for the developing countries, namely import substitution, exportsof labor-intensive manufactures, resource-based processing, and basic goodsproduction, the latter two are based on the domestic processing of naturalresources, in particular minerals and agricultural commodities.

The case for mineral processing as the centerpiece of an industria-lization strategy must be distinguished from a selective emphasis on mineralprocessing. The former type of strategy, being highly capital intensive, issuited primarily to mineral economies with extremely high mineral wealth per

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capita. The development strategies adopted by many mineral economies, forexample, Algeria, Iran and Trinidad and Tobago, suggest that there has been anoveremphasis on mineral-based industrialization. The relevance and merit of themineral-based industrialization option, although deserving of emphasis, haveclearly been exaggerated. Selective mineral processing, on the other hand, iseasily justified on value-added grounds for one or more of the following reasons:the raw material cost shares of such industries, the relative abundance ofcritical complementary inputs (such as natural gas or hydropower for aluminumsmelting), or as a mechanism for exacting mineral rents.

Sub-Proposition 1.5: The mineral economies have an exhaustible resource andthus transforming and diversifying their economies (before the mineral wealthis entirely depleted) are objectives of greater priority for them than forpredominantly agricultural countries.

Though the distinction is not a rigid one, since new mineral findsare often made, and since some mineral economies have reserves that are notexpected to be depleted for a hundred or more years (e.g. Guinea and Jamaicafor bauxite), it does identify a structural feature that would be expected toaffect the development strategy of mineral economies vis-a-vis predominantlyagricultural countries.

II

Proposition 2 suggests that the preceding structural differences, inconjunction with typical policy choices that have been made in the mineraleconomies, render these economies more prone to a number of economic problems.To test the underlying hypotheses a control group comprising all non-mineralmiddle income countries was used. The hypotheses and the degree of supportthey receive are summarized below. 1/

Hypothesis 2.1: The saving performance of the mineral economies is poorer thanthat of non-mineral economies.

This hypothesis is difficult to test, not least because the mineraleconomies' mineral wealth is of uncertain magnitude, but also because theevidence is mixed: average as well as incremental national saving rates arehigher in the mineral than in the non-mineral economies, but incremental savingrates are lower in the non-fuel mineral economies than in the non-mineraleconomies. A third test, which compares the saving rates of the mineral and

1/ These hypotheses are only superficially tested here. A thoroughstatistical test would require that for each dependent variable wedemonstrate a statistically significant difference between the mineraland non-mineral economies. Time constraints have made this impracticable.

non-mineral econ-Ti'.3 with their respective "norm" saving rates, 1! a1so confirmsthat the non-fuel mineral economies have under-saved in recent years. IrL con-trast, the saving recorc jf the petroleum economies compares very favorably withtheir respective "norms". It is noteworthy that neither the non-mineraleconomies nor the latter "norms" provide a measuring rod for evaluating the post-1973 saving behavior of the petroleum economies. Thus, we are uncertain aboutthe relative saving performance of the petroleum economies, but that of the non-fuel mineral economies seems to compare unfavorably with the non-mineraleconomies.

Hypothesis 2.2: The mineral economies are characterized by greater technologicaland wage dualism, higher unemployment, and lower school enrollment ratios thanthe non-mineral economies.

The literature is replete with evidence supporting the view that themining industry has been highly capital-intensive and is becoming increasinglyso, while mineral processing and related industries are also among the mostcapital-intensive manufacturing activities. A major empirical correlate oftechnological dualism in the mineral economies is wage dualism, evidence ofwhich exists in the literature and is revealed by a study of the mining-manufacturing wage differentials in mineral economies. Not all mineral economieshave highly dualistic wage structures: around 1970, Algeria, Nigeria andBolivia had a low mining-manufacturing wage differential, while Zambia, Venezuela,Chile, Jamaica had very high wage dualism. The tendency does exist however, andis a major obstacle for the development of the mineral economies. The evidenceon unemployment is also mixed, but there is again a tendency for mineraleconomies to exhibit high unemployment: among the mineral economies for which da-ta are available, Bolivia, Zambia, Morocco, Algeria, Trinidad and Tobago andJamaica have open unemployment rates greater than 10 percent of the labor force,while Syria, Iraq, Iran, Indonesia and Venezuela have an average unemploymentrate of 4 percent.

Finally, data on school enrollment indicate that the mineral economieslag significantly behind the non-mineral economies. Despite large increases inschool enrollment in mineral economies over the past fifteen years, the gapbetween them and the non mineral economies has not narrowed.

Hypothesis 2.3: Inflation rates tend to be higher in the mineral economies thanin the non-mineral economies.

Between 1960 and 1970, inflation rates were of the same order ofmagnitude in the mineral and non-mineral economies, but they were significantlyhigher than these average rates in the non-fuel mineral economies. In recentyears (1970-76) inflation has been higher in the mineral than the non-mineraleconomies, but this difference is accounted for primarily by the petroleumeconomies. Thus it may be inferred that mineral economies tend to exhibit

1/ Based on Chenery-Syrquin (1975), Table 4, Equation (la), p. 30.

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k. ''.,2er inflation rates, and in particular that the largcar inve't-mernLs made by thepetroleum economies in recent years have been higiily inftationat3. In this regard,the experiences of Iran and Nigeria are noteworthy.

Hypothesis 2.4: Agriculture tends to grow inore siwl.-, and food constitutes alarger share of total imports, in mineral than in non--nineral economies.

The evidence clearly confirms both these hypotheses. Although indivi-dual mineral economies may have reason to shift resources out of agriculture,this is unlikely to be true for all mineral ecao:mies.

Hypothesis 2.5: Mineral economies are more subject to export earnings instabilitythat non-mineral economies.

An examination of indices of export earnings instability shows theevidence to be mixed: export earnings were less stable, on the average, in themineral than in the non-mineral economies in both 1961-72 and 1968-73, but inthe latter period, earnings were more stable in the non-fuel mineral economiesthan in the non-mineral economies. It is well known that agricultural productexporters are subject to similarly high export earnings instability. Once again,however, the tendency does seem to be unmistakable. Also suggestive is thefinding that debt GNP ratios are significantly higher among mineral than amongnon-mineral economies, but though these high ratios are associated with unstableexport earnings, they may also be due to poor saving performance and almostcertainly reflect poor macro-economic management.

Hypothesis 2.6: The exports of mineral economies tend to remain more concentratedthan those of non-mineral economies.

Between 1960 and 1975, the petroleum economies and the non-fuel mineraleconomies increased their dependence on exports of minerals and of primarycommodities generally. The evidence on the poorer export-diversificationperformance of the mineral economies thus seems incontrovertible.

It may be concluded that there is substantial support for the view thatmineral economies, relative to non-mineral economies, perform poorly in agricul-ture, export diversification and inflation; and tnat the evidence suggests agreater tendency for the mineral economies to be characterised by poorer savingperformance, greater technological/wage dualism, higher unemployment, higherexternal indebtedness and higher export earnings instability.

III

Proposition 3 alludes to the nature of the recent economic performanceof the mineral economies, and suggests that their long-term prospects aremoderately favorable. The basis of this judgement is essentially that the recenteconomic performance of these economies has been very mixed. Proposition 3 restson two sub-propositions, the first factual and the second both factual andconjectural, that are summarised below:

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Sub-Proposition 3.1: The economic performance of the mineral economies, judgedby reference to the five indices of saving, growth in agricultural production,export diversification, inflation and the choice of investment priorities, showsno clear country patterns, and exhibits both positive and negative findings.

Although, on the average, the mineral economies' performances inagriculture and inflation may be described as poor, and those in saving, exportdiversification and investment priorities as moderate, there are sufficientdifferences in their achievements to suggest that the basis for a successfultransformation is being laid in some of them -- notably Venezuela, Morocco andAlgeria. On the other hand, there is enough evidence of poor performance on thepart of others to suggest that their transformation is unlikely to occur ifpresent trends continue. This group includes countries such as Zaire, Zambia,Indonesia, Ecuador, Trinidad and Tobago, Congo P.R., Chile and Bolivia.

Some of the most encouraging findings are that: agricultural produc-tion has grown faster in countries with large agricultural potential, such asBolivia, Guinea, Zambia and Ecuador; incremental saving rates are higher incountries in the middle stages of their mineral exploitation such as Gabon, Iranand Nigeria; and export diversification has been most successful in countriesin the late stages of mineral exploitation, notably Venezuela and Peru.

The discouraging findings include the conclusion that the incrementalsaving rate is lowest in the least well-endowed of the mineral economies (thosewith low capital resources); although this may be understandable, it suggeststhat these countries are not making the saving effort required to attain theirgrowth and transformation objectives. In this respect, the saving performanceof countries such as Peru, Congo P.D.R., Syria and Togo has been disappointing.Also unsettling is the finding that mineral economies of long standing havedone no better at export diversification than have the newer ones. 1/ Thus thecontinued high dependence on minerals of countries such as Bolivia, Chile, Zambia,Iran and Iraq is similar to that of newer mineral economies such as Libya andNigeria. Finally, inflation, which has been high in most mineral economies, hasbeen particularly high in the larger mineral economies and in countries at thelate mineral-exploitation stage; examples of the former group are Iran, Nigeria,Indonesia, Peru and Zaire, while the latter group includes Trinidad and Tobago,Bolivia, Syria and Venezuela.

Sub-Proposition 3.2: The economic performance of the mineral economies, whenevaluated against alternative pessimistic and optimistic scenarios, suggeststhat their prospects are moderately favorable.

Two criteria underlie the conceptualization of pessimistic and optimisticscenarios for the mineral economies: the size of the country's mineral wealth per

1/ Mineral economies of long standing are not necessarily also in the latestages of mineral exploitation, and vice versa. Thus Iran, Chile andZambia are 'old' mineral economies but are in their middle stage ofexploitation, while Ecuador and Indonesia are 'new' but in their laststage of mineral exploitation.

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capita and the country's stage of mineral exploitation. The optimistic viewcontends (a) that although the prospects of mineral economies with more mineralwealth per capita are better than those with less mineral wealth per capita, therelative economic performance of the latter group will be superior to that ofthe former; 1/ and (b) that economic performance will improve with the stage ofmineral exploitation. 2/ The pessimistic view contends (a) that the economicperformance of the lower per capita mineral wealth countries will be relativelypoorer than that of the other mineral economies, and will thus reinforce thedifferences between the two groups; and (b) that economic performance willremain generally poor through the various stages of mineral exploitation.

The actual economic performance of the mineral economies in recent yearsis found to be superior to that in the pessimistic scenario, but falls short ofthat in the optimistic scenario. Although this is interpreted as suggestingmoderate optimism for the mineral economies' long-term prospects, it is clearthat much will depend on improving performance in saving, in increasing agricul-tural growth rates, in keeping down inflation and, perhaps most importantly, inchoosing the right investment priorities and diversifying exports.

The task ahead is not an easy one. But the rewards to informedeconomic choices and policies are likely to be high, for some mineral economieshave done better than others.

IV

Proposition 4 deals with the policy framework for mineral economiesand rests largely on the preceding propositions. Thus, the differences ofstructure and performance between mineral and non-mineral economies suggest thepolicy objectives that ought to be adopted by the mineral economies. Proposition3 suggests that differences in economic performance across mineral economies maybe attributed to differences in their policy choices.

1/ Thus the optimistic view would suggest that the economic performance oflow-capital group countries such as Liberia, Zaire, Nigeria, Peru, Syria,Indonesia, Togo would be superior to that of high-capital group countriessuch as Kuwait, Saudi Arabia and Libya, where economic performance denotessaving, agricultural growth, export diversification, inflation and choiceof investment priorities.

2/ Again, the optimistic view would predict that along the same five dimensions,the economic performance of late mineral-exploitation stage countries suchas Venezuela, Trinidad and Tobago, Peru, Syria, Congo P.R., Bolivia andIndonesia would be superior to that of early or middle-stage countries suchas Liberia, Iran, Nigeria, Zaire, Chile, Jamaica, Morocco and Guyana.

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The paper identifies three sets of major policy objectives for themineral economies (see chart on page xviii).First, arising from their structuralfeatures and from their peculiar incentive-wage-consumption dynamic, 1/ the paperemphasizes the following objectives: fiscal and foreign exchange stability,higher marginal savings, more rapid employment growth, greater price stability,faster agricultural growth, more stable export earnings, and more exportdiversification. Secondly, with respect to investment priorities and sequencing,mineral economies have been apt to overstress mineral based processing and under-emphasize labor-intensive manufacturing, agriculture, small-scale enterprisedevelopment and expenditure on research and development, while inappropriatesequencing of investments has led to some waste of resources. It is importantto note, however, that although the benefits of mineral-processing are oftenexaggerated, there is still substantial scope for such processing in the mineraleconomies, and surmounting entry barriers in this highly oligopolistic industryremains an important policy objective. Thirdly, it is argued that given theimportance of the fiscal linkage, maximizing the exaction of mineral rents mustremain an important objective; in particular, there are substantial differencesin the degree to which different mineral economies are successfully tappingtheir rents, as is clearly suggested by a comparison of Indonesia, Zambia, Chileand Peru (high rent-exaction) with Bolivia, Liberia and Zaire (low rent-exaction).

Turning to the policy instruments recommended for the mineral economies,the paper clearly reveals that there are two 'prices' whose influences pervadethe mineral economy, and which must receive early attention if the incentive-wage-consumption dynamic is not to lead the mineral economy astray. These two

1/ The phrase 'incentive-wage-consumption dynamic' refers to what were found tobe typical policy responses to economic problems that most mineral economiesface early in their mineral-rent cycles. Thus, typically, the mineral economybegins its mineral-rent cycle by permitting incentives to the domesticproduction of non-mineral exports and agricultural commodities to wither away,by allowing the mining sector wage rate to lead wages in the rest of theeconomy and by increasing its incremental consumption ratio. In effect,there is a tendency for incentives, wages and consumption to evolve as if themineral resources were not depletable. This has certainly been true ofChile, Trinidad and Tobago, Oman and Congo P.R. But other mineral economiesdo indicate a clear awareness of the depletable nature of their minerals andattempt to plan for their post-mineral era, including countries such asAlgeria, Iran, Saudi Arabia and Kuwait. For these latter countries onecannot overemphasize the importance of appropriately choosing the level andsequence of investments if these resources are to be productively used.

prices are: (a) 'the' mining sector wage rate and (b) 'the' exchange rate. 1/In particular, these policy tools are seen as exerting crucial influences onsaving, unemployment, inflation, agricultural production, export diversificationand, through the latter, export earnings stability. Inattention to these major'prices' can only be perilous to the mineral economy, and hence to its objectivesof growth and transformation on the one hand, and employment and distribution onthe other. The long-term prospects of most mineral economies are bleak if anappropriate wages policy and a carefully designed foreign trade regime are notinstituted as early as possible in the mineral-rent cycle.

A second characteristic of the recommended policy instruments is note-worthy: apart from the two key prices noted above, they are primarily institu-tional in nature. 2/ In a developing economy, institutional change is of theessence. The problem is that it is much more difficult to bring aboutinstitutional change than to modify a few prices. The task ahead is therefore adifficult one. This can only increase the importance that must attach to themining wage rate and the exchange rate.

The chart (page xix) in addition to listing policy objectives and corres-ponding policy instruments, identifies sub-groups of mineral economies to whicheach of these policy objectives is most relevant, and gives country examples.

At the end of three major studies of economic policy making in LatinAmerica, an astute observer wrote: "in fine, the roads to reform are narrowand perilous, they appear quite unsafe to the outside observer however sympathetiche may be, but they exist". 3/ The success of the mineral economies in attainingtheir goals rests in large measure on the size of their respective mineral reserves,but perhaps even more importantly on whether they can tread the roads to reformthat are summarised below.

1/ High mining sector wage rates tend to render the mineral economy a high wage/high unemployment economy (the Gulf countries are an obvious exception to thehigh unemployment character of these economies, but only because internationalmigration is more easily controlled). The exchange rate problem in mineraleconomies is that foreign exchange has a low shadow price in the short tomedium term but a much higher one in the long term, when the mineral resourcesare depleted, and unless the foreign trade regime is made to reflect thispeculiar time profile of the exchange rate, the transformation of the mineraleconomy is unlikely to occur. But the very pervasiveness of these two pricesis also a major reason why they are likely to be difficult instruments to use.Throughout, policy recommendations are offered on the basis of the 'rationalactor' model of policy-making. An alternative and more realistic conceptualiza-tion of the policy-making process is the 'incrementalist' model which recognizes,in particular, that policy-making is plagued by uncertainty and conflict.Although the paths of reform are narrow it is to be hoped that Hirschmanianreform-mongers in the mineral economies will rise to the occasion. SeeLindblom (1958) and Hirschman (1973).

2/ The chart on page xviiiclassifies all policy instruments recommended intomicro-economic, macro-economic and institutional.

Hirschman (1973), p. 275.

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List of Policy Instruments Recommended

No. Type Policy Instrument Section No.

1 tMicro/macro Mining wage-rate/Incomes Policy II.5

2 Micro/macro Exchange-rate/Foreign Trade Regime I1.9

3 Institutional Appropriate Sequencing of Investments III.4

4 Macro/Institu- Short-run macro-economic management andtional Reserve Fund. II.1; 11-F

5 Institutional Measures to reduce sectoral wage-gaps II.5

6 Institutional Reform of Labor Markets II.5

7 Institutional Agricultural Extension, Credit Infrastructureand Research III.3

8 Micro Producer prices for Food II.7

9 Micro/Macro Interest Rate Level and Structure II.S

10 Institutional Infant Industry and Wage Subsidies II.9

11 Institutional Increased reliance on Income and ProfitsTaxes, Resource-rent taxes and ProductionSharing and Contracting IV.4

12 Instititional Widening of Tax Base II.4

13 Micro Taxes on luxury goods II.4

14 Instititional Reform of Financial Institutions andInstruments II.4

15 Instititional Producer Co-operation in processing, R&Dand tax policy I''. r,

16 Institutional Rate of Exploitation and Investment inAssets Abroad IV.3

17 Institutional Mineral Price Stabilization II.8

18 Institutional Government Recurrent Expenditure Budgeting II.4

19 Institutional Allowing for Periodic Tax Renegotiation inOriginal Contracts with FMCS. IV.4

Policy Recomendations for the NMineral economies

'p. e '. k i: jn nJ"lv Coda for RuIlvy Inatrumenta Recommended Iroup v Mineral Ecot,mies most Country xarplesa4televaLnt ror

A tlsca.] & re ,I exc.hwg.*e 8L&DilIy 2; 3; 4, IO. (1) Mon-fuel mlneral exporters. Bolilti. Chile, lIai t a, Guyana,Jamaica, Liberi a. MauritaLnia, HDroccc%Peru.Zaire. Zambia.

B. Higi. '4rgInal Savhl,.sa ; 4; 12; 13; 14; IH, (I) Low-capital girup;(it) Late Kxploitation-setge group; Liberia, Nigeria, ZaWre. Paru, Syria.

(i1) Smll ountries. Congo P.R. EcIuedor. Bolivt.windornesi Togo.

C. Eploynent 1 2; 5; 6; 7; 8; 10. (1) Lor- d moderate-capital groups; Guyana, Iraq. Morocco, Jomelca, Iran, Chile(1i) Lrge countries- Znbia, TrinidA L. Tobago. Liberia. ligeria.

Zaire. Indonesa,a Congo P.R.

D. Pricc Ste±litt, 1; 2; 3; 4; 7; d; iB. (3) AU mineral eoono.lies, but frdifferent reasons. not applicable.

t. Agricultural 'ro-tr, 1; 2; 5; 6; 7; H. (i) Low- and moderate-capital groups; Iraq, Noreco, Jemaica. Chile. Nigeria Zaire,(It) all countriea. Algerla, Peru, Congo P. .

4. t-por' t rn;ugre St,bi11t, 2; 4; 17. (1) tar- and moderate-capital group.; Guyaa, Norocco, Jeaica. Chile, Zmbli,Pezu, SoUn.la.

G. t,port4iverstficatin- 1; 2; 3; 10. (i All mineral econuomes. not applicable.

;. tl: G etrenoy g ;Minerai-based Processlng 1; 2; S; 6; 10. (1) Low- and Moderate-Capital groups. Guyana, Iraq, "40rocco, Jmica. Iran, Chile,(and lnstttutio..s.I) Trinldad & Tat-ago, NigerIa. Zaire. A1geria,

Congo P.H., Indonesia.

I Appr-priate Priority to Labor-intenalve 1; 2; 5; b; 9; l'. (1) Lao- Ad moderate-capital groupri Guyana. Iraq. Morocco. Jmica, Iran, Chile.Maz,uf&ctur-i,g (11) Large countriel Trinidad & Tobago. Nigeria. Zaire, Ageria,

Congo 14.1., Indonesia.

J. Appropriate Priorilty to Sa.l-aeale 1; 2; S; 6; 9. (1) Lox- nd moderate-capital groups; Guyana, Iraq, Mor.-o, oJamaica, le. ChileEnterpriae Developer.et (1i) Large oIuntries. Trinided & Tobego. Nigeria. Zair, Algeria,

Congo P.R.. Indonesia.

P. Apprnpriatb PrIorrit to R4 .D Expenditure (Institutions.) (i) Hlgh and moderste-capital groups; Kuwait, S. Arabia, Libya, rerq, Iran, Venruaia.

L. lHalmlxl ,i Mineral-rent Exactlon1 U; 15; 16; 19. (1 All mineral econodes. not applicable.

M. Su-nYunting Entry Barriers in Mirera.l-processing 15. (i All mineral economes not appllcbie.

j/ See eccozpa.,yiog chart.

I. INTRODUCTION

I.1 Introduction

Mention of the mineral exporting countries is likely to conjure upimages of Saudi Arabia and Kuwait on the one hand, and Zaire and 7ambia on theother. The first group seems embarrassed by its economic opport"..ties, and thesecond appears to stumble from year to year. But such oversimplified imagery ishazardous: one must drink deep from the Pierian spring, or not at all.

The mineral exporting countries share many developmental advantagesand problems. Their advantages derive from their possession of resources forwhich demand is vigorous, and that can form the cornerstone of a developmentstrategy: their mineral resources, with some investment, provide a source ofrents that can finance other investments, and may in addition form the basis ofa mineral-based industrialization strategy. Their problems stem from thedepletability of these resources, the short-run instability of demand for them,and the difficulties inherent in exacting mineral-rents. Essentially, thedepletability of their mineral resources implies that these economies must aimto attain a diversified base as the minerals are gradually exploited. Thefundamental problem that mineral-exporting countries have to deal with is thatthere is a tendency for incentives, wages and consumption to evolve as if themineral resources were not depletable. If this tendency is allowed to persist,a crisis ensues when the apex of the mineral-rent cycle is attained. Short-run demand instabilities, on the other hand, through fluctuations in exportearnings, tend to give rise to inflationary bouts in the mineral exportingcountries, and in a more direct fashion, to cycles in investment. Althoughother primary-exporting countries are subject to similar fluctuations, mineralexporting countries tend to be less diversified and hence more vulnerable.Finally, mineral-exporting countries must successfully tap the mineral-rentsthat provide their main advantage over other developing countries. This taskis necessarily complex because rents are not easily identified, vary with therent-exaction technique, and may even be increased through producer cooperation.The dominance of foreign mining companies (FMCs) in the mineral sectors of mostof these countries implies that untapped rents tend to migrate to other shores.

These then are the concerns of this paper. Our discussion of theseconcerns will proceed in three stages. Throughout, the ultimate objectivesare to assess the implications of these characteristics for the developmentobjectives of the mineral exporting countries, and to suggest ways in whichthey may best exploit their advantages. Section II focuses on the advantagesand problems of the mineral exporting countries relative to the other middle-income countries; in particular, it addresses the short- and medium-termproblems that arise from the peculiar incentive-wage-consumption dynamic ofthe mineral exporting countries, and from the instability of their exportearnings. Within the group of mineral-exporting countries, the distinctionbetween petroleum exporters and non-fuel mineral exporters is emphasized. InSection III, a closer look is taken at the mineral exporting countries. Theemphasis is on the long-run diversification of their economies, and distinctionsare drawn between high-capital, moderate-capital and low-capital mineralexporting countries, and between those in the early, middle and late stages of

- 2 -

exploitation of their mineral reserves. This differentiation of the mineralexporting countries permits us to assess their investment priorities, and todiscuss their long-term prospects. Section IV treats problems associated withthe exaction of mineral rents, and in particular discusses the taxation of FMCsand the exaction of monopolistic rents through producer cooperation. Section Vpulls together the policy recommendations offered in the preceding sections.The rest of this section is addressed first to defining the group of mineralexporting countries, second to assessing the implications for the mineralexporting countries of the historical record on export-led development, andthird to describing some salient institutional features of the mining industryand their consequences.

1.2 The Mineral Economies

The term 'mineral economies' is meant to capture those developingcountries in which the high share of mineral 1/ production in GDP and of mineralexports in total exports render the mineral sector the keystone of the economy.In order not to exclude those countries in which the mineral sector is decliningand yet continues to play a pivotal role, some discretion is used in our choiceof countries, although the guiding thresholds are: 10 percent of GDP (1967-75)and 40 percent of export earnings (1973-76). Our group of mineral economiescomprises 28 countries, of which 15 are petroleum exporters and 13 are non-fuelmineral exporters. Table 1 lists these countries, and gives their shares ofmining in GDP and mineral exports in total exports. In general, countries withpopulations under 1 million are excluded; however, Gabon and Guyana areincluded because they are small, non-Middle Eastern countries that have highmineral reserves per capita.

The development objectives of the mineral economies, like those ofthe other developing countries, are to sustain high growth rates; to meet thedistributional aim of alleviating poverty, both absolute and relative; and togenerate productive employment for their working populations. In addition, afourth objective is often emphasized: that of transition from a mineraldependent to a highly diversified modern economy. These proximate objectiveslead, of course, to the ultimate objective of improving the living standards oftheir populations. In discussing the long-term prospects of the mineraleconomies, frequent reference will be made to the productive employment objective.This is because it is seen as the key to the other objectives, all of whichfollow from an optimization of productive employment opportunities. The transi-tion objective also receives prominence in what follows because the specialadvantage of the mineral economies - their potential access to mineral rents -makes possible a more rapid transformation of their economies. 2/

1/ Minerals are defined here to include: bauxite, copper, iron-ore, lead,manganese ore, petroleum, phospate rock, tin and zinc.

2/ One additional comment may be made: in the phrase 'development problems', theword 'problems' presumes a prior choice of goals, and refers to the difficultiesencountered in attaining them. Also implicit is the availability of a givenconfiguration of resources for the attainment of these goals. A number ofproblems that frustrate some of the mineral economies arise from a choice ofgoals, that is seen to be wildly at variance with the resources they have athand, or can muster over time. This is particularly so for some of the low-capital group of mineral economies whose saving performance and investmentpriorities would seem to be based on an unrealistic assessment of their mineralreserves per capita. In some instances, problems can only be solved by a re-definition of goals.

Table I: The Mineral Economies: Shares of Mining in GDP and TotalMerchandise Export Earnings

a/ Share of Mimeral Ex1ort -Country Share of Miningrin GDP in Total Merchandise

Non-Fuel Mineral Economies Maior Mineral 1967-75 % Exportt(C)1973-75 1974-76

Bolivia Tin 11.9 74.6 73.6

Chile Copper 8.5 71.5 65.8

Guinea Bauxite n.a. n.a. 70.2

Guyana Bauxite 16.5 n.a. 26.0

Jamaica Bauxite 11.0 n.a. 18.4

Liberia Iron Ore 31.9 68.3 70.1

Mauritania Iron Ore 27.9 91.9 88.6

Morocco Phosphate 7.5 53.1 55.5

Peru Copper 5.6 45.1 36.7

Sierra Leone Iron Ore 17.0 11.3 10.9

Togo Phosphate 9.8 1/ 62.0 66.3

Zaire Copper 18.5 76.5 66.6

Zambia Copper 32.0 96.3 96.5

Petroleum Economies

Algeria 22.4 71.5 88.9

4ngola 11.0 48.6 43.0

Congo P.R. 9.5 61.2 66.0

Ecuador 11.4 2/ 50.6 56.1

Gabon 34.5 75.4 86.3

Indonesia 14.0 72.2 69.2

Iran 34.2 94.6 85.3

Iraq 45.7 93.1 97.6

Kuwait 69.2 91.8 80.2

Libyan, A.R. 55.5 96.9 93.4

Nigeria 24.9 3/ 87.2 93.3

Saudi Arabia 70.5 96.1 91.0

Syrian, A.R. 9.0 4/ 66.2 66.2

Trinidad and Tobago 23.9 5/ 83.2 31.0

Venezuela 25.0 97.2 63.7

I/ 1795-13.6 a/ Includes quarrying.

2/ 1972-77; 1977-11.6 b/ Only includes ores and concentrates,unwrought and unrefined (except copper

3/ 1970-76; 1976-32.4 which may be refined but is unwrought).

4/ 1970-76; 1976-13.7

5/ 1977-40.4

Sources: Mi) World Band datm (bdhare os a nd9 e ditions(ii) WB, Coo(iarty Trade andrtslnuTotalMJrc7 and 1978 editions

(Share of Mineral Exports in Total Merchandise Exports).

-4-

I.3 Some Conjectures Based on the Hist6tic&l Record

The role of foreign trade in the process of economic development hasbeen much debated since the late forties. To oversimplify, the line may bedrawn between economists who upheld the traditional role of primary exports asa leading sector in development and those who deprecated the dynamic potentialof such exports and espoused in its place import substitution and balancedgrowth. There can be no correct general position in this debate since countriesin the process of development are so diverse. However, an attempt at under-standing the development problems of mineral economies inevitably leads one toask: 1/ what does the historical record on export-led growth suggest aboutwhether and how development can be transmitted to the domestic economy?

An assessment of export-led growth may be pursued from at least twoangles. The production function approach or "staple theory" approach 2/focuses analysis not so much on the export industry itself as on the effects ofstaple production on the rest of the economy. The production function for thestaple is important because secondary and tertiary industry can possibly developaround the export base through the external effects of inputs demanded, outputssupplied, consumer markets created, and education provided or stimulated by theexport industry. Many attempts have been made to define and classify the typesof externalities and linkages surrounding export activities, of which the mostgeneral distinguishes between production, consumption and fiscal linkages. 3/Whatever the mode chosen for analyzing externalities, both theoretical andempirical work have shown that the range of strengths they may possess go allthe way from negligible to vast. 4/

If, as has been argued, a comparative appraisal of the existence,strength, and reliability of the various linkage effects for different staplesin various socio-economic settings is one way of understanding the period ofexport-led growth, 5/ what may one say about the mineral economies? There aretwo major conclusions to be drawn. The first is that most studies in which the

1/ A major premise here is that the mineral economies may be regarded as partof a larger sample of primary exporting countries, namely the now-developednon-European countries of the nineteenth century, and other primaryexporting countries of the present century. Although such a viewpoint isdebatable on numerous grounds, it is justified if, as is the purpose here,it is used as a heuristic device.

2/ The "staple theory" approach was pioneered by Innis in his study of Canadianeconomic development; see Watkins (1963). It has since been applied byBaldwin (1963), Roemer (1970) and others.

3/ Hirschman (1977).

4/ Caves (1965).

5/ Hirschman, op. cit.

staple theory is extended to mining suggest that, unlike other historical staples,the mining industry has been notably deficient in the sort of spread effectsarising from production and consumption linkages. 1/ The simplest explanationfor the failure of mining activity to generate production linkages is that itstechnology is generally highly capital- and skill-intensive and hence has inputrequirements that are highly divergent from domestic factor supplies; while thefailure of consumption linkages to arise is attributable to the low labor demandgenerally implied by mining technology. 2/ Not surprisingly, mining has onlybeen generative of such spread effects where it has been carried out by small-scale, independent miners with indigenous technology, as in Malaysia. 3/ Even so,given the scale of such activity, these spread effects were hardly significantfor the economy as a whole.

The second conclusion of the study of linkages in mining is that fiscallinkages make a strong showing in mineral economies. This is perhaps not acoincidence. For it is precisely because of this absence of links that theenclave becomes an obvious and comparatively easy target of the fiscal authorities:fiscal linkages are usually associated with the lack of production and consumptionlinkages, and vice versa. 4/

The difference between production and consumption linkages on the onehand, and fiscal linkage on the other, is critical: the former share anautomaticity that is glaringly absent in fiscal linkage. 5/ Production and con-sumption linkages work themselves out through the market, assuming the socialmilieu and the policy environment are supportive. But the success of the fiscallinkage depends on the willingness and ability of governments to tax or otherwiseparticipate in the incomes originating in mining; and in addition, the abilityto tax must be combined with an ability to invest productively. It is in thislack of automaticity that the major weakness of fiscal linkage lies. It mayfurther be argued that the tasks taken on by governments through fiscal linkage

1/ See Baldwin (1966) and Fry and Harvey (1974) for Zambia; Reynolds (1965) forChile; Mikesell (1974) for Zaire; Pearson (1970) and Meyer and Pearson (1974)for Nigeria; Killick (1974) for Sierra Leone; Wells (1971) for Saudi Arabia,Bartsch (1971) for Iran; and Harris (1971) for Venezuela.

2/ Thus, the mineral economies may be distinguished from the agricultural primaryexporters; for in the latter group, production and consumption linkages can,if allowed to, dominate the fiscal linkage; whether or not they do lead toexport-led development depends of course on the social milieu and policyenvironment (see below).

3/ Thoburn (1977).

4/ Hirschman, op. cit.

5/ It is primarily in this respect that the miperal economies differ from otherprimary producing countries: the configuration of linkages is vastlydifferent in economies dominated by export agriculture.

- 6 -

are often intrinsically more difficult than those that are assumed, frequently byprivate capital, in conjunction with production and consumption linkages.

Thus, an assessment of export-led growth in the mineral economies, judgedfrom the staple theory angle, suggests that these economies must rely primarily onthe fiscal linkage. The dominance of the fiscal linkage, characterized as it is bya lack of automaticity in its potential spread effects, necessarily means that thestate or government must play the leading role in charting mineral-based development.Of course, this role may be direct (through active state participation) or indirect(through fiscal and/or financial channels), but either way, it is a dominant role.

An evaluation of the historical record on export-led growth may, on theother hand, be approached from a second angle; 1/ exports lead to development onlyif the social milieu and policy environment are supportive. In particular, it isargued that history suggests that trade cannot be an engine of growth, it canonly be a handmaiden of growth: the differential impact of trade on growthacross countries lies in internal factors that determine the nature and mobilityof domestic factors of production. 2/ The world of foreign trade is one of changeand to be successful countries must be able to adapt the structure of their foreigntrade accordingly. The terms of trade turn against the enlarging economy thatcannot transform. 3/ Transformation, of course, does not demand shifts of thewhole economy from one task to another: the changes occur at the margin.

The essential implication of this view on export-led development is thatthe success of the mineral economies will depend significantly on the quality andmobility of their internal factors of production, and on the policy environment theyestablish for economic decision-making. Together,these two sets of factors willdetermine their capacity to transform as their mineral rents wither away or asdemand for their mineral decreases. In particular, the older mineral economiesmay not have benefited from the impulses from their mineral exports because theseinternal and policy factors were inhibiting. Such was the case, for example, withPeruvian guano and Chilean nitrates. 4/

What conclusions emerge from the literature on export-led growth and itscauses? Put rather tersely, it may be claimed that the historical record permitsthe following conjectures:

(a) Historically, successful export-led growth has, in largemeasure, hinged upon the effects of staple production,through production and consumption linkages, on the restof the economy.

1/ A third angle on export-led growth has been that set forth by Nurkse, namelythe trade-pessimism theory. The essence of Nurkse's argument, that forvarious reasons the prospects for exports of primary products to thedeveloped countries are poor, is least applicable to minerals and is thereforenot pursued here.

2/ Kravis (1970).

3/ Linder (1961), Kindleberger (1962 , 1964).

4/ Levin (1960).

(b) Production and consumption linkages are, however, notnecessary conditions for export-led development. Inprinciple, fiscal linkage, whic; 'ends to predominatewhere the other linkages are absent, provides an alter-native route to growth.

(c) Neither production and consumption linkages on the oiehand, nor the fiscal linkage on the other, are sufficientconditions for export-led growth: internal factors (thequality and mobility of factors of production), the policyenvironment, and an ability to invest fiscal proceedsproductively must all play supportive roles.

(d) The lesson from Canadian and Peruvian history is that, ingeneral, no single staple industry can be expected to leada country all the way through diversification and industria-lization. The production and consumption linkages of aseries of vigorous staples are required before the capacityto transform is great enough to avoid the instabilities ofan export economy. And the fiscal linkage of a singlestaple is, in general, not large enough to foster thetransformation of the entire economy. Perhaps the majorexception to this view arises in the context of those post-1973 petroleum economies whose fiscal linkage is largeenough to permit a transformation of their economies on thebasis of a single staple.

The implications of these conjectures for the study of the mineraleconomies are:

(a) Since export-led development will depend primarily on themagnitude of the fiscal linkage rather than on productionand consumption linkages, maximizing the fiscal linkageis a critical problem for the mineral economies.

(b) Since successful export-led growth based on the fiscallinkage rests, in large part, on the ability of the stateproductively to invest its fiscal proceeds, the investmentpriorities of mineral economies must be carefully chosenif they are to exploit their mineral-rent advantage.

(c) Since export-led development is particularly responsive tothe policy environment for economic decision-making, lacunaein the latter can only delay the transformation of the economy,and the attainment of the growth, distribution and employmentobjectives.

These implications mirror and reinforce the three main concerns of thispaper (see Section I.1), and are reflected, respectively, in Sections IV, III andII.

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I.4 Some Salient Institutional Features df the InternationalMining Industry and their Consequences

The most significant institutional features of the international miningscene are the highly uneven geographical distribution of minerals, the greatdegree of uncertainty associated with exhaustible natural resources, and thehighly capital-intensive technology of the industry.

The uneven geographical distribution of mineral reserves is indicatedby the statistical fact that 70 to 75 percent of world non-fuel mineral outputis produced in only a dozen countries, half of which are developing countries:the Soviet Union (18.7 percent), U.S.A. (15.9 percent), Canada (11.5 percent),Chile (4.6 percent), Zambia (4.1 percent), Australia (3.4 percent), China (3.2percent), Zaire (2.4 percent), Peru (2.3 percent), South Africa (1.9 percent),Mexico (1.8 percent) and Brazil (1.6 percent). The shares of the top fiveproducers in copper, bauxite, zinc, iron ore and nickel are 71 percent, 63 per-cent, 59 percent, 67 percent and over 90 percent respectively. 1/

Uncertainty pervades the mining industry. The search for new depositshas become increasingly systematized: large organizations with massive explora-tion budgets have replaced the maverick prospector. Yet discoveries, even today,are still sudden and unpredictable. The impact of discoveries on price, if thereis an open market for the resource, or on the plans of the organizations involvedin the trade of that resource, is likely to be dramatic. There is, in addition,the related uncertainty regarding future technologies. Techniques for searchingfor new deposits may change, or new technologies can also appear for workingknown mines, thus influencing unit costs. Technical change can generate cheapsubstitutes for resource inputs, as evidenced by the history of Chilean nitratesand Peruvian guano. Economic life, of course, is full of all types of uncertainty.The argument is that in the field of natural resources, uncertainty seemsespecially great.

Similarly, economic activities also require capital and a certainminimum scale of operations. Both the search for new deposits and theirexploitation appear to be, once again, especially capital intensive, wherecapital includes physical, human and social overhead capital. Such capitalintensity plus organizational requirements in production, transportation andmarketing combine to create indivisibilities in the production and distributionof many exhaustible natural resources. As a result, for substantial outputranges marginal costs are considerably below average costs.

These three features of the mining industry, i.e., uneven geographicaldistribution, uncertainty and capital intensity, provide much of the explanationfor a fourth feature, namely the dominance of large vertically-integratedinternational firms. The uneven geographical distribution of exhaustible

1/ Bosson and Varon (1977), pp. 85-86; based on 1968 value of world output.

- 9 -

resources implies that international trade in such resources must be significant.l/The relatively poor performance of open markets in the presence of the uncertain-ties and complexities described above encourages the substitution of corporateplanning for open markets, and gives rise to vertically-integrated firms. And thehigh capital intensity of the industry leads to an oligopolistic market structuredominated by a few large firms. Together, these three features explain, in largemeasure, the presence of large, international and vertically-integrated firms inthe mining industry, or of foreign mining companies (FMCs) in most mineraleconomies. Having come into existence, such FMCs have tended to maintain theoligopolistic structure of the industry by erecting various entry barriers. Butsuch barriers have been surmounted, and oligopolistic rivalry in the mineralindustry has an interesting history. 2/

There are two major consequences of these institutional features. First,the absence of open markets for many minerals and the high degree of uncertaintyimply that the identification of economic rents, which abound in the mineralindustry, is extremely difficult for the host country governments. Since fiscallinkages are a major spin-off from the industry, this rent-identification problemraises the question of how best the mineral economies may tax mining activity.The growing tendency to nationalize, or otherwise increase government participationin, mineral industries,as well as the growing number of producers' associations,are further responses to the rent identification problem. These issues are dealtwith at length in Section IV.

The second consequence of the dominance of FMCs in the mining industryis that exploration and investment decisions, as well as decisions on the locationof mineral-processing plants, are often taken from the point of view of the globalstrategy of these FMCs. 3/ In particular, it is argued that the capital intensityof the industry is a response to factor prices in the home countries of the FMCsrather than in the mineral economies; and that the concentration of mineral-processing plants in the industrialized countries reflects the particular interestsof the FMCs (such as oligopolistic rivalry) or those of their home countries (suchas protection to domestic industries and security considerations) rather than justthe pure economics of location. The questions of producer cooperation in general,and of industrialization strategies based on mineral-processing are addressed inSections IV.5 and II.3 respectively.

The preceding description of some salient features of the internationalmining industry has provided some background for the discussion of the problemsthat mineral economies face, and in particular has underlined the importance ofissues on our agenda of discussion: the taxation of mineral rents, increasinggovernment participation in the mineral industry, the increasing tendency forproducer cooperation and the economics of mineral processing in the producingcountries.

1/ Given the distribution of demand for such resources.

2/ Vernon (1971, 1974).

3/ Girvan (1971).

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II. THE MINERAL AND NON-MINERAL ECONOMIES IN PERSPECTIVE

II.1 Introduction

The merit of a distinction between mineral and non-mineral economiesmust, in the final analysis, rest on differences between their developmentadvantages and problems, It was claimed in Section 1.1 that the mineraleconomies have specific advantages; and further that their short- and medium-term problems stem primarily from the peculiar incentive-wage-consumptiondynamic that the discovery of minerals tends to unleash, and from short-runinstabilities in the demand for minerals. The purpose of this section is toattempt to substantiate these claims by comparing the mineral economies to agroup of non-mineral economies.

Among the mineral economies, a distinction is drawn first betweenthe petroleum and the non-fuel mineral economies; the higher average earningsof the former group necessitate such a division. Secondly, two other sub-setsof the mineral economies are distinguished: Sample I excludes Indonesia andMorocco from the universal set of mineral economies identified earlier (becausethese two economies have a more diversified production base than other mineraleconomies) while Sample II excludes Guinea and Zaire (the two lowest incomecountries in the group). The non-mineral economies may be defined in twopossible ways: first, in a residual fashion, as all middle-income developingcountries other than the mineral economies; or second, in a more particularisticfashion, by choosing a reference group of non-mineral exporting countries foreach group of mineral economies with otherwise similar long-term comparativeadvantages. By this latter criterion, one would compare Zambia and Zaire to,say,Tanzania and Malawi; Algeria and Morocco to, say, Tunisia; Saudi Arabia andKuwait to, say, Yemen Arab Republic and Yemen, PDR. The residual definitionof non-mineral economies is chosen on the grounds that any a priori reason forusing non-mineral economies as a standard of comparison is more defensible foran income-related definition. Although the mining sector remains in many waysan enclave par excellence, its direct and indirect effects on incentives, wagesand consumption in the rest of the economy render the mineral economy verydifferent from non-mineral economies with otherwise similar characteristics.Thus, for the rest of this paper, non-mineral economies are defined as allmiddle-income developing countries (i.e., with 1976 per capita GNP of US$260or more) other than the mineral economies. 1/

The major arguments of this section may be stated quite succinctly.First, in general terms, it is argued that the mineral economies enjoy twoimportant advantages over the non-mineral economies: (a) unlike many otherdeveloping countries, the mineral economies generally are not as burdenedwith fiscal and foreign exchange gaps; and (b) unlike many other developingcountries whose choice of an industrialization strategy is largely restrictedto import substitution, exports of labor-intensive manufactures and basicgoods production, 2/ mineral economies (like other resource economies) have

1/ WB, World Development Report 1978, Annex Table 1.2/ Roemer (1977).

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the added option of resource-based industrialization.

It is argued, on the other hand, that in comparison with the non-mineral econor'es, there is evidence to support the view that mineral economiesdo perform poorly in (a) agricultural growth (b) export diversification and(c) inflation; and the view that there is a tendency for these economies to becharacterized by (d) lower incremental saving ratios, (e) higher technological andwage dualism, higher unemployment and lower school enrollment ratios, (f) higherexternal debt-to-GNP ratios, and (g) higher export earnings instability. 1/

II2 Fiscal and Foreign Exchange Ease

In development planning, few ideas have received as much attentionas the constraints imposed by saving, fiscal and foreign exchange gaps. Thesegaps depend, of course, on the planned growth rate and on the allowed adjustingvariables. The principal argument here is that mineral economies are less likelyto be subject to the fiscal and/or foreign exchange gaps for a reasonable rangeof growth rates, at least while their mineral reserves last. (Saving in mineraleconomies is discussed in II.4 below.)

The essential advantage of the mineral economies, in comparison withother developing countries engaged in other forms of primary production, liesin their possession of a resource that, often in conjunction with foreigninvestors, is more easily converted into a financial flow. This financialflow, which principally represents the rent element that the mineral economyis able to tap, is usually generated as fiscal revenue, in the form of foreignexchange. The mineral economies' relatively easy access to this flow of fiscalrevenue in the form of foreign exchange arises principally because, (a) unlikethe agricultural primary producers, the mineral economies export products withhigh income elasticities of demand; and (b) taxes on the mining sector, whichis foreign-owned and easily identified, are easier to levy 2/ and to administer.The upshot of these advantages is that fiscal and foreign exchange gaps are lesslikely to constrain investment in mineral than in non-mineral economies.

1/ The distinction between mineral and non-mineral economies is two-pronged:first, there are structural differences that arise from the particularnature of the mining industry--namely, the relative importance of thefiscal linkage, fiscal and foreign exchange ease, the resource-basedindustrialization option, the exhaustible nature of the resource, thedominance of FMCs in the industry and the large rent component in themarket value of minerals; second, there are hypothesized differencesin performance which follow both from the structural features mentionedabove and from typical policy responses to these. These latter hypothesesare subjected to tests below; but only superficially so. A thoroughstatistical test would require that for each dependent variable wedemonstrate a statistical difference between the structural equationsfor mineral and non-mineral economies. Time constraints have made thisimpracticable.

2/ Hirschman [1977].

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Table II: INDICES OF FISCAL AND FOREIGN EXCHANGE EASEIN THE MINERAL 1/ AND NON-MINERAL ECONOMIES

a/Country Group Tax Revenue /GDP Export Earnings/GDP

Ratio Ratio

1960-70 1971-73 1968-70 1971-73 1974-76

Mineral Economies 18.3 20.0 33.1 32.9 43.1

Petroleum Economies 19.8 22.8 32.6 27.4 47,5(4)Non-Fuel Economies 16.8 17.0 33.4 35.9 35.2

Mineral Economies-Sample 1 18.8 20.4 34.9 34.4 45.0(4)

Mineral Economies-Sample II(3) 18.2 19.9 33.0 32.9 43.6(4)

Non-Mineral Economies 13.0 13.5 17.1 18.1 20.1(5)

a/ Tax Revenue defined to include income ~.axes, sales taxes, customs taxes,profits of fiscal monopolies, other tax revenue and rents and royalties.

(1) Excluding Kuwait.(2) All mineral economies excluding Indonesia and Morocco.(3) All mineral economies excluding Zaire and Guinea.(4) Excluding Saudi Arabia and Trinidad & Tobago.(5) Excluding Singapore.

Sources: (i) World Bank, World Tables 1976.

(ii) World Bank data.

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The evidence on the relative ease of access to fiscal and foreignexchange resources is summarised in Table II. The greater access to foreignexchange resources shared by the mineral economies is abundantly clear: theexport earnings to GDP ratio is about twice as large in these economies thanin the non-mineral economies. The evidence for fiscal ease shows the mineraleconomies to have a tax to GDP ratio about one and one half times that of thenon-mineral economies. 1/ However, this is an instance in which the middle-income definition of non-mineral economies is somewhat misleading, since onecould expect the efficiency of a country's tax administration to be correlatedmore with the general level of development than with per capita income per se.Some comparisons of individual countries make the point clearly: Zambia's,Gabon's, Congo P.R.'s and Zaire's tax revenue/GDP ratios average 27, 19.5, 20and 25 percent respectively (1968-73), while those for Cameroon, Ghana, IvoryCoast and Sudan average 15, 15.1, 20.1 and 14.3 respectively; Trinidad andTobago, Jamaica and Guyana had tax ratios, over the same period, of 15, 17.5and 21 percent respectively, while Guatemala, Honduras, Nicaragua, Panama,Paraguay and Colombia had tax ratios of 7.8, 10.6, 9.0, 11.5, 10.0 and 8.1respectively; finally, Saudi Arabia had an average tax ratio of 30 percentwhile Egypt's tax ratio, over the same period, averaged 14.5 percent.

However, these advantages are not unmixed blessings. The share ofgovernment revenue (Table III) and of income and foreign exchange (Table I)that arises in the mining sector is often so high that short-run demandinstabilities tend to generate corresponding instabilities in foreignexchange earnings and in fiscal revenue. The recent experience of thecopper producing countries is a classic example. In this respect, mineraleconomies come close to other countries that are highly dependent on exportsof one or a few commodities. This dependence calls first for astute short-run macro-economic management, and in the longer run, for a diversificationof the economy and a widening of the tax base. These policy objectives aredealt with in II.6 and II.9 respectively.

I1.3 Resource-based Industrialization 2/

Of the four strategies of industrialization that are being under-taken by or advocated for the developing countries, namely import-substitution,exports of labor-intensive manufacturing, primary export processing and basicgoods production, the latter two are based on the domestic processing ofnatural resources, including minerals. The principal argument of this sub-section is that although the mineral economies, perhaps to a greater extentthan other primary product exporting countries, have the option of pursuinga resource-based industrialization (RBI) strategy, it is not obvious that RBI

1/ The data are subject to an important error that does not permit them to beused as an index of the magnitude of fiscal linkage, namely they do notcorrect for non-fiscal mining revenue accruing to state-owned miningenterprises.

2/ This sub-section relies primarily on Roemer [1977], Takeuchi [1977] andBosson and Varon [1977].

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Table III: SHARE OP MINING REVENUES IN GOVERNMENT REVENUE INSELECTED MINERAL ECONOMIES

Country Mining Revenue as percentage of

Total Government Revenue

Algeria' 53.22/

Ecuador 535

Iran3/ 55.5

Kuwait4 / 88.6

Liberia / 13.2

Morocco 6/ 15.3

Nigeria - 48.6

Syria -/ 25.2

9'Venezuela- 47.3

1/ Average, 1975-76; Source: IMF Staff.

2/ Average 1973-76; includes oil income, export duties of 15% on oil productsexported, exchange profits on petroleum transaction, and petroleum royalties.

3/ Average, 1973-76; Source: IMF Staff.

4/ Average, 1972-74; Source: IMF Staff.

5/ Iron-ore profit-sharing, 1974 only.

6/ Average 1972-76; Source: IMF Staff.

7/ Average 1972-73; includes only tax revenues on petroleum profits.

8/ Average 1972-74.

9/ Average 1972-76; includes only tax revenues on petroleum and iron-ore companyprofits.

Source: IMF, Government Finance Statistics Yearbook, 1978, unless otherwise stated

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is better suited to achieve the goals of growth, distribution and employmentthan other potential strategies. The contribution of RBI to each of thesegoals must be assessed. Although often advocated as if its appropriatenessis unquestionable, resource-based industrial projects must, like all otherprojects, be subject to the cost-benefit calculus.

It is well known that mineral processing facilities are heavilyconcentrated in the industrialized countries; only about 30 percent of theminerals (including petroleum) mined in the developing countries is processedthere. Moreover, this ratio has remained relatively constant over the pasttwo decades, suggesting that increases in processing facilities in thesecountries have merely met increases in mine capacity. 1/ While mining mustby necessity be carried out where deposits exist, mineral-processing is morefoot-loose.

Various reasons may be adduced for the concentration of mineralprocessing in the industrialized countries: in several minerals, the developedcountries used to be major producers and built up processing facilities at home(lead, zinc, iron ore, copper and bauxite); their tariff structure has tendedto favor imports of unprocessed products; mineral-processing requires largecapital investments and is subject to high economies of scale; some mineral-processing activities are technologically highly sophisticated and requirehighly skilled labor; and finally, in some products proximity to consumersis a distinct advantage, while in others, the supply of complementary inputsdetermines location.

However, other factors also favor expanded mineral-processingactivities in the producing countries. The potential contribution ofmineral processing to the mineral economies may be discussed in terms ofcomparative advantage, economies of scale, external economies, and employ-ment and income distribution.

Comparative Advantage: In general, there are few data to support comparativeadvantage in mineral processing on the basis of lower labor costs: of all themineral-based industries, only primary metal processing is labor intensive andof median capital intensity. Capital costs on the other hand are a high frac-tion in all mineral processing except aluminum fabrication, averaging around40 per cent or more of total costs. Thus, if capital abundance were the solecriterion, only the highly capital-abundant mineral economies would possess acomparative advantage in processing. Raw material costs too are high for allmineral-based industries except aluminum, and this indicates that considerableimportance attaches to the saving of material-related costs such as transportand handling costs. Finally, the presence of critical complementary inputsmay confer a comparative advantage: for example, natural gas and hydropowerfor aluminum smelting.

1/ Bosson and Varon, op.cit.; Roemer, op.cit.

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Economies of Scale: Almost all industries based on natural resources aresubject to economies of scale. The important mineral economies producevolumes of their minerals well in excess of the minimum required output;this is true for the six leading copper exporters, the four major bauxiteexporters and all major petroleum exporters. In each of these cases., thelimitations are imposed by the ability of exporters to market the refinedoutput. This constraint is particularly severe in the highly integratedaluminum and petroleum markets, and to a lesser extent in copper. Yet,for all but the very large mineral economies, a part of their processedoutput would have to be exported if scale economies are to be attained.

External Economies: Perhaps the most important but oversold argument forRBI is the external economies one. Simply stated, it stresses the importanceof production linkages in the mineral processing industries. The linkagefrom ore-mining through smelting, refining, fabrication of metal products,and finally into capital goods, is pivotal to the basic goods industrializa-tion strategy. The critical role of steel in industrial development isargued on the basis of the latter series of linkages. Linkages based oncheap natural gas are being exploited in the industrialization of manypetroleum economies: these linkages extend from natural gas as a rawmaterial for fertilizer, petrochemicals and sponge-iron to gas as a cheapsource of power for smelting aluminum. Finally, the linkage argument forRBI receives its greatest support in a recent study in which a calculationof indices of toal production linkage (direct and indirect, forward andbackward) for 18 sectors showed that basic metals have the second highestindex, while chemicals, petroleum refining, metal products and machineryhad above-median scores. 1/

Employment: Labor-intensity in mining activity and in mineral-basedprocessing is so low as to make these activities at least on a directbasis,very low in employment generation. For example, it is estimatedthat in Colombia, each US$100 million of investment in petrochemicalsemployed only 2,500 in 1967, whilst the same funds invested in labor-intensive industries would have provided 50,000 jobs. 2/ When both directand indirect employment effects are allowed for, fertilizer and petroleum-refining score better, but other direct evidence conflicts with even theseresults. 3/ Thus assuming fixed factor proportions, most mineral-basedindustries simply do not offer much scope for employment creation. Nordoes there seem to be much scope for factor substitution to increaseemployment coefficients in these industries. Worse still, the employmentimplications of these industries go beyond themselves: they give rise tohigh wage enclaves which encourage high open unemployment and migration(see Section III.5).

1/ Yotopoulos and Nugent (1973).2/ Morawetz [1975].3/ Roemer [1977].

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Income Distribution: With very few employees who receive high wages, mostmineral-based industries tend to increase the income concentration of thealready dualistic economies. A recent study 1/ identified natural resourceabundance and dualism as two of the most critical variables (of 31 tested)in determining income distribution, both leading to greater concentration.The average share of income accruing to the top 5 percent of the populationis 50 percent higher for 26 resource-abundant countries than for 17 less wellendowed countries. 2/ But if the resource-based industries are introducedinto an economy that is already characterized by dualism due to a miningenclave and to a highly protected import-substitution sector, the formershould not take the full blame. Nor is RBI likely to break such a patternif it already exists. There is, in fact, some evidence to suggest thatincome distribution is largely insensitive to industrial structure orindustrial policy regimes. 3/ It may be noted that RBI could improveregional distribution since such industries tend to be located near themines, which themselves are often in some of the least developed regionsof the mineral economies.

An Assessment: The upshot of the above strategies is that subject to theentry barriers issue discussed below, RBI in the mineral economies receivetheir strongest a priori support on the basis of (a) the raw material costshares of such industries; (b) comparative advantage arguments for the morecapital-abundant of the mineral economies such as Saudi Arabia, and Libyaand for countries that are abundant in critical complementary inputs suchas Algeria, Nigeria (natural gas) and Zaire (hydropower) for aluminum smelting;and (c) external economy arguments where there is high potential for produc-tion linkages in basic metals, chemicals, petroleum refining, metal productsand machinery.

On the other hand, it is clear that the total employment effects ofRBI would in general perpetuate the already dualistic character of mostmineral economies, leading perhaps to more (open) unemployment, rural-urbanmigration and doing little or nothing to improve income distribution.

To decide whether such arguments favor RBI for specific mineralsin specific countries, these general propositions must be combined to producea single-dimensional indicator. Few studies provide such an analysis on acomparative basis, using the multiple objectives we have stressed above.The most reliable of the few comparative studies that have attempted toassess the value added picture for specific mineral-based processing 4/concluded that of the seven major non-fuel minerals, this criterion favoredthe processing of bauxite, copper, iron-ore and to a lesser extent, zinc,

1/ Adelman and Morris [1973].2/ Cline [1975].3/, Cline [1975].4/ Takeuchi [1977].

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Factors Favoring Factors not Favor- Mineral EconomiesMineral Processing f ing Process Favored

Zinc (i) Moderate Value (i) Tariffs; (ii) Long- Bolivia, Peru, Iran,Added;(ii) Transporta- term Contracts between Moroccotion; (iii) Pollution Smelters and Mines;

(iii) High Capital Costs

Lead (i) Simple Technology (i) Low Value Added; Peru(ii) Tariffs; (iii) High IranCapital Costs; (iv)Economies of Scale

Nickel (i) Recent Technologi- (i) Low Value Added Botswanacal Developments

Copper (i) High Value Added; (i) Import Barriers; Chile, Zaire,(ii) Transportation; (ii) High Capital Costs; Peru(iii) Pollution (iii) Economies of Scale (Zambia already refines

90% of output)

Tin (i) Excess Capacity; Bolivia(ii) Low Transport Costs Indonesia (on national

grounds only)

Iron and (i) High Value Added; (i) Import Barriers; Middle EastSteel (ii) Complementary (ii) High Capital Costs; Petroleum Economies;

Inputs (natural (iii) Excess Capacity other large mineralgas and petroleum) economies

Bauxite/ (i) High Value Added; (i) Tariffs; (ii) High Jamaica, Guyana,Alumina/ (ii) Complementary Capital Costs;(iii) Surinam (already pro-Aluminum Inputs (natural gas Sophisticated Technology; cessing 50%); Saudi

and hydropower) (iv) Scale Economies Arabia, Iraq, Ecuador,Algeria, Nigeria,Libya (natural gas);Zaire, Chile (hydro-power)

1/ A frequently cited, but somewhat dubious, factor favoring processing in theproducer countries is that of lower costs of pollution control; it isincluded here for the sake of completeness.

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while it disfavored both lead and nickel; the prospects for tin, on the otherhand, are poor because of the world's excess tin smelting capacity. Thepreceding table summarizes this evidence.

This evidence clearly indicates that even for minerals which passthe value-added test, entry barriers are a major stumbling block. Theseinclude tariffs and other import barriers in the developed countries, themarket power exercised by shipping conferences that can set rates todiscriminate against the processed commodity, and perhaps most importantly,oligopolistic market structures that prevent market entry. These raisepolicy issues related to producer cooperation and to the regulation of FMCswhich are dealt with in Section IV.

In the final analysis, then, RBI is defensible only if it satisfiessome combination of direct value-added and potential linkage effects. 1/Its low demand for labor implies that it can be the sole industrializationstrategy only for highly capital-abundant countries with small populations,such as Kuwait, Libya and Gabon, and even in these economies only if complemen-tary investments are made in education, training, and research and development.For the moderate- or low-capital mineral economies, and in particular for thelarger mineral economies, import substitution and development of labor-intensive manfuactures for export are likely to be integral components oftheir industrialization strategies. This issue is discussed in greaterdetail in Section III.

II.4 Macro-economic Consumption-Investment Choices

It is often claimed that mineral economies are characterized byconsumption standards that assume that their mineral rents have an infinitetime-horizon rather than a medium-term one. 2/ On the realistic assumptionthat such mineral rents first increase and then gradually decline over time,such consumption behavior would clearly not be prudent, let alone optimal.Investments made during the lifetime of the mineral should clearly be suchas to substitute an equivalent or larger flow of income as the rents witheraway. A test of the hypothesis that the mineral economies' consumption istoo high is rather difficult, not least because a given country's mineralreserves may increase over time as prices and technology change and asexploration proceeds. 3/ Mineral prices may change over time for similar

1/ A third argument favoring RBI is that it is an instrument for exactingmineral rents. The rent-exaction problem and other approaches to it arediscussed in Section IV.

2/ There is also interview evidence that suggests that many petroleum economiesare acutely aware of the medium-term nature of their mineral rent cycles,and the need therefore to invest these 'temporary' rent flows productively.This is so in particular for Saudi Arabia, Kuwait,Iran and Algeria. SeeThe Economist, May 17, 1975, pp. 57-62, August 9, 1975, p. 67.

3/ The uncertainties associated with sea-bed mining put the point across rathergraphically,

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reasons, and possibly also as a result of market interventions and changesin market structure. To add to the complications, different mineral economiesare on different mineral-rent cycles, and in different stages of their res-pective cycles. In the face of such complications, our simple comparison ofthe macro-economic consumption-investment choices made by mineral and non-mineral economies can only be suggestive in nature. Even so, it does consti-tute a simple test of the hypothesis. 1/ 2/

Table IVa below compares the mean gross national saving rates forthe mineral and non-mineral economies, and in the former group, for the petro-leum and non-fuel mineral economies. The evidence is somewhat mixed. Grossnational saving rates, on the average, are higher in the mineral economiesthan in the non-mineral economies: in 1968, the respective rates were 20.4and 13.5 percent and had risen by 1976 to 26.5 and 16.2 percent respectively.However, disaggregation reveals that the saving performance of non-fuel mineraleconomies has been deteriorating: in 1968, these economies had a higher grossnational saving rate than the non-mineral economies, but have more recently(1973-76), fallen behind the latter. The evidence would seem to suggest thatthe hypothesis may be true for the non-fuel mineral economies.

Further evidence on saving in the mineral and non-mineral economiesis provided in Table IVb which compares incremental saving ratios for the twogroups. The distinction between the two sets of economies is no longer asclear as it was above: the non-mineral economies had an incremental savingrate of 23.6 percent over 1968-70, but this has since fallen to 13.8 percentfor 1973-76, while the mineral economies,which had a 1968-70 rate lower thanthat of the non-mineral economies (13.7 percent),have since increased theirrate to 24.2 percent.

1/ In principle, the consumption-investment split depends, of course, on thesocial rate of time preference and on the rate of return on investment.There is much to be said for the argument that the social rate of timepreference must be quite high in the petroleum economies, but clearlynot in the non-fuel mineral economies.

2/ It is worth noting however that there is already some evidence that providesindirect support for the above hypothesis. In a number of studies in recentyears, the effect of foreign aid and capital inflows on the behavior ofnational saving rates has been analyzed. These studies suggest that aconsiderable portion of such capital inflows has in fact been allocatedto consumption. It would not be surprising then to observe that theonset of a foreign resource inflow in new mineral economies, or suddenincreases in these inflows as in 1973 in the petroleum economies andduring export booms in the non-fuel mineral economies, lead to increasedconsumption-income ratios. See Griffin and Enos [1970], Weisskopf [1972].For a critique see Papanek [1972].

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Table IVa: GROSS NATIONAL SAVING RATES IN THE MINERAL AND NON-MINERALECONOMIES 1968-76

1/Country Group Gross National Saving Rates

1968 1970 1976

Mineral Economies 20.4 19.4 26.5

Petroleum Economies 22.9 25.9 41.9Non-fuel Mineral Economies 17.6 14.8 14.9

Mineral Economies-Sample 2/ 21.1 20.8 27.8Mineral Economies- Sample I- 20.5 20.8 27.4

MinralEcoomes-SamleII-- 20. 2.8 7.

Non-Mineral Economies 13.5 15.2 16.2

1/ Savings/GNP at current prices.

2/ All mineral economies other than Indonesia and Morocco

3/ All mineral economies other than Guinea and Zaire.

Source: World Bank data.

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Table IVb: INCREMMNTAL GROSS NATIONAL SAVING RATES IN THE INERAL ANDNON-MINERAL ECONOMIES 1968-76

Country Group Incremental Gross National Saving Rates-/

1268-70 1970-73 1973-76 LMineral Economies 13.7 25.4 24.2

Petroleum Economies 21.2 42.9 41.4Non-fuel Mineral Economies 5.7 6.5 4.1

Mineral Economies - Sample I 2/ 14.4 25.3 32.9

3/Mineral Economies - Sample II - 16.6 30.3 27.8

Non-mineral Economies 23.6 16.3 13.8

1/ Change in Savings/Change in GNP, current prices.

2/ All mineral economies other than Indonesia and Morocco.

3/ All mineral economies other than Guinea and Zaire.

4/ Excluding Zambia, which exhibited negative savings over this period.

Source: World Bank data.

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The disaggregated figures reveal that the improvement in the savingperformance of t0e mineral economies over the 1968-76 period solely reflectsthe performance in the petroleum economies: although their incremental savingrate was lower than that of the non-mineral economies during 1968-70, it hassince risen to account for the entire difference between the saving performances

of the mineral and non-mineral economies. Saving in the non-fuel mineraleconomies has shown little change over the 1968-76 period, but despite thefall in the non-mineral economies, still compares unfavorably with that inthe latter group of countries.

Table IVa and IVb therefore clearly show that consumption accountsfor a higher share of income in the non-fuel mineral economies than in othereconomies. There is also some indication that saving performance in the petro-leum economies may also have been inferior to that in the non-mineral economiesbut for recent oil-price increases: the 1968-70 incremental saving rate islower for the former than for the latter. 1/ At any rate, subject to furthertesting, it is neither possible to accept nor to reject the hypothesis for thepetroleum economies.

Table V below presents the results of a final test of the hypothesisunder consideration. It aims to assess the relative saving performance of thepetroleum economies in particular, and to provide some information on thevariance of average saving rates for the groups of economies under consideration.It uses as a benchmark the "norm" Saving-GNP ratios that emerge from the Chenery-Syrquin cross-country saving equation, 2/ and presents for each group, (a) themean absolute deviation of actual from "norm" saving rates, and (b) the propor-tion of below "norm" saving rates. The former index measures the degree towhich, on average, the saving performance of the group varies from what itwould have been if each country in the group were to save "normally" (allowingfor its income per capita and population). The second index gives a measureof the degree to which the group's variance is characterized by saving ratessuperior or inferior to the "norm" (hence, the lower this index, the betterthe saving performance relative to the "norm").

The evidence in Table V suggests a number of conclusions. First,it clearly supports the view that saving behavior of the mineral economies asa group differs significantly from that in the non-mineral economies as agroup, since the variation around the "norm" is twice as high in the formerthan in the latter. Also, since this order of magnitude persisted between1968 and 1976, the evidence also suggests that no changes along the abovedimensions occurred in this period.

1/ It is important to note that the improvement in the saving performance ofthe petroleum economies follows the oil price level which increased between1970 and 1973 from $1.80 to $3.30 per barrel, and in 1974 to $11.59.

2/ See Chenery and Syrquin [1975], Chapter 2, especially pp. 21-23. Theindependent variables in the equation are GNP per capita, population anda time trend. Thus, given any country, one can compute its "norm" saving-ratio using its GNP per capita and its population.

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Table V: DEVIATIONS OF ACTUAL FROM "NORM" 1/ GROSS NATIONAL SAVINGRATES IN THE MINERAL AND NON-MINERAL ECONOMIES

Proportion of Below "Norm'32/ Observations (%)

Country Group Mean Absolute Deviation-

1968 1976 1968 1976

Mineral Economies .10 .14 30 38

Petroleum Economies .11 .20 35 21Non-Fuel Mineral Economies .09 .08 23 59

Mineral Economies - Sample I- .11 .15 24 38

Mineral Economies - Sample II/ .10 .14 32 38

Non Mineral Economies .04 .06 58 59

1/ "Norm" Gross National Saving Rates are computed on the basis of Equation (l.a),Chenery and Syrquin [1975], p. 30. Deviations are obtained as the differencebetween actual and "norm" saving rates.

2/ Average deviation for each group, ignoring signs.

3/ Number of negative deviations divided by total number of countries in group.

4/ All mineral economies other than Indonesia and Morocco.

5/ All mineral economies other than Guinea and Zaire.

Sources: (i) World Bank Data.(ii) Chenery and Syrquin [1975], Table 4, Equation (la).

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Secondly, to the credit of the mineral economies, the evidencesuggests that they have, as a group, not wasted their mineral-rent advantage:for both years, the proportion of below "norm" saving performances is muchlower in the mineral economies than in the non-mineral economies.

However, it is clear that the proportion of below "norm" saversamong the mineral economies has increased over the period, while for thenon-mineral economies it has remained the same. And what is more, the newclass of low savers among the mineral economies are all non-fuel economies.The third conclusion that we may draw from these facts then is that thesaving record of the non-fuel mineral economies has been rapidly deterioratingin recent years; so much so, in fact, that in 1976, the proportion of below"norm" savers in this group was equal to that for the non-mineral economies.As a group therefore, the non-fuel mineral economies seem in recent years tohave totally wasted their mineral-rent advantage! It is instructive to citethose countries in this group which have below "norm" saving rates: in 1968,Chile, Peru and Morocco; and in 1976, Chile, Peru, Morocco, as well asBolivia, Guinea, Jamaica and Sierra Leone.

Finally, the evidence suggests that the petroleum economies haveby far the best saving record of all the groups considered here, if theirrespective "norms" are used as the measuring rod. Their performance as agroup has, not surprisingly, improved substantially between 1968 and 1976,the below "norm" proportion having fallen from 35 to 21 percent. In 1968,the below "norm" petroleum economies were Syria, Iran and Indonesia, whilein 1976, they were Syria, Kuwait and the Congo P.D.R. Much as this evidencesuggests an impressive saving record for the petroleum economies as a group,it must be borne in mind that the measuring rod is a debatable one for theseeconomies, given their post-1973 quantum leap in mineral rents. The conclu-sion has to be therefore that it is possible neither to accept nor rejectthe high consumption hypothesis for these economies.

It is of particular significance that throughout this section,the control group of non-mineral economies is chosen on the basis of percapita incomes. For among the many suggested determinants of savings,that which receives unambiguous empirical support is income. 1/ Therelevance of the control group for the purpose at hand is certainly notideal, but it does offer some standard of comparison.

The general policy implications of the poor saving performanceof the non-fuel mineral economies are clear, although they may vary forindividual countries. In particular, national saving is likely to beinfluenced by the functional distribution of income between wages andother forms of income (see Section II.5), by the level and structure ofinterest rates, by the rate of inflation (see Section II.6), by the effi-ciency of the financial institutions, and not least,, by the saving perfor-mance of the public sector. To the extent that saving performance reflectsthe influence of these factors, it may be improved by:

1/ Saito [1977].

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(a) an incomes policy directed at controlling wagesespecially in the mineral and related sectors(Section II.5);

(b) a more progressive income tax and/or high taxeson luxuries, both imported and domestic;

(c) policies aimed at a lower rate of inflation(Section 11.6);

(d) a widening of the geographical and functionalcoverage of the financial institutions and amodification of the level and term-structureof interest rates; and

(e) controlling the growth of government consumptionexpenditure, particularly through the programmingof recurrent expenditure outlays associated withcapital expenditures.

These polieies must cleariy receive attenti,m in the nen-fuelmineral economies, the sub-group for which the evidence supports thehypothesis of low relative savings. As argued earlier, it is possibleneither to accept nor reject the low-saving hypothesis for the petroleumeconomies; however, the saving performance of petroleum economies in thelow-capital group, as we shall see below, needs substantial improvement(see Section III).

II.5 Technological and Wage Dualism, Migration and Unemployment

In reviewing the historical record on export-led growth and thecase for RBI in mineral economies, attention was drawn to the technologicaldualism that characterizes the mineral economies: an enclave, after all, isdefined by its distinctiveness from its environment. This characteristic iswell documented and does not therefore call for much substantiation here.Except in the very early stages of mining when mining activity was largelylabor-intensive, small-scale and primarily carried out by independentnationals 1/, the mining industry has been highly capital-intensive and isbecoming more so, and has infrastructure requirements that are enormouscompared to most other industries. The order of magnitude of capitalintensity in mining and processing is gleaned from Table VI, while thedualism it leads to is documented in most studies of the mineral economies.2/

1/ For example, tin in Malaysia, copper in Peru and Chile: see Thoburn[1977], Roemer [1970] and Reynolds [1965] respectively. Small-scalemining is still of some significance for some minerals and countries:see Bosson and Varon [1977], Appendix K, pp. 261-265.

2/ For example: Baldwin [1966]; Reynolds, op.cit.; Pearson [19701.

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Table VI: TYPICAL CAPITAL INVESTMENT REQUIREMENTS FORMINING AND PROCESSING FACILITIES

(In 1975 U.S. Dollars)

Capital Cost per Minimum Efficient Minimum Capital

Mineral Facility Ton of Capacity Scale of Output Investment Require-ments

(US$) ('000 tons) (US$ mil)per annum

Aluminum

Bauxite Mining 85 n.a. n.a.Alumina Refining 510- 750 800-1200 408- 900Alumina Smelter 1900-2800 150- 200 285- 560

Copper

Mining 3000-5000 40- 60 120- 300Smelting-Refining 2000 40- 60 80- 120

Lead

Mining-Refining 790-1400 50- 100 39.5- 140

Zinc

Mining-Smelting 800-1400 50 40- 70

Sources: (i) K. Takeuchi et. al. "Investment Requirements in the Non-Fuel MineralSector in the Developing Countries," Natural Resources Forum 1, April1977, Table III, p. 269.

(ii) K. Takeuchi, "Potential for Increased Processing of Non-Fuel Mineralsin Developing Countries - Background Note for WDR 1978 passim.

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Although such dualism is characteristic of most developing countries, itsdegree would seem to be higher in the mineral economies. That this is sofor countries in which processing takes place is easily established byreference to a ranking of two-digit industries on the basis of theircapital-intensity, the top six of which include Petroleum Products,Chemicals and Primary Metals (see Table VII).

A major empirical correlate of technological dualism, evidencedby widely differing capital-intensities across sectors, is wage dualism.The documentation in support of wage dualism in those mineral economiesthat have been intensively studied is just as overwhelming as that fortechnological dualism. 1/ This not only reflects the higher labor pro-ductivity in the more capital-intensive mining sector, but also a varietyof other factors: first, when nationals replace foreign workers, thehigher inducement wages paid to the latter must generally be maintained;second, the industry's small number of workers makes it easier for themto unionize; third, governments tend to support higher wage demands inthe mining sector as one way of increasing the retained value of miningcarried out by foreign investors, who in turn often offer higher wagesthan those prevailing in other sectors both to attract higher qualitylabor and because it is deemed to be "good politics". Although wagedualism also characterizes non-mineral developing countries, it is likelyto be more extreme in the mineral economies because of the greater degreeof technological dualism, the often greater participation of foreigninvestors in the economy and the relative ease with which unionizationis achieved (due to the small number of workers in the industry).

A more rigorous test of the hypothesis of greater wage dualismin the mineral than in the non-mineral economies would require data on thewage structure of various economic sectors for a large number of countries.Such data are difficult to come by. However, World Bank data on sectoralwages in Zambia, Trinidad and Tobago and Jamaica show extremely high wagedualism. Further, in a recent study which compared the coefficient ofvariation of wages (in two-digit sectors) for 18 developed and developingcountries, Jamaica (the only mineral economy in the sample) ranked fourth. 2/

Evidence on wage differentials in mineral economies between themining and manufacturing sectors is presented in Table VIII below. It showsthat not all mineral economies are characterized by very high degrees of wagedualism. Thus Algeria, Nigeria and Bolivia had a mining-manufacturing wage-ratio of around unity; while Zambia, Venezuela, Chile, Jamaica had ratiosin excess of 1.6.

1/ See Baldwin [1966], Reynolds [19651, Pearson [1970].2/ See Tidrick (1975] and Papola and Bharadwaj [1970].

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Table VII: RANKING OF TWO-DIGIT MANUFACTURING INDUSTRIESBY INDEX OF CAPITAL INTENSITY lt

Sector Index of Capital Intensity Rank

U.S. Manufacturing, total 100

Food and Kindred Products 109 7Tobacco Manufactures 179 3Textile Mill Products 64 17Apparel and Related Products 49 20Lumber and Wood Products 59 18Furniture and Fixtures 68 16Paper and Allied Products 105 8Printing and Publishing 94 12Chemicals and Allied Products 93 2Petroleum and Coal Products 220 1Rubber and Plastic Products 93 13Leather and Leather Products 53 19Stone, Clay, and Glass Products 101 10Primary Metal Industries 115 6Fabricated Metal Products 93 14Machinery, except Electrical 105 9Electrical Machinery 96 11Transportation Equipment 122 4Instruments 117 5Miscellaneous 81 15

Source: Hal B. Lary, Imports of Manufactures from Less Developed Countries,(N.Y.: N.B.E.R., 1968), Table 2, pp. 24-29.

(1) The index of capital intensity used in the Lary Study is"value-added per employee," and is based on U.S. data. Althoughits use as an index of capital intensity assumes fully competitivefactor and product markets, various ancillary tests performed byLary suggest that the imperfections of the measure do not vitiateits use as an index of capital intensity. Further, the rankingsbased on U.S. data are also shown not to conflict with similar(but less complete) rankings based on Indian and Japanese data.

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Table VIII: WAGE DIFFERENTIALS, UNEMPLOYMET AND THE SHAREOF MINING IN THE LABOR FORCE FOR SELECTED

MINERAL PRODUCING COUNTRIES CIRCA 1970

Mining-Manufacturing Unemployment Share of Mining inWage Differential 1/ Rate() Total Labor Force(%)

Nigeria 1.01

Bolivia 1.02 16.0

Zambia 1.63 10.0 4.2

Morocco - 9.0 1.1

Syrian Arab Republic 1.26 6.4 0.8

Algeria 0.92 10.0 0.9

Iraq - 6.0 -

Iran - 2.0 0.3

Venezuela 2.29 6.0 1.2

Peru - 5.2 1.4

Chile 1.77 14.7 2/ 2.9

Jamaica - 22.4 3/

Indonesia 2.2 0.2

Trinidad and Tobago 15.3

Notes

1/ Average wages in mining divided by average wages in manufacturing.

2/ 1975

3/ 1976

Sources: (i) ILO Yearbook of Labor Statistics 1977 (Geneva, 1977)

(ii) World Bank Data.

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The preceding arguments and the evidence on wage dualism are notconclusive; but they seem enough to suggest that there is a tendency forgreater wage dualism in the mineral economies. In addition, it appearsthat in such wage-gap economies in which workers of like skills receivedifferent wages in different sectors, (a) increases in wages tend to spillover from the high to the low-wage sectors, thus preserving the wagestructure but increasing the average wage level; and (b) the rate ofunemployment, working through the migration mechanism, responds to themagnitude of the wage gaps. 1/

Support for the wage spill-over and higher unemployment ratehypotheses for the Jamaican case is argued in a recent study 2/, as wellas in internal Bank studies for Jamaica, Trinidad and Tobago and Zambia.The severe unemployment problems of mineral economies such as Guyana,Indonesia, Bolivia, Liberia, Peru, Algeria, Chile and Zaire have alsobeen much emphasized in internal Bank studies 3/ and are supported bythe unemployment data in Table VIII. Finally, the responsiveness ofmigration to expected wage differentials has received empirical supportin many developing countries, 4/ and there is no a priori reason to expectat least the 'labor surplus' mineral economies to be different. 5/

1/ The reasoning relies on the assumption that labor supply in various sectorsresponds to expected income differences, and hence migration between sectorsoccurs as long as expected income in the receiving sector is higher thanthat in relevant alternative sectors.

2/ G. Tidrick [1975].

3/ 1976 unemployment rates for Jamaica and Trinidad and Tobago are 22.4 and15.0 percent respectively, and are based on labor-force sample surveys.Source: ILO, Yearbook of Labor Statistics, 1977.

4/ See Yap [19771. It is noted that although much of the evidence is basedon rural-urban migration, and many mining areas are non-urban, the mostimportant causal factor has been the expected wage differential.

5/ Casual empiricism suggest that relative to the non-mineral economies, mineraleconomies have faster-growing 'service' sectors. But the evidence shows thisto be a mirage: for 1970-75, both groups, on the average, had a growth rateof about 6.6 percent in their service sectors. Petroleum economies exhibiteda rate of 8.2 percent and non-fuel mineral economies, of 4.9 percent. Thecomplex nature of intra-sector changes in the service industry during thedevelopment process is suggested in Keesing [1969].

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Table IX: INDEX OF RELATIVE WAGES- IN MINERAL

AND NON-MINERAL ECONOMIES (CIRCA 1975)

Country Ratio of Manufacturine Wageto GNP per capita

Mineral Economies 1.68

Bolivia .93

Chile .45

Morocco 1.95

Pery 1.84

Zambia 2.36

Ecuador 1.77

Algeria 1.67

Nigeria 1.97

Venezuela 1.67

Syria 1.91

Non-Mineral Economies

Egypt 2.2

Thailand 1.1

Philippines 1.3

Ghana 1.2

Colombia 1.5

Korea, Republic of 1.9

Nicaragua 1.9

Dominican Republic 1.3

Panama 1.5

Argentina 0.9

Hongkong 0.7

Singapore 0.5

1/ The index is a proxy for efficiency wages,i.e. wages controlled for relative

skill-levels across countries; per capita GNP is the proxy for the country's

average skill level.

Sources: (i) ILO Yearbook of Labor Statistics 1977, (Geneva: 1977) Table 19.

(ii) World Bank, World Development Indicators, 1978, Table 1.

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The preceding paragraphs have argued first that mineral economies,relative to non-mineral economies, are characterized by greater technologicaland wage dualism; second that there is some, although somewhat poor, evidenceto suggest that the greater wage dualism in mineral economies is associatedwith wage spill-overs from their mining to other sectors; third that there isno a priori reason to believe that the responsiveness of migration to expectedincome differentials is any different in mineral economies than in non-mineralones. In a nutshell, it has been argued that mineral economies have largewage gaps which continue to be sustained by wage spill-overs and which, inturn, given migrant behavior, result in high unemployment rates. As a result,mineral economies tend to be high-wage economies characterized by high unemploy-ment. (Evidence supporting the high relative wage hvpothesis is presented inTable IX). This conflicts not only with their employment and equity objectives,but also with the growth objective since the distorted factor prices are likelyto lead to a misallocation of resources.

In this discussion of labor markets in mineral economies, it also isinstructive to examine school-enrollment data for the mineral and non-mineraleconomies for two reasons: first, as an indication of the relative qualityof labor supply; and second, to compare at least one social indicator for thetwo groups of countries. Table XI below presents the evidence on primary,secondary and higher education enrollment for the mineral and non-mineraleconomies. The evidence clearly indicates that over the 15-year period,school enrollment has been significantly higher in the non-mineral than inthe mineral economies, at all levels. In educational development, then,mineral economies are far behind the non-mineral economies; furthermore,there has been no narrowing of the gap in educational attainment betweenthe two groups of countries. The only gratifying bit of evidence in Table XIis that the mineral economies have increased school enrollment at about thesame rate as the non-mineral economies. Given the greater priority of thetransformation objective in mineral countries, this can hardly be describedas adequate.

From a policy point of view, it is important to note that theanomalies of the labor market in mineral economies are rooted (a) in thewage gap,(b) in institutions which permit wage spill-overs, and (c) ininstitutions which encourage a particular form of migration behavior.Thus policies aimed at transforming the high-wage/high-unemploymentcharacter of mineral exploitation must be aimed at these targets. Inparticular, the following measures would be instrumental in any labor-market reform in the mineral economies:

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Table X: RELATIVE INCOME SHARES* OF THE BOTTOM TWENTYPERCENT OF HOUSEHOLDS IN SELECTED MINERALAND NON-MINERAL ECONOMIES (CIRCA 1970)

Country

Mineral Economies

Bolivia 4.0 a/Chile 4.4Liberia 5.3 a/Morocco 4.0 b/Peru 1.9S. Leone 4.5Zambia 3.8Iran 4.0 clTrinidad and Tobago 3.0Venezuela 3.0

Non-Mineral Economies

Egypt 5.1Sudan 5.1Thailand 6.1Honduras 2.3Philippines 3.7Ivory Coast 9.0 a/Colombia 3.5 d/Paraguay 4.0Korea 5.7Tunisia 6.0Malaysia 3.3Turkey 3.4Costa Rica 3.3Mexico 2.9Brazil 2.0Panama 2.1Argentina 4.4Yugoslavia 6.5Hongkong 5.6Spain 6.0

* These data are highly tentative and not,strictly speaking, comparable

across countries.

Sources: World Development Indicators 1979.

World Bank data.

a/ Populationb/ Household consumption expenditures only.c/ Urban households only.d/ Economically active population.

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Table XI: SCHOOL ENROLLMENT"VIN THE MINERAL

AND NON-MINERAL ECONOMIES, 1960-75(percent)

Primary Secondary Higher

Country Group 1960 1970 i 1975 1960 1970.4/ 1975 1960 1975

Mineral Economies 62.7 84.7 85.5 12.0 22.2 28.8 2.2 5.6

Petroleum Economies 66.5 89.5 94.6 11.9 23.8 33.2 1.8 5.5

Non-Fuel Economies 58.3 79.0 75.0 12.0 20.4 23.6 3.0 5.7

Mineral Economies Sample I2 63.1 86.5 86.8 12,5 23.1 29.8 1.3 5.8

Mineral Economies Samiple I],1 64.0 83.4 87.8 12.7 22.3 30.1 n.a. 6.0

Non-Mineral Economies 82.9 92.0 94.9 17.4 32.2 37.0 4.1 9.4

1/ As percentage of Age Group.

2/ All mineral economies excluding Indonesia and Morocco

3/ All mineral economies excluding, Guinea and Zaire.

4/ Excludes Guinea, data not available.

Sources: (i) World Bank, World Development Report, 1978Table 18 (for 1960 and-1975 data).

(ii) World Bank, World Tables 1976, Table 5(for 1970 data).

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(a) A clearly defined wage policy for the mining andmineral-processing sectors aimed at offsetting thefactors other than workers' productivity that makefor higher wages in these sectors;

(b) To reduce the wage gap, it is clearly necessary that,subject to productivity considerations, permissiblewage increases be greater for the low-wage than forthe high-wage sectors; in particular, no generalmeasure (such as a devaluation) can reduce the wage gap;

(c) Institutional reforms in the operation of the labor-markets are likely to pay off handsomely: for example,hiring on a queuing system rather than a random systemmight encourage migrants to register for jobs and waitin a lower-wage sector (including agriculture) ratherthan remain unemployed. In general, such institutionalreforms would have to reflect the behavior of migrantsand the characteristics of the sharing system (throughwhich the unemployed are supported while they wait fora job opening) in individual countries.

II.6 Inflation in the Mineral and Non-Mineral Economies

Interest in the relative inflation rates in mineral and non-mineraleconomies is of long standing. What does the evidence suggest? Are inflationrates higher in the mineral economies? Table XII compares inflation rates forthe two groups of countries over the 1960-76 period, and shows that whileinflation rates during the sixties were similar (5.3 percent relative to 5.5percent), in more recent years (1970-76) inflation has been higher in themineral economies (16.2 relative to 13.7 percent). Moreover, the evidenceshows (a) that inflation rates were higher during 1960-70 in the non-fuelmineral economies than in the petroleum or the non-mineral economies; and(b) in more recent years (1970-76) inflation in the petroleum economies hasfar exceeded that in the non-fuel mineral and non-mineral economies. Arethere reasons to expect higher inflation rates in the mineral economies?

Actual inflations are rarely due to any single factor. In whatways may it be argued that the mineral economies, relative to the non-mineraleconomies, are more prone to some or all of the following causes of inflation:demand-pull, cost-push, internationally transmitted and structural inflation?(Since monetary growth must support each of these causes of inflation, it isnot treated as a primary causal factor.) Only after identifying thesemechanisms can offsetting policies be suggested.

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Table XII: INFLATION RATES IN MINERALAND NON-MINERAL ECONOMIES, 1960-76

Country Group Inflation Rate(1) (2

1960-70 1970-76

Mineral Economies 5.3 16.2

Petroleum Economies 2.5 19.2

Non-Fuel Mineral Economies 8.3 12.2

Mineral Economies - Sample I(3) 5.4 16.2

Mineral Economies - Sample II' ' 4.4 17.1

Non-Mineral Economies 5.5(5) 13.6(6)

Source: World Development Indicators 1978, Table I.

(1) Excluding Indonesia(2) Excluding Chile(3) Excluding Indonesia and Morocco(4) Excluding Zaire and Guinea(5) Excluding Uruguay(6) Excluding Argentina

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Demand-pull inflation often manifests itself in economies cha-racterised by export earnings instability-both mineral and non-mineral.Since this instability is directly transmitted to fiscal revenues, andgiven the political difficulties associated with cuts in governmentexpenditures, governments tend to run fiscal deficits financed largelyby central bank borrowing. The reduction in foreign exchange earningsalso implies that imports do not increase aggregate supply. The resultis a demand-pull inflation. 1/ Although inflations always have a varietyof causes, this sort of inflation has been characteristic especially ofthe copper exporting countries, Chile, Zambia and Zaire. (See Section II.8).

A second type of demand-pull inflation is more characteristic ofthe petroleum economies and, in periods of export booms, the other mineraleconomies. In these cases, even though the governmentts budget is insurplus, its domestic expenditure out of oil reveneues is in effectfinanced by the issue of high-powered money and is therefore akin todeficit financing, except insofar as leakages occur through imports.This kind of inflation merges with structural inflation (see below).

Perhaps the single most important cost-push element in themineral economies is the wage rate in the mining sector, which as notedabove tends to spill over to other sectors. A second cost-push elementis the price of food: as we shall note below (Section II.7), agriculturalproduction tends to stagnate or grow very slowly in mineral economies,resulting in food-price inflation and large food imports. In both of thesecases, the increased prices easily spread throughout the economy.

A third kind of inflation in mineral economies, as in other highlytrade-dependent economies, is that which is transmitted through internationaltrade.

The structuralist view of inflation is deemed to be relevant formost developing countries. To the extent that mineral economies are morelikely to invest massively over relatively short periods with the aim ofrapidly transforming their economies, they are more likely to hit againstthe supply rigidities or inelasticities that are the main cause of structuralinflation. There is some truth in the monetarist view that many of theseinelasticities are inflation-induced to begin with; however, once in operation,they are also inflation-causing. Of particular relevance here is the distinction

1/ Jenkins [1978] points out that, unlike in the Keynesian framework, a fallin exports leads to inflation, not unemployment, in mineral economies.

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between "tradeables" and "non-tradeables", for the supply of "tradeables"may easily be increased, albeit not always without problems (especiwally dueto port congestion and opposition from domestic producers), but "non-tradeables"must, of necessity, be supplied domestically. If the growth of productivityin these latter sectors is slower than in the "tradeables" sector, (i.e., supplyis more inelastic in these sectors) and/or demand shifts to these sectors(often due to expected inflation), price increases are likely to spread fromthese to other sectors.

Such structural inflation is often also described as due to absorp-tive capacity constraints. It is important to note that there are at leasttwo aspects of such constraints; first, there is the view that the marginalproductivity of new investments begins, at some point, to decline belowacceptable rates because supplies of co-operant factors are limited; andsecond, it is believed that there are decreasing returns to the scale ofinvestment--whose source is not technological but lies rather in the pro-cesses of maturation of labor and capital which are inevitably associatedwith new investments. 1/ Both elements can give rise to structural inflation,but the former may be inflation-induced while the latter is clearly not.

If mineral economies are more prone to inflation, as they seem tobe, and for the sorts of reasons indicated above, we have still to arguethat the consequences of inflation warrant an attack on it: after all, asthe structuralists often argue, the costs of fighting inflation may exceedthe costs of inflation.

The consequences of inflation are both economic and social.Economists have argued that rapid and erratic inflation (often accompaniedby price controls) causes serious inefficiencies in the allocation of currentand investible resources. Also commonly cited are the redistributive effectof inflation, and the resource costs of levying the inflation tax. In arelated vein, one may cite at least two socio-economic effects of erraticor unanticipated inflation: first, the incentive to be efficient at theproduction and distribution of 'real' goods and services gives way to thatof forecasting inflation and coping with its consequences, with obviousimplications for the allocation of people's efforts and ingenuity and forthe social framework; and second, people tend to rely relatively less onprivate contracts and more on political compacts in trying to ensure forthemselves a reliable frame for their economic lives, with some danger ofoverloading their political institutions. 2/ These economic and socialcosts of high and unanticipated inflation hardly seem trivial.

1/ Eckaus (1971).2/ Leijonhufvud (19771.

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The causes of inflation in mineral economies suggest the kinds ofpolicies that may help to keep it at bay;

(a) Firstly, it is clear that there is no obvious reason whyexport earnings instability must translate into fiscal and import instability;the establishment of a reserve fund which is built up during export booms anddrawn down during export recessions is an obvious solution that has receivedthe attention of many mineral economies, such as Zambia, but that in practicehas been difficult largely it would seem for political reasons. if Poor macro-economic management in the face of instability in export earnings is not onlylikely to set off inflation during every export recession, but may also leadthe mineral economy to accumulate large debts. This is part of the incrementalsavings problem referred to earlier.

(b) The second cause of demand-pull inflation, arising from theeffects ot spending high-powered money, calls for some combination ofexpenditure control, offsetting monetary and fiscal policies andmeasures to switch expenditures towards imports. Expenditure controlis especially relevant for the non-fuel mineral economies whose inflation isfuelled by a temporary increase in export earnings,and much less so for thepetroleum economies whose earnings have taken at least a semi-temporaryincrease. Where fiscal expenditures are considered of greater prioritythan private expenditures, offsetting monetary (reserve-ratios) and fiscal(increased taxes) measures may be necessary to maintain internal balance.Allowing imports to offset the increased liquidity is an attractive solution,but must not jeopardize investments dictated by the long-run comparativeadvantage of the economy. It is most easily achieved by upvaluing theexchange rate, but as noted in Section II.9, the evolution of 'the' exchangerate in the mineral economy is plagued by the requirement that it must reflectone shadow price for the short to medium term (while substantial mineral rentsflow in) and another for the long-run (when they are withering away).

(c) Cost-push inflation in mineral economies, it was argued,results from food price inflation and from wage increases in the mineralsector which spill over to other sectors. Policy guidelines for the latterwere discussed above, while those for the agricultural sector are dealt within the next section.

1/ In an internal Bank study, a simulation model for Zambia suggests thatZambia could, over the next decade, comfortably allow governmentexpenditures to grow at 3.5 percent p.a., while such a resource fundoperates alongside.

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(d) The international transmission of inflation through importprices is hardly amenable to policy manipulation except through demand-shifts or by encouraging the production of goods that can be domesticallyproduced below international prices.

(e) Structural inflation is best avoided by appropriately choosingthe level and sequence of investments in various sectors so as to avoid theabsorptive capacity constraints that are due to the scarcity of cooperantfactors and to the gestation lag implied by learning and maturationprocesses. To the extent that some supply rigidities are policy induced theycall for a general reform of the policy environment. This is, however, moreappropriately discussed in Section II.9 on foreign-trade regimes in mineraleconomies. A discussion of the appropriate sectoral sequence of investmentsis discussed in SectionIII where the general problem of the sectoral alloca-tion of investments for different types of mineral economies is addressed.

Mineral economies then, are more prone to inflation for a number ofstructural reasons, and the socio-economic costs of inflation are clearly nottrivial. However, price stability is only one of many objectives thatgovernments set themselves, and trade-offs with other objectives do existand will be expected to influence policy. It is sufficient to note herethat high and unanticipated inflation seems detrimental to growth as wellas distribution; and although inflation is, in the short run, a 'socialmollifier', it tends to erode the social order if allowed to persist athigh erratic rates over long periods.

The inflationary experiences of two petroleum economies--Iran andNigeria 1/-- in recent years are instructive enough to warrant reference.Both countries have, since 1973, exhibited higher than average increasesin inflation rates. Their record suggests the degree to which (a) increasesin aggregate demand arising through the monetization of foreign receipts and(b) structural rigidities, especially in the non-traded goods sector, cancombine to spawn high inflation rates and the consequences thereof.

Throughout the Third and Fourth Plans (1962-72) Iran had remarkableprice stability, with increases in the wholesale price index(WPI)and consumerprice index(CPI)peaking (1971/72) at 7.1 and 6.3 percent respectivelv. The situa-tion changed dramatically after 1972. In 1973, the WPI increased by 13.1 percentand in 1974 by 15.9 percent. Corresponding increases for the CPI were 11.2and 15.5 percent, while the 1975 CPI increase, between March and June, was17.5 percent.

1/ The ensuing analysis is based on internal Bank studies.

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Two facts are important in suggesting explanations for thisinflationary trend. Both of them relate ultimately to the large increasesin expenditure following the 1973 oil-price increase. First, in 1973/74the money supply grew by 29 percent, and in 1974/75, by 62 percent. Second,the highest price increases were recorded for building materials (27 percentin 1974) followed by home produced and consumed goods (17.5 percent) andthJrdly, by imported goods (11.9 percent). Both facts suggest that inflationin Iran has been due more to the monetization of foreign exchange inflows andstructural rigidities than to imported inflation. In the meanwhile, budget-ted public spending for 1976 was already outstripping oil revenues, while taxrevenues continued to stagnate. Two other observations are noteworthy: sincemost "non-tradeables" are publicly supplied, excess demand is more likely tobe expressed in greater congestion, delays etc., than in price increases; andthe CPI would probably have been higher but for low producer prices paid tothe agricultural sector.

The Nigerian experience parallels that of Iran, except that it hasbeen even more traumatic. Between 1970 and 1976, Federal capital expenditures(in current prices) increased by a factor of forty, while the correspondingfactor for State capital expenditures was sixteen. Probably, no other countryhas witnessed a more discontinuous expansion of public sector expenditure insuch a short period. The money supply grew in 1974 by 50 percent, in 1975 by70 percent and in 1976 by 40 percent, while the rate of inflation in 1974/75was 34 percent. Through various short-term palliative measures--a massiveimport program and consumer subsidies--the rate of inflation was reduced to22 percent in 1976. But the Government can hardly continue to pay thesesubsidies indefinitely, nor can Nigeria afford to rely on imports for morethan a small share of its aggregate supply. There is already evidence thatthe inflation has adversely affected the share of rural in total incomes,and it is fairly certain that (in conjunction with the stable exchange rate)the inflation has only deepened the import bias of the Nigerian economy.The only solution would seem to be to reduce government spending whilecorrecting the import bias either through exchange or fiscal means.

II.6 Agricultural Production and Food Imports in the Mineraland Non-mineral Economies

That mineral economies tend to exhibit low growth in agriculturalproduction is evident from a cursory examination of Table XIII below.Agricultural growth rates are higher in the non-mineral than in themineral economies (3.6 vs. 3.3 percent for 1960-76, and 3.4 vs. 2.7percent in 1970-76), and higher in the petroleum than in the non-fuelmineral economies (3.6 percent for 1960-76 and 3.1 vs. 2.6 percent in1970-76). The agricultural sector is singled out for mention as a problem

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Table XIII: GROWTH OF AGRICULTURAL PRODUCTION IN THEMINERAL AND NON-MINERAL ECONOMIES (1960-76)

Country Group Agricultural Growth Rates

1960-76 1970-76

Mineral Economies 3.3 2.7

Petroleum Economies 3.6 3.1Non-fuel Mineral Economies 3.0 2.6

Mineral Economies - Sample I(') 3.3 2.8

Mineral Economies - Sample II(2) 3.4 2.4

Non-Mineral Economies 3.6 3.4

Source: World Development TIdicators, 1978, Table 2

(1) All mineral economies other than Indonesia and Morocco(2) All mineral economies other than Zaire and Guinea

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sector for most mineral economies. 1/ The major exceptions are Venezuela,Ecuador, Indonesia, Syria, Togo, and Liberia.

Although the long-run comparative advantage of some mineraleconomieB is unlikely to be in agriculture, e.g., Saudi Arabia, Kuwait andLibya, it is clear that, in general, agriculture plays a critical rolein the development process, and there is no a priori reason why thepresence of a vigorous mining sector should encourage mineral economiesto neglect their agricultural sectors. 2/

The industry vs. agriculture debate, beleaguered in part by aconfusion between sectoral growth rates and priorities in governmenteconomic policy, may have been resolved by recent attempts to clarifythe areas of complementarity and competitiveness between agriculturaland industrial development. In the long run,it is the interactionbetween agriculture and other sectors, involving increases in theproductivity and output of each, that permits rapid growth in thenational product and in opportunities for productive employment through-out the economy. 3/ Thus the case for not neglecting agriculture rests(a) on its role in supplying surpluses of food, and sometimes labor andcapital,to the industrial sector; (b) on its favorable economic charac-teristics in terms of the productivity of investment, the provision ofemployment and the distribution of income; and (c) on its complementaritywith other sectors at the level of final and intermediate demand. Thisimplies the need for an acceptance of some measure of 'balanced growth',qualified of course, by the possibilities of trade. The objective offood self-sufficiency, embraced by many countries and sometimes counterto comparative advantage considerations, only adds to the case for en-couraging agriculture.

Of course in any individual economy, the arguments in favor ofagriculture must be assessed de novo. It is important to note that pooragricultural performance in the mineral economies is not explained by lowagricultural potential. Population density per square km. of agriculturalland (as a crude measure of agricultural potential) varies considerablyamong the mineral economies. In particular, eighteen of these economieshave a population density of under 100 per square km: Angola, Bolivia,Chile, Guinea, Guyana, Mauritania, Morocco, Peru, Sierra Leone, Syria,Togo, Zaire, Zambia, Congo P.R., Gabon, Libya, Saudi Arabia and Venezuela(see Section III). 4/

1/ As for example in internal Bank studies on Algeria, Bolivia, Chile,Congo P.R., Ecuador, Iraq, Jamaica, Nigeria, Zaire, Zambia.

2/ An interesting result, due to P. Temin, is that the historical basisfor the argument that a declining share of agriculture in GDP is anestablished "pattern of growth" is, at best shaky; the increasingshare of industry is however clearly established. See Temin [1966-7]and Ashworth [1977].

3/ See Johnston and Kilby (1974, 1975] and Johnston [1977].4/ Source: World Tables 1976.

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If, as emphasized above, agriculture contributes not only togrowth 1/ but also to employment and a more even income distribution,then the case for agriculture is stronger than that implied by considera-tions simply of comparative advantage, In particular, it has been arguedthat diffusion of yield-increasing innovations and technologies within aframework of small-scale, labor-intensive farm units will be instrumentalin determining the extent to which the expansion of farm output will leadto widespread increases in income-earning opportunities. Such a 'unimodal'strategy, based on the spread of technologies to small-scale farm units,may be contrasted with a 'bimodal' strategy that leads to a concentrationof resources in an atypically large and capital-intensive subsector withinagriculture. Examples of mineral economies that have tended to pursue a'bimodal' strategy are Iran, Liberia, Zambia, Zaire, Bolivia, and Jamaica.

The major short-run consequence of the poor agricultural perfor-mance of the mineral economies has been that a large share of their importsare food imports: Table XIV shows that in 1967, the share of food importsin total imports was higher in the non-mineral than in the mineral economies,but that the position has since changed: over the 1970-75 period it was 17.9percent in the mineral economies and 14.6 percent in the non-mineral economies.Further, the relevant share is higher in both the petroleum economies (15.4percent) and the non-fuel mineral economies (19.4 percent, 1970-74) than inthe non-mineral economies.

The primary causes underlying agricultural stagnation in the mineraleconomies are not unlike those in other developing countries, although theyare perhaps more accentuated. In the first place, commercial and tradepolicies aimed at industrialization, namely the protection of import-substituting industry, act as disincentives to both agriculture and exports.This is dealt with at some length in Section II.9. A second factor of someimportance is that of labor shortages in agriculture, resulting from migrationto cities, which in turn seems to be particularly serious in wage-gap mineraleconomies. Labor shortages in agriculture are important in Jamaica, Trinidadand Tobago, Guyana and the Congo People's Republic. Thirdly, in many mineraleconomies such as Chile, Congo P.R., Ecuador, Iran and Nigeria low producerprices for food products seem to have discouraged agricultural production.And finally, internal Bank studies of most mineral economies suggest thatagricultural infrastructure, extension credit and research and developmenttend to receive little attention in practice even though an awareness oftheir importance is generally in existence. 2/

1/ That the marginal productivity of capital is higher in agriculture thanin industry has been argued most forcefully by M. Lipton (1977).

2/ This is so, for example, for Bolivia, Congo P.R., Ecuador, Jamaica,Liberia, Nigeria, Zaire and Zambia.

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Table XIV: SHARE OF FOOD IMPORTS IN TOTAL IMPORTSOF MINERAL AND NON-MINERAL ECONOMIES, 1967-75

Country Group Share of Food Imports in Total Imports1967 1970-75

Mineral Economies 15.8 17.9(1)

Petroleum Economies 18.1 15.4Non-Fuel Mineral Economies 14.2 19.4(1)

Mineral Economies - Sample I(1) 15.8 17.9

Mineral Economies - Sample II(2) 16.2 17.8

Non-Mineral Economies 16.8 14.6

Source: UNCTAD, Handbook of International Trade and Development Statistics,1976, 1977.

(1) All mineral economies other than Indonesia and Morocoo.(2) All mineral economies other than Zaire and Guinea,

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The policy recommendations arising from the preceding discussion ofthe causes of agricultural stagnation in mineral economies are much easierstated than implemented:

(a) A modification of commercial policies to remove the biasagainst agriculture (or more generally ethe urban biast) is clearly apriority. This is treated at greater length in Section II.9.

(b) Reference has already been made to the role of wage policiesin improving the international competitiveness of the mineral economy'snon-mineral activities, and in possibly reducing migration and unemploymentin the cities and hence increasing the supply of labor to agriculture.

(c) Agricultural pricing policies must reflect the importancethat agriculture deserves in the long-run development strategy of eachindividual mineral economy. Unfavorable terms of trade for agriculturehave been advocated on the grounds that they provide a mechanism fortransferring capital to industry; but this has certainly not been thecase in mineral economies, which have relied on mining rents for muchof their 'primitive accumulation'.

(d) Finally, arguments for the expansion of agriculturalextension, credit, infrastructure and research can hardly be over-emphasized, while on employment grounds, the choice between a unimodaland bimodal strategy clearly favors the former.

II.8 Export Earnings Instability in Mineral and Non-mineral Economies

The hypothesis that mineral economies are more subject to exportearnings instability than non-mineral economies is tested here. Table XVbelow shows that the evidence is mixed. For both the 1961-72 and 1968-73periods, export earnings were more unstable on the average, in the mineralthan in the non-mineral economies. However, in the latter period, exportearnings were more unstable in the non-mineral economies than in the non-fuel economies.

Export earnings instability is considered a problem for mostdeveloping countries, and it is not surprising that the evidence inTable XV is mixed. Studying the causes and consequences of exportearnings instability in the mineral economies is a major undertaking,and we may satisfy ourselves with the evidence for LDCs as a group.In particular, there is increasing evidence to suggest that bothcommodity concentration and geographical concentration are positivelycorrelated with export earnings instability; 1/ and that the negativeconsequences of such instability on the growth rate, on the level of

1/ Soutar (1977), Massell (1970). Incidentally, Soutar finds thatexport earnings instability is negatively correlated with the shareof petroleum in total exports.

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Table XV: INDICES OF EXPORT EARNINGS INSTABILITY INTHE MINERAL AND NON-MINERAL ECONOMIES 19o1-73

Countrv (roup Indices of Export Earnings Instability

1961-72(l) 1968-73(2)

Mineral Economies 10.4 9.6

Petroleum Economies 12.8 10.4Non-Fuel Mineral Economies 8.5 8.8

Non-Mineral Economies 7.9 9.3

(1) Source: Lancieri (1978); the index of export earnings instability isdefined as the average of annual percentage differences betweenobserved and calculated trend values, disregarding the signs ofdifferences, and expressing them as percentages of the trendvalue. The trend values were obtained with a log-linear regressionof annual export earnings on time. Thus the index is:

11'fli-l ( v1) 100Xi

where Xi observed data

xila calculated trend value

N - number of years.

(2) Source: World Tables 1976, Table 14; the index of export earnings instabilityis calculated as a coefficient of variation, but using five-yearmoving averages instead of the mean for the period, to determineexpected values. Thus, the index is:

I2 = 100 X( i-_i) /4Xi

where Xi - observed data; Xi= five-year moving average of

Xi centered on year i.

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inve-stment and on the growth of exports are significant, l/ The mostextensive study, with the widest country- and period-coverage to date,unambiguously supports the hypothesis that unstable export earnings aredetrimental to growth. 2/ Finally, the inflationary consequences of suchinstability have already been described (Section II.6).

The evidence in Table XV provides only an extremely simple testof the hypothesis under consideration: it neither holds other factorssuch as commodity and geographical concentration constant, nor does ittest for statistical significance. It is however suggestive of greaterexport earnings instability for mineral than for non-mineral economies.Further support is provided (in Section II.9) by the poorer performanceof the mineral economies in export diversification. Additional supportis implicit in three characteristics of mineral supply and demand: (a)low short-run price elasticity of supply once available capacity is beingfully used; (b) low short-run price elasticity of demand; and (c) quantumshifts in the demand for minerals over the business cycle. 31

The hypothesis that such export earnings instability has tendedto cause higher international debt ratios in the mineral than the non-mineral economies is one that may be at least probed here. The evidence inTable XVIa clearly indicates much higher average external debt ratiosin the mineral than the non-mineral economies. And although this ratiohas increased by about fifty percent for both groups between 1970 and 1976,the changes within the group of mineral economies have been more pronounced,for the debt ratio of the petroleum economies remained unchanged, 4/ whilethat of the non-fuel mineral economies almost doubled. 5/ It is clear thatthe greater propensity to accumulate external debts in mineral economiescannot be attributed solely to export earnings instability, for saving perfor-mance and macro-economic management can offset the latter. It seems howeverthat the greater propensity to accumulate debts in the mineral relative tonon-mineral economies can hardly be disputed.

1/ Lancieri (1978), Glezakos (1973) and Kenen and Voivodas (1972).2/ Lancieri [1978].3/ Tilton [1977].4/ It might reasonably have been expected to fall after the oil-revenue boom.5/ Excluding Zaire and Guinea, both with extremely high debt ratios in 1976

of 99.1 and 63.8 percent respectively, does reduce the mineral economies'debt ratio considerably, to 28.1 percent. But the exclusion of the lowest-income countries in an analysis of the tendency to accumulate debts inmineral economies is surely suspect.

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Table XVIa: RATIO OF EXTERNAL DEBT TO GNPIN THE MINERAL AND NON-MINERAL

ECONOMIES, 1970-76

Country Group External Debt Ratio

1970 1976

Mineral Economies 24.1 33.0

Petroleum Economies 17.4 17.7Non-Fuel Mineral Economies 27.2 45.7

Mineral Economies - Sample I(1) 24.0 33.6

Mineral Economies - Sample II(2) 21.3 28.1

Non-Mineral Economies 13.2 19.2

Source: World Development Indicators, 1978, Table 11.

(1) Excluding Indonesia and Morocco.(2) Excluding Guinea and Zaire.

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The policy implications of this vulnerability of the mineraleconomies, (and in the post-1973 era this applies particularly to thenon-fuel mineral economies), are three-fold:

(a) First, it increases the case for the establishment of areserve fund which is accumulated in periods of high export prices anddepleted during recessions, and more generally, for better short-runmacro-economic management in the mineral economies (see Section II.6):

(b) Second, it suggests that mineral price stabilizationthrough buffer-stocks and/or production quotas may be worth furtherinvestigation;

(c) And thirdly, it lends greater weight to the argumentfor export diversification in the mineral economies (see Section II.9),since the effect of commodity concentration on export earnings instabilityseems now to be established.

The administrative and political difficulties entailed in thekind of fine-tuning implied by (a) are not trivial. 1/ Hence it is criticalthat price stabilization and export diversification be regarded as powerfulalternative weapons in the arsenal of the mineral economies if the costs ofexport earnings instability are to be avoided.

II.9 The Foreign Trade Regime and Export Diversificationin the Mineral Economies

Export diversification emerges on all counts as a worthy deity.Firstly, as is clear from the diversification principle in portfolio theory,export diversification is an instrument for stabilizing export earnings. 2/In addition, the argument for export diversification follows (a) from thelong-run depletability of mineral reserves and (b) from the possibility ofdeclining terms of trade for minerals in a world of uncertain reserves andtechnology.

The principal argument of this sub-section is that relative tothe non-mineral economies, the mineral economies' export diversificationperformance has been poor. For the reasons given above, the case forexport diversification appears to be stronger for the mineral economies.As Table XVTb shows, the evidence is not encouraging. Between 1960 and 1976,

1/ Taylor [1974].

2/ The portfolio approach to export instability is tested and confirmed inHirsch and Lev [197]], and is indirectly supported by studies whichconfirm the contribution of commodity concentration to export earningsinstability (see Section I1.8).

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Table XvIb: MINERAL PRODUCIfNG COUNTRIES: EXPORTDIVERSIFICATION, 1960 AND 1976

(Percentages)

Shares of TotalMerchandise Exports

MineralsAll Primary [IncludingCommodities Fuels]

1960 1976 1960 1976

Mineral Economies 95 98 59 94

Petroleum Economies 99 99 57 95Non-fuel Economies 86 89 67 72

Non-mineral MiddleIncome Countries 83 50

Sources: WB, World Development Indi.cators, 1978, Table 7.UN Monthly Bulletin of Statistics, Various Issues.

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the dependence of the mineral economies on exports of minerals increasedincreased from 59 to 94 percent. This increased dependence was evidentfor both the petroleum (57 to 95 percent) and the non-fuel mineral economies(67 to 72 percent). The evidence for the dependence of the mineral economieson primary commodities, also compares unfavorably with the non-mineraleconomies: the latter group decreased its dependence on primary commoditieswhile the former group's dependence increased.

The data in Table XVTh therefore support the hypothesis thatexport diversification performance (away from primary commodities) hasbeen poorer among the mineral economies than among the non-mineraleconomies.

The dismal export diversification performance of the mineraleconomies is primarily attributable to their foreign trade regimes.Like many other developing countries, many mineral economies haveestablished foreign-trade regimes that protect import-substitutingindustries, whether or not this was their original objective, and thatgave rise to capital-intensive and inefficient (relative to internationalstandards) industries. Such foreign trade regimes by definition discrimi-nated against exports and agriculture. However, unlike many other develop-ing countries, the mineral economies are more able to afford the short- tomedium-term costs associated with such a policy because their mineral rentsare not affected thereby. Thus, over this period, food imports increase andthe need for alternative sources of export earnings may go unperceived.In particular, many mineral economies are able to maintain an exchange ratethat may be appropriate to the high productivity mining sector, but whichin the light of wage spill-overs to other sectors, etc., is increasinglyover valued with respect to the non-mineral sector. As long as this policyframework operates, export diversification through exports of agriculturalproducts or manufactured products is unlikely to occur, and pre-mineralagricultural exports are likely to dwindle. This scenario fits the caseof Chile, in which the mineral sector has been active over the last century,almost perfectly; it is largely true also of Jamaica, Guyana, Trinidad andTobago, Nigeria, Zaire, Zambia and Iran, inter alia. 1/

There is much evidence to support the importance attached to theforeign trade regime in the preceding paragraphs. The effects of exchangecontrols, quantitative restrictions and high tariffs on growth and on exports

1/ This conclusion is based on internal Bank studies of the respectivecountries.

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have been studied extensively, 21 Three mAjor conclusions emerge, First,among the e-onomies studied, the relatively open ones grew fzster than thechronically "closed", The main reasons given for superior performance werethiat exports proved to be highly responsive to the reduction or eliminationof the bias against them, while the partly consequential increase in importsreduced the chaotic pattern of import substitution incentives. Secondly,and somewhat interestingly, countries that have had export-oriented develop-ment strategies have intervened almost as much on the side of promotingexports as other countries have on the side of import-substitution. Amajor explanation is thought to be that export products, however muchthey may be sheltered in the domestic market, must face price and qualitycompetition in world markets. Of course none of the above detracts fromthe infant industry argument for protection based on internal and externaleconomies, although it ought to be noted that protection through subsidiesis to be preferred to protection through tariffs and/or quotas both becauseof its greater political visibility and on consumer surplus grounds. Thethird conclusion of these studies is the critical importance of stablepolicies: export incentives must not be erratic, or nothing happens.

Export diversification is, of course, one aspect of the transitionobjective that mineral economies set themselves and must necessarily followan initial effort of diversifying production in the mineral economy. Thegeneral problem of the sectoral allocation of investment in different kindsof mineral economies is dealt with in Section III. What must be emphasizedhere is that unless the choice of productive activities in mineral (or anyother) economies reflects their particular long-run comparative advantages,and unless trade policies compel a rapid maturation of infant industries,the diversified production base is unlikely ever to lead to a diversificationof exports.

The preceding discussion has three policy implications for themineral economies, relating respectively to the choice of economic activities,protection and the exchange rate.

(a) The choice of economic activities, and in particular of indus-tries to be established, must reflect the country's long-term comparativeadvantage, or else production diversification will not result in export

1/ The three groups of studies are summarized respectively in Little et al.(1970), Balassa (1971) and Bhagwati and Kreuger (1973).

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diyersification; this is not to deny, of course, that nQn-econQmic objectivesmay ampetimes dictate otherwise. Section III Addresses the long-r7un c 4mpaativeadvantage issue in detail,

(b) Protection must only be offered to infant industries, forthe shortest feasible and pre-fixed interval, and via subsidies rather thanvia tariffs or quotas.

(c) The exchange rate system is perhaps the most difficult singledecision for the mineral economy: this is because the mineral economy"s cir-cum tances imply, in effect, a low shadow price for foreign exchange in theshort to medium run and another higher one in the long run when mineralreserves are depleted.

There are essentially two approaches that the mineral economy maytake, but neither approach reduces to a freely floating exchange rate(without subsidies). A freely floating exchange-rate would essentiallymirror the mineral-rent cycle, the domestic currency's value rising in theinitial stages, and falling as mineral rents decline. This will simply notdo, because the market is hardly efficient over time and under uncertainty,and there is no escaping the fact that if production and exports are to bediversified as the mineral rents decline, gestation lags require that speci-fic incentives be offered in the new activities well in advance of suchdeclines in mineral rents.

The first approach would be to decide by political judgement anarbitrary "long-term equilibrium" exchange rate and let private considerationsof profitability determine the mix of activities to be undertaken at thisexchange rate. This has the advantage of administrative ease, but amountsto a tax on the rest of the private sector in order to protect certain existingor planned production units. Thus, it may be advisable for the low-capitalmineral economies but not for the moderate- and high-capital mineral econo-mies who are more likely to want to have this tax levied on the government.A variant of this approach, and one that is in principle somewhat moreattractive, is for the exchange rate to be periodically depreciated but bymore than is warranted by declines in mineral rents,and by enough to renderan increasing number of socially beneficial activities privately profitable.This arbitrary "medium-term equilibrium" exchange rate approach would bemore flexible, and would imply a lower tax burden on the consumer, but isquite clearly more difficult to administer.

The alternative approach would be to operate some system of dualexchange rates, either de facto or de jure. 1/ Under the de Jure dualexchange rate system, one rate would be applicable to the mineral sector

1/ Bery [1976].

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and another to the non-mineral-sectoX, Under the de fActq 8ystem, therewould be a single exchange rate-but lnterlj subsidies would be qffered toactivities in which the countryts long-term comparative advantage is believedto lie. The subsidies would be warranted not only by internal and externaleconomies Cinfant industry subsidiest) j but also by the generally higherwages in mineral economies ('wage subsidiest). '/ In both cases, the objectivewould be, once more, to render socially beneficial activities in the non-mineral sector privately profitable i.e., to offset various exchange rate,labor and capital market imperfections and failures, in order to ensure thatthe long-run comparative advantages of the mineral economy are exploited.

These are the considerations that ought to underlie the mineraleconomy's exchange rate system. The advantages would seem to lie most withthe de facto dual exchange rate system because it is most susceptible tofine-tuning; but this is precisely what makes it administratively andpolitically less attractive. At the other extreme is the "long-termequilibrium" exchange-rate approach which is the least flexible, andcorrespondingly administratively and politically attractive. The "medium-term equilibrium" exchange-rate approach and the de iure dual exchange-rate system are middle cases, providing greater administrative economyand less room for purely political decision-making, but at the expenseof flexibility. In these assessments, flexibility has been given prideof place because the choice of activities in which long-term comparativeadvantages reside is a difficult process, as is the choice of an exchangerate. 2/ The "right" answer will clearly be country-specific. 3/

Two observations are in order here: First, mineral economies maybe able to postpone remedying their foreign trade regimes through newmineral finds which set off new mineral rent cycles. This has occurredin Oman, Trinidad and Tobago, Chile and Peru at various times. But thecritical link between the foreign trade regime and production-exportdiversification cannot be severed. There is no denying the fact thatthe exchange rate is a key policy variable for the mineral economy, andone which if inappropriately adjusted over time could result in a set ofinefficient industries, stagnant agriculture, declining export earningsas mineral reserves are depleted, and in some cases, unemployment. The

1/ Hagen [1958], Johnson [1964].

2/ Long-term comparative advantage considerations are dealt with in Section III.The difficulties inherent in choosing an exchange rate are described byHutchison (1977).

3/ In other words, the relative dependence on exchange rate and fiscalinstruments will vary from country to country for political, administrativeand similar reasons.

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relative absence of production and consumption linkages in the mining industryimplies that the government0a role in establishing an appropriate policyenvironment il all the more critical,

The second observation is a caveat: the payments regime is only onefactor among many that determine a country's overall growth, and the relation-ship between them is anything but simple. It depends upon a host of otherinstitutional factors specific to individual countries and cannot be analy edwithout regard to other aspects of the domestic economy. This is a principalconclusion of recent studies of the relationship between foreign trade regimesand economic development, and holds notwithstanding the general statementsmade in the preceding paragraphs.

I1.10 An Assessment

The preceding sub-sections have attempted to demonstrate that themineral economies may be distinguished from the non-mineral economies on anumber of counts. In particular, it has been suggested that the mineraleconomies are less susceptible to fiscal and foreign exchange gaps andhave the important, but limited, advantage of industrializing via mineralprocessing. On the other hand, with varying degrees of support, it hasbeen demonstrated that the mineral economies are more likely: to havelower marginal saving rates, higher rates of inflation, lower growth inagriculture and higher shares of food in total imports; to develop intohigh wage/high unemployment economies; to perform poorly on export-diversification; and, to some extent, to be more open to export earningsinstability.

In each of these problem areas, likely underlying causes weresuggested, and policy recommendations offered. Three observations are inorder here:

(a) First, although each problem area has been analyzed separatelyand policy suggestions offered in a piecemeal fashion, it is clear that thereare interdependencies within each and that for any given mineral economy, anintegrated policy package which recognises the links within problem areas and

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policy-tools would have to be designed, 1/

(b) Second, in keeping with the preceding observation? it is clearthat there are two policy tools whose relevance cuts across all the problemareas identified: (i) the mining sector wage rates, and (Li) Ithe' exchangerate. In particular, these policy tools were seen to be instrumental ininfluencing the mineral economy's performance in saving, unemployment,inflation, agricultural production, export diversification and through

1/ For example, just such an attempt is made in an internal Bank study whichuses a simulation dual economy model for Zambia. The model permits acomparison of major economic performance indices under varying assumptionswith respect to the growth of government expenditures, the level of foodsubsidies, government expenditure on agriculture, and the growth of wages.The most important exogenous variable is of course the internationalcopper price. In particular, two policy packages are compared. Thebasic scenario assumes that government expenditure grows at 3.5 percentp.a., that food subsidies continue, that government expenditures onagriculture remain at 20 percent of total government expenditure andthat real wages rise at the same rate as productivity. The model thenpredicts a growth rate of 4.4 percent p.a., a rapid growth of food imports(7.9 percent p.a.), increasing government subsidies, a worsening of theincome distribution with agricultural incomes falling while urban andmining wages increase, and high rates of migration and urban unemployment.In contrast, when it is assumed that subsidies are gradually eliminated(over 1977-81) and that the share of agricultural expenditure graduallyincreases to 30 percent of total government expenditure, the alternativescenario preducts a higher growth rate of 5 percent p.a., a fall in agri-cultural imports and rising agricultural production such that Zambiabecomes a net agricultural exporter after 1990, a slower increase inthe rural-urban wage gap as real incomes in agriculture increase, thoughnot by enough to narrow the gap, and lower migration and urban unemploy-ment. The construction of such models for stylized types of mineraleconomies (say, the five types distinguished in Section III) as a meansof evaluating alternative policy packages, is the most important nextstep in any further work aimed at policy recommendations for the mineraleconomies.

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the latter, export earnings stability, 1/ This is nQt to belittle the otherpolicy recommendations offered, but to recognise that the influence of thesetwo 'prices' is pervasive throughout the mineral economy, Inattention tothese major 'prices' can only be perilous to the economic performance ofthe mineral economy, and hence to its objectives of growth and transformationon the one hand, and employment and better income distribution on the other. 2/

(c) Finally, in order to contrast them with the non-mineral economies,the degree of variation in economic performance within the group of mineraleconomies has not received much attention: in particular, only the distinc-tion between petroleum and non-fuel mineral economies was emphasized. Butthe mineral economies' performances with respect to savings, inflation,

1/ The Zambia model also permits an assessment of a wages policy in theZambian context. In particular, the model suggests that a 1 percentreduction in urban real wages would lead to a 1.9 percent increase inemployment, one-third of this latter change occurring within two years,and a 1 percent increase in employment resulting within five years.The merit of a wages policy has long been recognised in mineraleconomies such as Zambia, Trinidad and Tobago, Jamaica and Bolivia.In particular, it has been tried in the latter three countries, butin each case abandoned following a labor crisis e.g., Jamaica in 1972/73and Bolivia in 1975. In each of the latter cases, an effort to re-instate a wages policy followed closely. The political obstacles inthe way of a successful adoption of such a policy are clearly no lesssevere in developing, relative to developed,countries.

2/ In contrast with the general awareness of the high wage problem by themineral economies, the exchange rate problem has received less openrecognition. Of course varying tariff and subsidy levels imply, evenwith a single and over-valued exchange rate, different effectiveexchange rates for different activities. But an explicit dualexchange rate system is much less common in the mineral economiesthan would have been expected. Chile had in the fifties used sucha system, but no evaluation of its operation and of the reasonsfor its abol seems to have been done. (See Reynolds [1957]).More recently in January 1974 Iran moved towards a type of dualexchange rate system, "aimed at encouraging non-oil exports andincreasing imports to relieve inflation" but once again, no rigorousassessment of its operation seems available. A second area ofconcern in any further work on policies for the mineral economies mustclearly be to evaluate previous attempts with the dual exchange-ratesystem in mineral economies, and more generally, of other policies aswell. No matter how confident one is of one's a priori reasoning,one can hardly offer policy recommendations without worrying aboutthe evaluation of previous attempts with them, even if only indistant lands.

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agricultural production and export-diversification do show significantvariation acroa8 countries. In particular, the variance in these indicesof medium-term economic performance may be analysed in order to offerjudgements regarding the long-term prospects of the mineral economies.This analysis, as well as that relating to the differences in investmentpriorities across mineral economies, is taken up in Section III.

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111. THE MINERAL ECONOMIES: THE LONG VIEW

II1.1 Introduction

In a historical sense, the mineral economies are a rare species.

Their potential membership in the club of successful export-led developers

is therefore difficult to conjecture on. However, there are substantial dif-

ferences among the mineral economies which have a bearing on their relative

prospects for successful long-term development. In particular, Section 1.3

drew attention to the importance, for the long-term development of mineral

economies, of two factors that differ across mineral economies. These were:

first, the magnitude of the fiscal linkage and the ability of the state produc-

tively to invest the fiscal proceeds thereof; and second, the choice of an

appropriate policy environment for economic decision 'Making in the short to

medium term. This section aims to assess the long-term prospects of the mineral

economies, differentiating them on the basis of these two sets of criteria. The

approach is a broad-brush one, and is primarily of heuristic value. But it is

rooted in the past and present performances of the mineral economies, and pro-

vides-a basis for offering judgements on the long-term prospects of the mineral

economies.

The key to the long-term development of the mineral economies,

by definition, resides in their mineral exports and in the impact of these

exports on the rest of their economies. In particular, choices regarding the

sectoral allocation of investment are a critical problem area when a long view

of the mineral economies is taken. One of the tasks of this section is to dif-

ferentiate the mineral economies by reference to divergences between their

actual sectoral investment priorities and the 'ideal' priorities suggested by

their growth and equity objectives, given the respective sizes of their mineral

resources and other comparative advantages. Thus Section I11.2 suggests a

classification scheme for the mineral economies, Section III.3 suggests

'ideal' investment priorities in five types of mineral economies, while

Section II1.4 attempts to identify country- and sector-wise patterns of diver-

gence between actual and 'ideal' investment priorities in the mineral economies.

The second task of Section II1.4 is to examine the performance of

different mineral economies along the dimensions examined in Section II, namely

with respect to saving, inflation, agricultural production and export diversi-

fication. Thus Section II.5 examines country-wise patterns in the medium-term

performance of the mineral economies.

The preceding identification of country patterns forms the basis

for an assessment of the long-term prospects for the mineral economies, which

is offered in Section III.6.

The major conclusion of Section III is that contrary to one widely

held view the long-term prospects of the mineral economies are moderately

favorable: differences in their investment choices and in their medium-term

performances suggest that some mineral economies have highly favorable long-

term prospects, and that these prospects are more favorable than those of

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others even after allowing for the size of their respective mineral reserves.However, their long-term prospects are seen to be conditional upon criticalpolicy choices that are summarized in Section V.

I11.2 A Classification Scheme for the Mineral Economies

The key concept in this classificatory attempt is that of long-termcomparative advantage. It is commonplace that in a dynamic and growing world,technological change and changes in factor proportions imply that comparativeadvantage is, in the long run, highly amenable to modification through invest-ment choices. Thus the division of total investment over physical capital,human capital and R & D (research and development) is instrumental in determiningthe country's long-term comparative advantage. However, the concept of compara-tive advantage maintains its usefulness because it requires that resource avail-abilities and hence opportunity costs at the beginning of the planning periodplay a critical role.

The Primary Classification

The central classificatory device used to differentiate the mineraleco;iomies is an index of their lonR-run capital stock per capita. The reasonfor this choice is clear: the specific advantage of these economies is theirpossession of mineral reserves that are, in effect, capital assets. The indexof long-run capital stock per capita is based on three underlying indicators:(a) capital stock per capita at present; (b) the size of their mineralreserves; (c) the long-run terms of trade for their minerals;l/ the lattertwo indicators permit an approximate valuation of the per capita mineralreserves of each mineral economy.2/

Adding present capital stock per capita to the per capita value ofmineral reserves gives an index of long-term capital stock per capita. It isbest considered an index because it involves gross oversimplifications: apartfrom the usual limitations due to uncertain reserves and prices, it assumes nodifferences in savings or in retained value across countries, and assignsrevenues generated in their mining sectors to capital formation. Notwithstand-ing these limitations, it may be considered a measure of the potential forcapital formation permitted by their mineral reserves, or an index of longterm capital stock per capita.

These data are also used to obtain an index of the stage of uimwalexploitation that each mineral economy is presently at. By taking the ratioof the value of mineral reserves per capita to the value of present capitalstock per capita, we obtain an index of mineral exploitation stage.

1/ Projected 1985 prices used; Source, WB, Price Prospects for Major PrimaryCommodities, 1978.

2/ Under the assumption that relative populations are unlikely to change-significantLy, 1976 population figures are used.

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The indexes of long-term capital stock per capita and of mineralexploitation stage allow a classification of the mineral economies into (a) high,moderate and low capital groups; and (b ) early, middle and late stage of mineral-exploitation groups. Like all classifications these are also somewhat arbitrary.But they do separate the mineral economies along dimensions that are interestingfrom the point of view of their long-term prospects.

Table XVII: CLASSIFICATION OF MINERAL ECONOMIES BY INDEX OF LONG-TERM CAPITAL STOCKPER CAPITA

Group Value of Index Councri~es Countriesi

High $50,000 5 Kuwait, S. Arabia, Libya, Guinea, Gabon

Moderate $10-50,000 9 Guyana, Iraq, Morocco, Jamaica, Iran,

Chile, Trinidad and Tobago, Zambia,

Venezuela.

Tow $10,000 11 Liberia, Algeria, Peru, Syria,

Congo P.R., Ecuador, Nigeria,

Bolivia, Zaire, Indonesia, Togo.

1/ By decreasing order of value of index.

Table XVIII; CLASSIFICATION OF MINERAL ECONOMIES BY INDEX OF MINERALEXPLOITATION STAGE

No. of ConrisGroup--- au fIdx CutisCutis

Early > 10 9 Guinea, Jamaica, Morocco, Kuwait

S. Arabia, Guyana, Iraq, Liberia,

Libya.

Middle 5-10 6 Chile, Zambia, Gabon, Iran, Zaire,

Nigeria.

Late L 5 10 Bolivia, Peru, Indonesia, Ecuador,

Togo, Syria, Congo P.R., Algeria,

Trinidad and Tobago, Venezuela

1/ By decreasing order of value of index.

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The central merit of the preceding analysis is that it provides acomparative perspective on the potential contributions of the mineral sectorto the long-run development of the mineral economies. Thus it is clear fromthe above tables that countries such as Kuwait, Saudi Arabia, Libya and Guineahave better potential long-term prospects than countries such as Algeria, Peru,Ecuador, Indonesia and Togo; this is so both because the former countries havea higher index of long-term capital stock per capita, and because they are at anearlier stage of mineral exploitation. In a very real sense, countries at alater stage of mineral exploitation can afford far fewer mistakes than thoseat an earlier stage.

Secondary Classification

The primary classification of mineral economies distinguished betweenthose with high, moderate and low long-run capital stock per capita. Thesecondary classifications are aimed at further pinning down their comparativeadvantages. This is done by focusing on the two other major factors of pro-duction: skilled labor and agricultural land, and on their market size. Theultimate aim is of course to derive priorities for the sectoral allocation ofinvestment for the different mineral economies, as determined by (a) growth(comparative advantage) considerations; and (b) distribution (employment)considerations.

The chosen index of the skill level of the population is the Harbison-Myers index, one that has come to be used as an index of human resource develop-ment.l/ It permits a classification of the mineral economies into high- andlow-skill economies.

As an index of the potential for agriculture, the index chosen waspopulation density per square kilometer of agricultural land. This allows usbroadly to classify the mineral economies into those that have and do not havehigh agricultural potential.2/

The last criterion is that of market size, measured by population,and permits a distinction between large and small mineral economies.3/ Thesignificance of population as a determinant of country growth patterns has beenconvincingly established.4/ Following from the degree to which domestic demanddominates total demand, its major significance for the mineral economies lies

1/ See for example, Balassa (1977).

2/ This is clearly a crude measure because it does not allow for qualitydifferences; it is somewhat justifiable as a broad classificatory device.

3/ The dividing line, following the studies cited below, is taken to be apopulation of 15 million.

4/ See Kuznets (1971), Chenery (1960); Chenery and Taylor (1968).

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in determining the long-term share of international trade in their GDP. Inparticular, together with comparative advantage considerations, it helpsdetermine the required long-term level and structure of export diversificationaway from minerals. The structure of export diversification as described belowderives from the relative weights given to the various types of manufacturing(labor intensive, capital intensive and/or resource intensive) on the one hand,and agriculture on the other.

The characteristics of the mineral economies with respect to humanresource development, agricultural potential and market size are summarizedin Table XIX below. These comparative advantage considerations, qualifiedby employment objectives, form the basis of the priorities in the sectoralallocation of investment for the different mineral economies that are suggestedin Section III.3.

III.3 'Ideal' Investment Priorities in the Mineral Economies

The allocation of investment in the mineral economies may be clas-sified along the following lines: physical infrastructure; education andtraining; agricultural extension, credit and research; small-scale enterprisedevelopment; and by major industrial sectors.l/ The following general statementsmay be made:-

(a) Investments in physical infrastructure are important in allmineral economies, although somewhat more so in the larger than smaller ones,and particularly so in land-locked countries;

(b) Investments in education and training are more important incountries with a large long-term capital stock per capita, and in countrieswhere present skill levels are low; for those mineral economies which have apotential advantage in capital-intensive industries, research and developmentexpenditures will have to follow expenditures on education and training;

(c) The importance of investments in agricultural extension,credit and research is of course likely to increase with the country's agricul-tural potential, but also with the size of the country's population, and todecrease with the country's long-term capital stock per capita;

(d) Efforts to develop small-scale enterprises are likely to bemore important in large countries, and less important in countries with alarge long-term capital stock per capita;

(e) The industrial bias in the mineral economies' development, andits structure, may be analysed in terms of the four industrialization strategiesreferred to earlier: import substitution, export diversification, resource-based industrialization and basic goods production.

1/ Any finer distinction of sectors is possible only in the context of multi-sectorprogramming models.

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Table XIX: COMPARATIVE ADVANTAGE CHARACTERISTICS OF THE MINERAL ECONOMIES

Human Resource Agricultural MarketDevelopment Potential Size

CountryHigh Capital Group

S. Arabia Low Low Small

Libya Low Low Small

Kuwait High Low Small

Gabon Low Low Small

Guinea Low High Small

Moderate Capital Group

Trinidad & Tobago High Low Small

Venezuela High High Small

Chile High High Small

Zambia Low High Small

Guyana High High Small

Iran Low Low Large

Iraq Low Low Small

Morocco Low Low Large

Jamaica High Low Small

Low Capital Group

Bolivia Low High Small

Ecuador Low Low Small

Togo Low Low Small

Zaire Low High Large

Peru High High Large

Syria High High Small

Algeria Low Low Large

Liberia Low Low Small

Indonesia Low Low Large

Nigeria Low Low Large

Congo P.R. Low High Small

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Import Substitution as an industrialization strategy is fraught with

difficulties unless each industry is guided to maturity in the shortest pos-

sible time, and market-size considerations are not inhibiting. Thus its feasibility

increases with the size of the mineral economy. Further, import substitution

is constrained by the country's supply of capital.

Export diversification into labor-intensive manufactures is most suited

to small and skill-abundant economies with moderate levels of long-term capital

stock per capita.

Mineral Processing is nominally open to all mineral economies, but as

the foundation of a resource-based industrialization strategy makes most economic

sense in those countries with high levels of long-term capital per capita. However,

these industries are generally also skill intensive, and are inadvisable in countries

that are unlikely to beabundant in skilled labor in the medium run. The importance

of research and development in these industries cannot be overemphasized.l/ The

resource-processing industries, unlike say textiles and automobiles, are tech-

nically unsettled. Countries opting for mineral processing as the cornerstone

of their industrialization strategy must therefore be able to develop an R & D

capability, or else will soon be stranded with inefficient plants.2/

Finally the basic good industrialization strategy, which is a selective

mix of import-substitution and resource-based industrialization, is most suited to

large countries that have high long-term capital stocks per capita, although it

may also be feasible in countries in which these stocks are moderate. The skilled

labor and research and development required for resource-based industrializationare also necessary, in appropriate measure, to this strategy as well. Since it is

essentially a mix of two other industrialization strategies, it is not considered

separately any further.

The above discussion provides the general considerations upon whichpriorities in the sectoral allocation of investments are offered. These

considerations do not, however, address the critical problem of sequence. Theappropriate sequencing of investments in these sectors cannot be overemphasized.It is critically related, of course, to the spread of the mineral-rent cycle. But

more importantly, investments in infrastructure, education and training, and

research and development need to be carefully planned before the establishment ofindustries that require them as inputs. Inappropriate sequencing is likely to

lead to inefficient investments and high inflation, and to necessitate a slow-

down in the rate of investment. This is evident in some of the high capitalmineral economies such as Saudi Arabia, and in other mineral economies such

as Iran and Nigeria.

1/ This is evident from R & D rankings of 2 digit industries.

2/ The importance of a technology strategy in the industrialization process

is clear from the Japanese example, and in a negative fashion from recent

British experience; see,respectively, Blumenthal (1976) and Peck (1968).

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The preceding considerations suggest that, by their 'ideal' developmentpaths, the mineral economies may be classified into five groups:l/2/

(a) Small High-Capital Group

Since all mineral economies in the high capital group are small, thiscategory includes Kuwait, Saudi Arabia, Libya, Guinea and Gabon. Except forGuinea, which is at present highly underdeveloped and has a high agriculturalpotential, the long-term strategy for these economies is resource-based capital-intensive industrialization, with agriculture playing the largely passive role ofmaintaining structural balance or the non-economic role of ensuring food self-reliance. This requires careful pre-planning in the fields of education andtraining and in research and development capabilities. Although investments incapital-intensive plants may begin early, the emphasis at the earlier stages wouldneed to be on the manpower requirements of such industries and on efficientimport-substitution in industries for which market size is not much of a limitationInvestments in education have long gestation lags, and hence the critical importanc.of the sequence of investments in these economies. Some reliance on foreignexpertise is to be expected in the early stages. But if these economies are toevolve away from rentier to productive economies, upgrading their domestic skillsis essential. Industrialization is capable of solving the employment problem inthese economies if the right investment priorities and sequence are emphasized.The case of Guinea differs because its mineral reserves remain largely untapped;although its long-term strategy should not differ from the others in this group,the pace of approach seems likely to be much slower and a far greater reliance onagricultural investments is warranted for the forseeable future.

1/ The characteristics of these groups are described below by emphasizing thedifferences between them rather than repeating the common features each time.

2/ This classification of development strategies may be compared to that in Cheneryand Syrquin [1975]. The latter study uses three major criteria for classificatinamely market size, trade orientation and primary-industrial specialization; assuch it distinguishes between four development patterns: primary specializatiorbalanced production and trade, import substitution and industrial specializatiorOur own classification wsesmarket size; in addition, since mineral exporters areby definition highly trade-oriented, it emphasizes instead the degree to whichmineral wealth can bolster the accumulation processes in the mineral economies,the implications of the size of this wealth (relative to population) for the dellopment strategy of individual mineral economies. Thus, most mineral economiesare still in a primary specialization stage, and their market size, present deg,of development, agricultural potential, and mineral wealth per capita suggestwhat the relative emphases on various industrial sectors, on agriculture, and o0the associated investments in education and training and R&D expenditures mightbe. These indicators suggest,then, for individual mineral economies, whetherthe movement away from primary specialization ought to emphasize balanced pro-duction and trade, import substitution or industrial specialization. As arguedearlier, the mineral economies, although specializing in the primary sector,differ vastly from the agricultural primary specialized countries.

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(b) Large Moderate-Capital Group

For the two large mineral economies, Iran and Morocco, option (a) isnot available, due to their lower ratios of mineral reserves to population. In-dustrialization by itself cannot solve the entire employment problem, and agriculturemust therefore play a pivotal role, as must small-scale enterprise development.l/Appropriate investments in agricultural infrastructure, extension, research andcredit are therefore warranted as are similar efforts in the direction of small-scale enterprises. The appropriate extent of the former investments will, ofcourse, vary with the degree to which the economy has a comparative advantage inagriculture. Industrialization can be more broadly based in these economies:their size makes import substitution in consumer as well as capital goodseconomically viable, and their capital endowment is high enough to permit selectiveresource-based industries (for which complementary investments in education andR & D are required). The general development strategy for these countries isbest described in the words of the Chinese dictum: "walking on two legs".

(c) Small Moderate-Capital Group

This group has the capital endowment characteristic of the lattercategory, but not their market-size advantage. The essential difference betweenthem is that the small moderate-capital group must be more export oriented thanthe large moderate-capital group. This implies an important role tor iabor-intensive exports, exports from selective resource-based industries, and agricul-tural exports if comparative advantage permits. Since industrialization cannotemploy the entire labor force, agriculture and small-scale enterprise develop-ment are also priority sectors. For these economies, then, walking on two legsis not sufficient: export markets must provide further support. Countriesin this category are Venezuela, Trinidad and Tobago, Chile, Zambia, Guyana,Iraq and Jamaica.

(d) Large Low-Capital Group

This group and the next share the major disadvantage of having relativelysmall mineral wealth relative to population. This means that, unlike the othermineral economies, these two groups simply cannot afford the various short-and medium-term mistakes that mineral economies were seen to be prone to. Thediscovery of mineral reserves sets off a dynamic that is likely to come to ahalt long before these economies have provided productive employment to theirlabor forces. The aim of the large low-capital countries ought to be to emulatethe development strategy of the large moderate-capital group through a veryhigh saving effort. The alternative is, otherwise, not a very promising one.Countries in this group are Algeria, Nigeria, Peru, Indonesia and Zaire.

1/ The historical role of small-scale enterprises in the development processis more pervasive than is generally recognized; see Hoselitz (1959).

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(e) Small Low-Capital Group

This group, as the preceding remarks suggest, must aim at the develop-ment strategy of the small moderate-capital group through a high saving effort,if it is to make the transition to a diversified economy providing employmentto its entire labor force. This group includes Bolivia, Ecuador, Togo, Syria,Liberia, and the Congo P.R.

111.4. 'Ideal' and Actual Investment Priorities in the Mineral Economiesll

The preceding discussion provides a framework for offering 'ideal'investment priorities for the various mineral economies. These 'ideal' priori-ties may be compared to the actual development paths that individual mineraleconomies seem to be embarked upon. A comparison will then suggest what themost frequent divergences seem to be. This is only meant to capture broadtendencies rather than to reflect on the appropriateness or otherwise of theinvestment priorities of individual mineral economies. In particular, ourassessments of the mineral economies' actual performance are based upon the con-clusions of internal Bank studies. Since our assessments are expressed qualita-tively, they are individually subject to a margin of error, although the generalcharacterization of these economies is fairly accurate.

The comparison between 'ideal' and actual priorities is made along thefollowing dimensions: capital-intensive import substitution, labor-intensiveimport substitution, resource-based industrialization, labor-intensive manufactuiexports, education and training, and agricultural extension, credit and research.Comparisons for physical infrastructure and small-scale enterprise developmentare not made, due to inadequate information.

The divergences between 'ideal' and actual development priorities maybe analyzed by asking two questions: first, what country patterns, if any,emerge as one moves from countries with low to countries with high divergence;and second, what sectors seem most often to be under- or over-emphasized? Thefollowing patterns2/ seem to emerge:

(a) More mineral economies have high divergences than low divergences;

(b) countries with high divergences include members of the moderate andlow capital groups; they also include countries at various stagesof exploitation of their mineral reserves, are both small and large,and are both long-time mineral economies and new ones;

1/ In this section, investment priorities are suggested purely on the basisof macro-economic characteristics of countries. In particular, no assessmentof the efficiency of past investments is either offered or implied.

2/ Like all patterns, these can only be measures of central tendency.

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(c) their low divergences indicate that Saudi Arabia, Morocco andVenezuela have favorable investment priorities; but of these,only Venezuela (in its late mineral-exploitation stage) alreadyhas a fairly diversified economy;

(d) the next group of economies showing relatively low divergencehas one striking characteristic: the two members of thegroup are both centrally-planned economies (Algeria and Iraq);

(e) the divergence is highest for Zaire; but it is also relativelyhigh for two mineral economies of long standing (Chile, Zambia),for three of the largest mineral economies (Indonesia, Nigeria andIran); and for two economies that are already in their latemineral exploitation stage (Trinidad and Tobago, Congo P.R.);

(f) finally, among sectors, more mineral economies have tended tounderemphasize agriculture and labor-intensive manufactures, andto overemphasize resource-based industrialization, while botheducation and training and import substitution have fared better;(the efficiency of import substituting investments is not beingjudged here, only its sectoral priority).

These observations do not provide any firm conclusions. But they areat least mildly suggestive of some conjectures or working hypotheses. Theseare stated below, and for ease of expression rather more baldly than the evidencewarrants:

(a) Investment priorities tend to be chosen better in the high capitalgroup and in the more centrally planned mineral economies. This may be becausethe former group is less disposed to overstretch its capacity constraints (andempirically, excludes all of the larger mineral economies); while centrally-planned economies are, in general, more successful in achieving planned prioritiesin the sectoral allocation of investments.

(b) Investment priorities seem to be particularly misplaced in thelarge mineral economies. This may have something to do with their being inthe low or middle capital group and therefore aiming to speed up the developmentprocess; or with the sheer size of their populations which make greater demandson their managerial and project-related capabilities; or with the non-economicobjectives which are more often embraced by larger countries.

(c) The period over which mineral exports have been important for theeconomy is no indication of whether the appropriate sectoral priorities are beingfollowed; Chile and Zambia are at one extreme, Venezuela at the other, and Peruin between, and yet all of them are mineral economies of long standing.

(d) The stage of exploitation is not indicative of whether or not amineral economy's investment priorities are likely to be appropriate; in particular,Venezuela and Algeria on the one hand, and Trinidad and Tobago and Congo P.R. onthe other, are all in their late stages but have fairly different degrees ofdivergence.

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(e) The mineral economies as a group seem not to attach sufficientpriority to agriculture and labor-intensive manufactures, and to overemphasizeresource-based industrialization, but generally give appropriate weights toeducation and training and import substitution.

The preceding comparison of 'ideal' and actual investment priorities,while useful in capturing tendencies in the mineral economies, is sketchy andunanimated. To fill in some detail and to exemplify changes in investmentpriorities undertaken by the petroleum economies after 1973, brief referencesto the experience of selected mineral economies would be useful. The choice ofcountries for such treatment is guided by the divergence between their actualand 'ideal' investment priorities. Thus, we treat Algeria, Morocco and Venezuelaas examples of countries with low divergence, and Congo P.R., Chile, Trinidad andTobago, Nigeria, Zambia, Zaire and Iran as examples of countries with relatively

high degrees of divergence.l/

Algeria. In the five-way classification of mineral economies offeredabove, Algeria falls in the large low-capital group. Hence, its 'ideal' invest-ment priorities are essentially guided by balance between industry and agricul-ture, with the former sector being characterized by import substitution in con-sumer and capital goods as well as selective resource-based industries. In additionthe role of education, training, and R & D expenditure would be expected to beimportant. Since it is in the low-capital group, a high saving effort would be

particularly necessary.

In 1966, Algeria's Revolutionary Council defined Algeria's long-termdevelopment strategy as emphasizing industrialization and the acceleration ofeducation and training. Algeria obtained results close to plannedobjectives; the share of investment in GDP rose from 15% to 39% between 1966 and1973, while the population in school increased from 1.5 million to 2.9 millionover the same period. However, less satisfactory results were registered in

the agricultural sector where slow output growth was accompanied by an increasein underemployment; about 9% of the agricultural labor force was officiallyconsidered to be "strongly underemployed" in 1973 compared to 4% in 1966. Pro-viding jobs for unskilled workers therefore continued to be a worrisome problem.

The improvement in Algeria's financial situation following the 1973oil price increase led to an acceleration of the pace of economic development.The 1974-77 Plan ained at increasing investments, broadening the productive base,shifting the distribution of investment in favor of sectors other than industry,and improving the employment prospects of unskilled labor. A post-Plan evaluationsuggests that these aims were largely accomplished. Substantial employment creatioreduced the unemployment rate in non-agricultural sectors to about 10 percent in1976 compared to 17 percent in 1973; growth in the non-hydrocarbon sectors washigher than in the hydrocarbon sector (10 percent relative to about 1 percent);

1/ The ensuing country examples, and the data used therein, are based on internalBank studies of the respective countries undertaken in and around the mid-seventies. In some cases, investment priorities may have been modified inthe last year or two. Since the emphasis is on broad historical characteriza-tions, the country analysis remains valid even in the latter cases.

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and the saving performance remained impressive at 44 percent of GDP. There werealso some blemishes, however. Although agricultural output growth was high(around 8 percent) over 1974-76, actual public investment in agriculture wasaround 6 percent, only half of planned investment in that sector. Educationand training also received 6 percent relative to a planned 9 percent of totalpublic investment over the 1974-77 period. In contrast, the hydrocarbon sectorreceived about 24 percent relative to a planned 18 percent.

These remarks suggest, as will be confirmed below, that the divergencebetween actual and ideal investment priorities, although not insignificant, islower in Algeria than in other mineral economies.

Morocco. Morocco falls in the large moderate-capital group; but unlikethe other member of this group - Iran - the time profile of its mineral rents ismore spread out. Thus, it must aim at a greater balance between industry andagriculture, and make a relatively high saving effort (since its mineral wealthis less easily tapped immediately).

The Second Plan (1968-72) saw growth in all sectors, and an unchangedstructure of production. Thus agriculture grew slightly faster than GDP at 6percent p.a., as did mining, energy and tourism. Manufacturing expanded by about5 percent p.a. But unemployment remained at about 9 percent of the labor force,with higher rates in the urban centers. Modern agriculture and industry pro-vided relatively few new jobs, and underemployment in agriculture and servicespersisted. Although education and training received much emphasis, Morocco isstill to utilize its educated in labor-intensive industries aimed at the domesticas well as export markets. Thus, although it is commendable that agriculturereceives the highest priority and that phosphate processing receives its dueattention, greater attention to the scope for labor-intensive agriculture andmanufacturing is essential if the unemployment and underemployment problems areto be redressed. The Third Plan recognized this objective, but performance over1973-77 has still to be evaluated.

Venezuela. Venezuela belongs to the small moderate-capital group. Itis therefore required to emphasize some degree of industrial specialization andto rely on export markets. The importance of diversifying its productive baseis paramount because Venezuela's petroleum production has been declining and itis in the late stage of exploiting its known mineral reserves.

Venezuela's investment priorities in the past have emphasized balancebetween agriculture and industry. Long-term trends show that Venezuela has beenable to maintain a fairly high rate of growth of GDP (4.2 percent over 1970-75;5.9 percent excluding petroleum) and a higher rate of growth in industry (4.8 percentor 7.4 percent excluding petroleum production). Although the share of industryis somewhat smaller than that in other Latin American countries, Venezuela hasin recent years experienced very rapid change in industrial structure: if indus-trial diversification is measured by the change in the ratio of value added inmetal-mechanical industries to value added in traditional industries, Venezuelaexperienced greater diversification than Brazil, Colombia and Peru between 1963and the early seventies.

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Venezuela's agricultural growth over the past two decades has alsobeen impressive: between 1949-51 and 1975, real agricultural output grew at5.2 percent p.a. Emphasis on education and training has long been pursued, andVenezuela has large numbers of trained and experienced people at all levels,from managers and h:i.h level technicians to skilled workers and operators.

Notwithstanding the preceding remarks, Venezuela has a relativescarcity of skilled manpower, especially in the light of its investment programfollowing the 1973 oil price increase. In addition, industrial development hasreached a point where the traditional strategy of import substitution must in-creasingly be replaced and complemented by one emphasizing industrial speciali-zation and export development. In the former group, emphasis is being given toresource-based industries (steel, petrochemicals and aluminum and industrieslinked to these. It is important that export development not be neglected sincegiven its market size, the employment and diversification objectives make exportingindispensable.

Congo P.R. Congo P.R. falls in the small low-capital group; hence itmust emphasize agriculture and labor-intensive manufactures, be highly export-oriented, and achieve high saving rates. These aims are more compelling becausethe Congo P.R. has extremely low mineral reserves per capita; oil productionincreased from 100,000 metric tons to 2 million metric tons in 1973, but hadalready begun to decline by 1975. Output from a second oil field is expectedto come on stream in 1978; and although the prospects for other oil wells areconsidered quite bright, Congolese oil is known to have high recovery costs.

Output has declined in the agricultural sector, the mainstay of theeconomy: although agricultural production increased by 4.5 percent in 1971,and2.0 percent in 1972, it declined by 1.2 percent in 1973 and appears to havestagnated since. This is believed to be due to labor shortages in the ruralareas, deterioration of roads and low producer prices. Exports of the othermajor export item, timber, have also fallen as the most accessible forests havebecome increasingly bare. Further exploitation of the Congo's vast timber resourcewill have to await improvements in its transportation system.

Recent saving performance has been on the low side even though theinvestment rate has consistently been above 20 percent and reached 27 percentin 1974. External sources supply on the average as much as much as 75 to 50percent of total investment -- a proportion that largely reflects investmentsin the mining industries. External public debt has been rising.

Although the 1975-77 Plan allocates 15 and 38 percent of plannedexpenditures to agriculture and infrastructure respectively, it was based onhigher oil production estimates than were realized and it is not clear whatsectors will be de-emphasized as a result.

Chile. Chile belongs to the small moderate-capital group. Thisimplies a significant degree of export-orientation -- labor-intensive and resourcebased manufactures as well as agricultural commodities. In connection withthese sectors, some emphasis on education and training is also called for.

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Chile 1/is mere highly urbanized than most developing &.conomies,and its urban growth was stimulated by the development of services rather tharnby that of manufacturing. Given the dominant role of the mining sector, Chile'spast development has appropriately been described as "primary-terLiary" -innature. Education and training have received much attention but have primarilyfed the service industries. Given the extremely high degree of urbanization,most prior governments have kept food prices relatively low, and agricultulraloutput has tended to be sluggish while food imports have continued to increasad.

Chile has in the past failed to disengage itself from its almostcomplete dependence upon copper; its agricultural potential is relativelyunexploited, and its industrial sector is "inward-looking" to an extreme degree.With its highly trained labor force, Chile has much potential for export-oriented development which remains untapped. Perhaps more than in any othermineral economy, past policies have tended to be guided by short-term considerationsrather than by development objectives.

Trinidad and Tobago belongs to the small moderate-capital group, andlike Chile and Venezuela would be required to stress export activities, especial-ly in manufactures, since its agricultural potential is low. Correspondinginvestments in education and training would be necessary.

During its Third Five-Year Plan (1969-73) GDP grew at 2.3 percent p.a.in real terms -- much below the target rate of 4.3 percent. This was to a largeextent due to the unexpected decline of some 30 percent in oil production asknown reserves were depleted. Production from newly discovered reserves beganin 1972 and,together with the increased oil prices since 1973, could providethe basis for future growth if appropriately invested. Past development inTrinidad and Tobago has manifested many of the negative symptoms of a dualeconomy, with the high productivity of the petroleum sector contrasting sharplywith that in other sectors of the economy. Despite the recognition in the ThirdFive-Year Plan that industrial development must be geared toward export markets,the effect of industrial promotion policies has been to encourage import substitu-tion. Agriculture-provides employment for 25 percent of the labor force, and hasreceived much government attention, but the tendency has been to concentrate onthe development of new crops and the cultivation of new land, even though tradi-tional export crops would seem to be unwarranted.

A detailed development strategy which takes account of the higherpetroleum earnings is under formulation. The general thrust of governmentthinking, unfortunately, is to plough back into the petroleum sector andpetroleum-based industries a large part of the higher revenues anticipated.This is only likely to entrench dualism, and to exacerbate Trinidad and Tobago'smost serious problem, that of unemployment.

1/ Since 1973 the Chilean economy has undergone relatively drastic changes.The above characterization reflects the pre-1973 growth pattern.

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Nigeria was earlier classified as a large low-capital country. Hence,the importance of agriculture as well as industry and,in the latter, of importsubstitution in consumer and capital goods and of selective mineral processing.Its low-capital status suggests further that high savings would be necessary ifits mineral endowment is to be used for developmental purposes.

The performance of the directly productive sectors in recent yearshas been particularly disappointing. Nigeria's economic development has beendominated by the oil sector which in 1974 accounted for 41 percent of GDP,93 percent of export earnings and 82 percent of government revenue, surpassingthe agricultural sector in all measures of relative importance except employment.The growth of manufacturing output, although high (10-12 percent p.a.), has beenhampered by physical bottlenecks and, to some extent, by import competition.The decline of agricultural exports following the emergence of the petroleumsector has continued unabated.

The Third National Development Plan (1975-80) was comprehensivelyreviewed in 1976 by the government, both because of rising prices and an over-estimation of oil, revenues: although the bulk of thepublic sector program wasleft unchanged, prestige projects were reduced in scope and greater emphasiswas given to such areas as agriculture, education, housing and health. Mostimportantly, the significance of agriculture and rural development to thefuture growth prospects of the country was recognized.

The emergence of sizeable budget deficits and declining foreignreserves in 1975/76 meant that a sharp reduction in government spending wasnecessary. The financial constraint calls for a careful assessment of theappropriate sequence of investments among the following sectors: infrastructure,education, industry, agriculture and the social sectors such as housing andhealth. In particular, in the context of the 'ideal' investment priorities dis-cussed above, it would seem inappropriate for a low-capital group country suchas Nigeria to be spending 21.7 percent of the public sector investment programon social services, and only 6.7 percent and 16.2 percent respectively on agri-culture and manufacturing. It would seem wise to follow the recommendations ofthe Anti-Inflationary Task Force and give higher priority to the directlyproductive sectors.

Finally, the bias against industry and agriculture and in favor ofimports must be corrected if these productive activities are to re-emerge asfoci of growth and employment. This calls, among other things, for adjustmentsin the exchange rate or equivalent fiscal or commercial measures. These problemsand the appropriate solutions are recognized, and are gradually being acted upon.

Zambia, classified as belonging to the small moderate-capital group,would be expected to be highly export oriented,l/ and to emphasize agriculture,

1/ Since Zambia is landlocked, transportation costs are likely to impede thedevelopment of exports; however, there may still be scope for exports toneighboring countries, such as Zaire and Angola.

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labor-intensive industry and selective resource-based industry, with theassociated investments in education and training.

With its vast mineral resources and high agricultural potential,Zambia possesses the potential for rapid sustained growth. To date, however,the contribution of these sectors to growth and development has been belowpotential. Zambian development since 1964 has been characterized by decliningproductivity of capital and increasing capital intensity in the modern sector,a lagging agricultural sector, and increasing urban unemployment. Althoughmanufacturing has grown faster than other modern sector activities, it has con-tributed less to import substitution and employment than would have been pos-sible with more realistic factor prices and a greater agro-processing orientationin industrial investment. An internal Bank study projected that, with properpricing and investment policies for rural development, Zambia could achieve anaverage annual rate of agricultural growth of 6-7 percent over the next twodecades. Such growth would not only supply Zambia's food and raw material needs,but would also probably create net surpluses for export. Increasing attentionto the agricultural sector in the very recent past is clearly an encouraging sign.

Zambia has made impressive strides in education and training, but thereare still acute shortages of manpower in science and commerce-based occupations,and in high and middle level agricultural jobs. The 1976 Education System Reviewrecommends a major effort in education and training, but one that may be exces-sive relative to budgetary resources, and that almost certainly calls for somepruning down.

It is clear that to diversify the productive base and to improve employ-ment opportunities, incentives should encourage investment in agriculture bycommercial and traditional farmers, in the processing of resource-based (largelyagricultural) products and in more labor-intensive methods of production.

Zaire, like Nigeria, is also a large low-capital country, with themajor difference that its mineral-rent cycle is likely to be more spread outover time. These characteristics and Zaire's high agricultural potential andlow level of skills suggest that the major emphasis in the earlier stages ofof its development ought to be on agriculture, education and training and someprocessing of minerals and other resources, with increasingly complex manu-facturing being gradually introduced over time. The importance of a high savingeffort is, of course, clear.

Zaire's economy grew at a rate of about 7 percent from 1968 to 1973.The rate of saving, which was around 25 percent in the late sixties, has fallento 20 percent while foreign borrowing has increased to keep Lnvestments at theearlier level. The highest growth rates occurred in manufacturing, constructionand services (including government), and to some extent in mining and powergenerating activities. Agriculture grew at 2.5 percent--below the rate ofpopulation growth. Investment in agriculture has been low -- about 8 percentof domestically-financed government investment in recent years, or 2 percent oftotal government capital expenditure (including government investments financeddirectly by external aid agencies). Similarly, expenditure on education andtraining has been extremely low -- 6 percent of domestically-financed or 2 percent

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of total government capital expenditure in recent vears. On the other hand,investment in import-substituting manufacturing and mining have accountedfor 90 percent of capital expenditures in the private and semi-public sectors.In short, the only priority sectors that have received due attention arephysical infrastructure and mining, while agriculture, education and trainingand resource-processing continue to be neglected.

Iran, being in the large moderate-capital group, would be expected toemphasize balance between agriculture and industry and,in the latter, betweenimport-substituting and resource-based processing; it would also need a com-mensurate effort in education and training. Like Nigeria, Iran's response tothe increased flow of financial resources since 1973 has been to attempt to dotoo much, with the predictable result that much reformulation has been necessaryin recent years and as inflation has reached very high levels.

Over the 1962-72 decade, Iran achieved an average annual growth rateof 11 percent in real GNP. The boom in oil revenues, which increased between1962 and 1972 from U.S.$400 million to U.S.$2.4 billion annually,helped tofinance massive investments in economic infrastructure and a rapidly growingmodern industrial sector. But this performance was accompanied by an inabilityto spend the amounts allocated in the plans for agriculture and primary education.These latter failures contributed in no small measure to the unequal incomedistribution that Iran has most often been criticized for.

The Fifth Plan recognized the critical importance of agriculture andrural development. Despite this alleged shift of policy, a Bank mission con-cluded that the support given to these programs in the Plan document was inadequate,the performance targets were too optimistic and that Iran's development strategyretained its brban bias. In particular, it appeared that the programs of ruraldevelopment were unbalanced, with emphasis being placed on programs that wouldbenefit only a few and leave untouched the mass of the rural poor.

There has since been a revision of the planned agricultural strategy,to give more recognition to the importance of the private sector and the needfor supports and incentives to foster its growth in agricultural activities.But actual policies still remain unchanged; in particular, preoccupation withthe stabilization of consumer prices has resulted in depressed agriculturalproducer prices and incomes. Since agriculture provides a livelihood for 40 per-cent of the population, it remains the most challenging sector to develop.

The revision of the Fifth Plan following the oil price increase emphasize!the promotion of basic and petrochemical industry. The major constraints arerecognized to be those of trained manpower, including management, and the infra-structure of ports, roads and communications. In spite of the large investmentsbeing poured into these sectors, both are characterized by long gestation lags,with the result that there is much doubt about whether the large investments inthese and other sectors can be absorbed productively. The increased oil revenuesappeared to offer two alternative courses: maintenance of the old pace ofdevelopment (which was itself rapid) while systematically working on the bottle-necks that would impede faster development,and thus banking or investing abroad

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for a time the surplus earnings; or alternatively, acceleration of the rate ofdevelopment by the injection of most of the increased earnings in the domesticeconomy, with the objective of changing Iran's economic structure within a shorttime. In the event, the latter course was chosen.

III.5 Patterns in the Medium-Term Performance of the Mineral Economies

A second way of distinguishing among the mineral economies is by refer-ence to certain aspects of their medium-term performance. Section II argued thatthe policy choices of mineral economies were critical in determining their savingrates, inflation rates, agricultural production growth rates, and their successwith export diversification. This section analyzes these indices of medium-termperformance and attempts to glean some country patterns.

Six criteria are used, independently of each other, 1/ to partition themineral economies into sub-groups. These criteria are: long-term capital stockper capita, stage of exploitation, size (population), agricultural potential,degree of central planning, and length of mining history. Table XX presentsrelevant data on growth rates of agricultural production, inflation rates, marginalsaving rates and export diversification (measures by share of primary commoditiesin total exports) for these country groups.

These data suggest the following patterns:

(a) Growth of Agricultural Production has, in recent years, beenhigher in large countries and in those with high agriculturalpotential but lower in the low- and moderate-capital countriesas well as in the 'centrally planned economies'.

(b) Inflation is higher in the large countries, in the high-capitalcountries and in countries at the early stages of mineralexploitation, but is lower in the 'centrally planned economies'.

(c) Marginal Saving Rates have been higher in large countries; theyhave been highest in the high-capital group, followed by themoderate- and low-capital groups; they have also been highestin the middle exploitation-stage countries, followed by theearly- and late-exploitation stage countries; but haveworsened, in recent years, in the 'centrally planned economies'.

(d) Export diversification as measured by the share of primarycommodities in total exports has been most successful incountries at the late mineral-exploitation stage; for themoderate-capital group countries followed by the low- andhigh-capital groups respectively; and for the 'centrallyplanned economies; but worse for the 'old' mining countriesthan for the 'new'.

1/ In other words, the ceteris paribus clause does not hold; or, what is thesame thing, the underlying statistical concept is that of simple correlation,not partial correlation.

Table XX; MEDIUM-TERM PERFORMANCE OF SUB-GROUPS OF MINERAL ECONOMIES

Growth in Rate of Marginal Savings Share of Primary Comnodities

Agricultural Inflation Rate in Total Exports

Country-Group Production(tfi) .937 . . 4-7

160-70 _ 190-76 _ o70-76 1970-73 1973-76 1960 1973-75 1974-76

Low-Capital Group 3.0 1.5 15.6 23.1 26.9 95.8 86.8 86.7

Moderate-Capital Group 4.2 1.8 15.1 i 31.2 27.9 96.6 79.3 69.5

High-Capital Group 2.2 12.4 23.2 26.3 55.9 100.0 93.1 87.8

Early Stage Group 3.7 6.o i8.4 26.7 36.6 85.9 80.0 77.9

Middle Stage Group 3.2 2.2 15.2 j 30.1 50.6 3/ 97.2 90.7 88.1

Late Sta.ge Group 3.3 1.4 16.2 24.5 21.7 95.4 86.9 78.8

Large Countries 2.7 5.7 17.1 28.9 39.9 96.6 83.2 81.6

Small Countries 3.5 3.6 15.8 / 24.2 28.2 / 91.9 83.7 74.2

o~~~~~~~~~~~~~~~~~~~~~

High Agricultural Potential 2.6 3.3 n.a. n.a. n.a. n.a. n.a. n.a.

Low Agricultural Pbtential 3.7 2.2 n.a. n.a. n.a. n.a. n.a. n.a.

'Centrally-plannedWEconomies 2.7 -2.8 14.7 29.9 22.7 96.2 76.2 73.7

Non-Centrally-planned Economes 3.5 4.5 16.4 i 24.4 33.7 / 92.3 85.6 76.7

'Old' Mining Countries n.a. n.a. n.a. n.a. n.a. 91.0 87.4 80.6

'New' Mining Countries n.a. n.a. n.a. n.a. n.a. 97.8 81.4 73.6

j Excl. Chile . 4 not applicable. 4 15.6 if Zambia include. j/ 18.4 ifZambia included.. 24.5 ir zambia included.

a/ See Table mXI for detinition of groups,S See Table XVIII for definition of groups,i See Table xrx for definition of groiUP,/ See Table XIX for detUaition Qf 8gruea%

i 'Centrally-planned economies' are Algeria, Angola, Congo P.R., Jamaica, Iraq and Peru.

U 'Old' mining countries are Bolivia, Chile, Iran, Iraq, Kuwait, Morocco, Peru, S. Arabia, Venezuela and Zambia.

Source: Section II.

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The most important conclusion that emerges from the above analysis isthat none of the six criteria unequivocally sifts 'good' from 'bad' performersfor any of the four performance indices.

The implication to be drawn is that the prospects for the mineral

economies, as reflected in their recent performance, are moderately good:although these economies are, in a historical sence, a rare species, there aresufficient differences in their achievements to suggest that some of them arelaying the basis for a successful transformation. On the other hand,

there is enough evidence of poor performance on the part of othersto suggest that the transformation is unlikely to occur if present trendscontinue.

Some of the most encouraging findings of the above analysis are that:agricultural production has grown faster in large countries and those with highagricultural potential; marginal saving rates are higher in the large countriesand highest in countries in the middle exploitation stage; export diversificationhas been most successful in the late- exploitation-stage countries and in themoderate-capital countries.

There are discouraging findings too. In particular, inflation has beenhigher in the large countries, somewhat higher in the high-capital group andhigher in the early and late mineral-exploitation stage countries than in themiddle stage countries. It is distressing that agricultural production has grownmuch more slowly in the low- and moderate-capital groups than in the high-capitalgroup. The finding that the marginal savings rate is lowest for the low-capitalgroup and highest for the high-capital group, although understandable, suggeststhat the former countries are not making the higher saving effort that they arerequired to. And finally, the poor export diversification performance of the'old' relative to the 'new' mining countries is indicative of a failure in theattempt at transformation.

In a nutshell, the performance of the mineral economies has been worstwith respect to inflation, and mixed with respect to agricultural production,saving and export diversification.

III.6 Long-Term Prospects in the Mineral Economies

The long-term prospects of the mineral economies rest, ultimately, ontheir medium-term performances: in particular, on their choices of in-estmentpriorities and on their achievements in reducing the problems of inflation,agricultural stagnation, low saving and export concentration. Our evaluation ofthe mineral economies' performance makes possible an assessment of their long-term prospects in two ways:

(a) In principle, the long-term prospects of individual mineraleconomies are, other things equal, directly related to thelevel of their long-term capital stock per capita. It istherefore of interest to determine whether their economicperformance in recent years reinforces this general principleor offsets it. In other words, is the economic performance

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of the low-capital group countries superior to that of themoderate-capital group, and is that of the latter group5uperior to that of the high-capital group?

(b) Under the assumption that the cross-section view of themineral economies grouped according to their stage ofmineral exploitation may be used as a guide to the long-term evolution of a stylized mineral economy moving fromearly to late mineral exploitation, 1/ we may ask: doesthe recent economic performance of the mineral economiessuggest that the stylized mineral economy is likely totransform its economy into a highly-diversified and growingone as its late stage approaches?

The indices of economic performance used are: agricultural growth,price stability, marginal savings, export diversification and investmentpriorities, all of which were analyzed above. The accompanying charts summarizethe evidence by distinguishing, for each of the two criteria, ideal-typepessimistic, optimistic and actual economic performances.

Essentially the pessimistic ideal-type view assumes (i) that theeconomic performance of the low capital group is better than that of the moderatecapital group, while that of the high capital group is least impressive; and(ii) that performance improves from the early to the late stages of exploitation.

On the other hand, the optimistic views assume (i) that economicperformance is better for the low capital group than for the moderate capitalgroup, and least impressive in the high capital group; and (ii) that it improvesfrom the early through to the late stages of exploitation.

The indices of actual performance are based, of course, on SectionsII.4 and II.5.

The evidence in these charts suggests that the long-term prospects ofthe mineral economies, as judged by their recent economic performance, aremoderately good. This is because:

(a) Their actual performance is superior to the pessimistic viewsfor both questions posed above, but falls short of therespective optimistic views: in other words, performancecorrelates positively with level of long-term capital stockper capita, but not as perfectly as the pessimistic view wouldsuggest; and performance correlates positively with the stageof mineral exploitation but not as perfectly as the optimisticview would suggest.

(b) The most outstanding positive finding is that export diversi-fication improves with the stage of mineral exploitation.

1/ The problems associated with applying cross-section evidence to time-seriesprojections are well-known: for the purpose at hand, however, these maybe glossed over.

MEDIUM-TERM ECONOMIC PERFORMANCE OF THE MINERAL ECONOMIES

Classification Criterion: Level of Long-TermCapital Stock Per Capita

2/ Assessment of ActualPerformance Index Pessimistic View Actual Performance Optimistic View Performance

L M H 1/ L M H L M H

Agricultural (,rowth 1 1 1 1 1 3 3 2 1 Poor

Price Stability 1 1 1 2 1 1 3 3 3 Poor

Marginal Saving Rate 1 1 2 1 2 3 3 2 1 Moderate

Export-Diversification 1 1 1 1 2 1 3 2 2 Moderate

Investment Priorities 1 1 1 2 2 3 3 3 3 Moderate

1/ L - Low-Capital group; M - Moderate-Capital group; H - High Capital group.

2/ 1 - Poor Performance; 2 - Moderate Performance; 3 - High Performance.

MEDIUM-TERM ECONOMIC IERFORMANCE OF THE MINERAL ECONOMIES

Classification Criterion: Stage of Mineral

Exploitation

Performance Index -/ Pessimistic View Actual Performance Optimistic View Assessment of Actual Performance

E M L E M L E M L

Agricultural Growth 1 1 1 1 2 1 3 2 1 Moderate

Price Stability 1 1 1 2 1 2 3 3 3 Poor

Marginal Saving Rate I 1 . 3 1 3 3 2 Moderate

Export-Diversific I I I 1 2 3 1 2 3 High

InvestmentI I L 2 2 2 3 3 3 Moderate

Priorities

1/ E - Earlv 1irieral-Exploitation Stage Countries; N - Middle Stage Countries: L - Late State Countries.

2/ 1 - Poor Performance, 2 - Moderate Performance; 3 - High Performance.

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(c) The poorest record is that of inflation which is high inall mineral economies (in particular the moderate-capitaland/or middle-stage groups); followed by the record foragricultural growth which is low in the low-capital and/orearly-stage countries.

(d) Saving performance and choice of investment priorities areboth in-between cases with actual performance mid waybetween the pessimistic and optimistic views.

(e) The most outstanding of the discouraging findings is thatmarginal saving is least for the low-capital group.

In short, the record does not suggest a pessimistic view for the long-term development of the mineral economies, but it does suggest that much willdepend on an improved performance in keeping down inflation, increasing agricul-tural growth rates and, in the low-capital group, in improving saving performance.Further, although successful export diversification would seem to be within thereach of the mineral economies, it would clearly depend on an improvement in thechoice of investment priorities, particularly in the low- and moderate-capitalgroup countries. The task ahead is not an easy one, but the rewards to informedeconomic choices and policies are likely to be high. That, at any rate, is'whatis suggested by this attempt to glean the long-term prospects for the mineraleconomies on the basis of 'verbal correlations'. 1/

1/ 'Verbal regressions' are to be preferred, of course; but with so manyconflicting influences, they escape identification.

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IV. ECONOMIC RENTS: THE DISTRIBUTION OF GAINS FROM MINERAL EXPLOITATION ANDMINERAL DEVELOPMENT POLICY 1/

IV.1 Introduction

Preceding sections of the paper have assumed away the problemsassociated with the conversion of minerals from their physical state to a flowof financial resources. The mining industry, ever since minerals enteredinternational trade, 2/ has involved the participation of direct foreign investors.In particular, after the eighteenth century, the industrializing countries, inaddition to greatly increasing mining activity at home, began to seek mineralsabroad notably in the developing countries of today. The distribution of gainsfrom mineral exploitation have, especially following the 1938 nationalization ofthe Mexican petroleum industry, increasingly become a bone of contention betweenthe mineral economies and the mining companies. The subsequent watershed was,of course, the OPEC action in 1973 which culminated in a quadrupling of oilprices.

What we have christened the conversion problem raises a complex setof issues. First and foremost, it raises the question of the rate at whichmineral reserves should be exploited. 3/ A second set of questions relates tothe general regulation of the foreign mining companies (FMCs) and in particularto the policy options through which mineral economies may share in mining rentsand exercise leverage on long-run investments and exploration in their miningsectors. And thirdly, it raises the question of producer cooperation in themining, marketing and processing of individual minerals. Subsequent sections

1/ The title of this section and a fair measure of the ensuing discussion arebased on Hughes (1975). Other basic sources for this section are: DiazAlejandro (1976) and Gillis (1977).

2/ Precious metals excluded.

3/ An additional issue that has received little or no attention in the literatureis the rate of exploration. Like the rest of the mining industry, explorationhas large economies of scale. Since no returns can be assured, explorationfunds must be provided strictly as risk capital. Rough estimates indicatethat in the early 1970s approximately US $300-350 million were spent annuallyon non-fuel mineral exploration activity worldwide (excluding centrallyplanned economies), but only 15 percent of this was in the developing countrietIn the past, the FMCs have done most of the exploration (Mexico was theexception). More public exploration companies, notably in Brazil, have beensuccessful in exploring on a large scale, and similar steps are being con-sidered throughout the world. Bilateral and multilateral technical andfinancial assistance on the one hand, and greater producer cooperation onthe other, may be expected to play a greater role in the future. See Bossonand Varon (1977) pp. 31-34.

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discuss each of these sets of issues, but running through each of these is theunderlying concept of rents in the mining industry, a subject to which we turnfirst. The major conclusion of the ensuing analysis is that the mineral economieswould do best to concentrate on exacting non-monopolistic mineral rents throughappropriate tax systems and modes of participation in the mining industry, ratherthan the more uncertain monopolistic rents which have received so much attentionin recent years.

IV.2 Rents in the Mining Industry

It is possible to distinguish five different types of rent in the mineralindustry. First, arising from the basic characteristic of minerals, namely theirexhaustibility, is an element of scarcity rent. The essential factor in thedetermination of scarcity rent is the rate of consumption of the mineral relativeto total stocks (reserves): thus, petroleum enjoys a substantial scarcity rentwhile salt, limestone and other minerals used in the construction industry havenegligible scarcity rent. Quite clearly, as total stocks diminish scarcity rentsincrease, ceteris paribus. In general scarcity rent will increasingly dominatemarket price as depletion occurs.

Differences in the quality of ores, in the ease of mining, or inlocation, give rise to Ricardian-type differential rents. Thus bauxite fromJamaica, Guyana, Surinam enjoys locational advantages with respect to theU.S. market; Nigerian petroleum is well known for its low sulphur content,and off-shore drilling in the North Sea for its hazards.

Monopolistic rents are a third type and can arise in two ways:firstly, through producer-country cartels,and secondly as a result of thestructure of the international market for minerals. To take the latter first,the existence of excess profits due to the oligopolistic structure of inter-national markets in many minerals is not disputed, although difficult to prove.There are no open competitive markets for bauxite, iron ore and nickel. On theother hand, as the 1973 OPEC price rise demonstrated, it is possible for mineraleconomies, under some circumstances, to increase monopolistic rents by in effecttaxing the consumer. Whether or not taxes on specific minerals can be shiftedby the FMCs on to consumers depends, to a large extent, on the degree of competi-tion in the industry: given few substitutes, the more competitive, the greaterthe incidence of the tax on consumers. 1/ The two kinds of monopolistic rentstherefore differ in that the mineral economies can tap the first only byincreasing oligopolistic excess profits at the expense of consumers, while thesecond is at the expense primarily of the FMCs. The Jamaican 1974 bauxite"oproduction levy" may have been borne largely by the FMCs. 2/

The presence of quasi-rents is quite general, but there is reason tobelieve that these rents are higher in the mining industry. Since capital isimmobile in the short-run, and the mining industry is highly capital-intensive,capital enjoys a sizeable quasi-rent. Taxing this element is likely, however,

1/ Gillis and McLure (1975), p. 392.

2/ Ibid.

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to drive future investments away. Other factbrs also enjoy quasi-rents, andin mining, this is particularly true for managerial and technical know-how.Given that the mineral economies' capabilities in these areas are still inade-quate, these rents are high. But they are less easily taxed than the formerbecause they are more mobile. These quasi-rents are best tapped by imitationand displacement than by taxation.

Finally, reference may be made to windfall rents that arise in themining industry periodically and are largely due to sudden demand increasesin the presence of low short-run supply elasticity. Whether these rents shouldbe taxed is questionable (because the industry is also prone to demand increases),unless fortuitous losses are given favorable tax treatment.

In all of the above, rent is conceived as the surplus earned by aparticular factor of production over and above the minimum earnings necessaryto induce it to do its work. Although there is some ambiguity about the rela-tive costs and benefits of tapping quasi-rents, most mineral economies lay nominalclaim to the scarcity, differential, monopolistic and windfall rents. Exactingthese rents however poses many problems.

However desirable it may be, it is as a rule impossible for a govern-ment to collect all rents. The major difficulty is that of distinguishing rentfrom supply price, both because of the government's relative ignorance of theindustry and because the supply price depends on the producer's perception ofrisks. The latter is difficult to judge and risk must, in any case, benegotiated. The absence of arms-length transactions in many of the relevant mar-kets is a complicating factor. Thus, all ex ante taxes on rents are plaguedby uncertainty. On the other hand, ex post taxes amount to a marginal tax rateof 100 percent, which has obvious implications for incentives, even if transferprices were controlled. Thus rents are uncertain, vary with risk (and hence alsowith the tax instrument used to tap rents) and involve actual costs of collection.Any attempt to tap rents must contend with these difficulties. Before appraisingthe policy options for mineral economies in their attempt to maximize their rentextractions, a brief account of the factors that ought to determine the rate of

mineral exploitation is in order.

IV.3 The Rate of Mineral Exploitation

A fixed and known stock of an exhaustible resource may be regarded asa capital asset. The representative owner has to decide whether to exploit itand at what rate. If the marginal costs of exploitation and the present and futureprices of the resource are known to the owner, assumed to be a price taker, thedecision is simple. Exploitation should be at a rate such that the price of the

resource, net of costs, increases at the same rate as the ruling rate of interest.Efficiency calls for all forms of investment having the same yields: Venezuela

1/ Hotelling (1931) and Solow (1974).

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should sow petroleum into new factories only while the return to these assets ishigher than the appreciation of oil in her ground.

It is well known that even if we limit ourselves to competitivemarkets within a single country, to homogeneous deposits and no uncertainty,doubts arise regarding the efficiency of markets. The institutional featuresof uncertainty, high capital intensity, and large foreign mining companies(whose rate of time preference differs from that of the mineral economy) canonly imply that the rate of exploitation of mineral reserves is a policy decision,par excellence.

The opportunity cost of the various rents from a mineral depost is thediscounted value of these rents if the mineral were to be exploited in thefuture under other circumstances. In particular, changes would follow from:

(a) future. movement of real prices due to changes in demand,supply and technology;

(b) future possibilities of increasing domestic gains throughgreater domestic supply of inputs, greater domesticmultiplier effects and/or greater domestic taxes due tobetter tax administration;

(c) future increases in absorptive capacity and hence in theproductivity of investments; and

(d) expected increases in domestic demand for the mineral which maydictate its preservation for later own-use, given the non-competitive nature of the market, imperfect knowledge, longgestation periods, fluctuating demand and/or nationalsecurity considerations. 1/

It is noteworthy that uncertainty with respect to the trend of futureprices makes present extraction plus investment in financial or real assetsabroad an attractive alternative, as it has to Kuwait and S. Arabia. In themajority of the mineral economies however, including the petroleum economies,mineral exploitation is being pushed ahead at full steam except as dictated byproduction cut-backs to maintain prices. The reason is not difficult to find.Development is of the utmost priority, and speed is believed to be of theessence. It is difficult to quarrel with this objective, except in cases inwhich development expenditures are increasing at such phenomenal rates that theycannot be productively absorbed, and the manna leads to indigestion! The recentcut-backs in Iran and Nigeria, and the open recognition in the 1975-80 Saudi planthat actual spending is likely to fall far short of allocations, 2/ are allsymptoms of such over stretching. From a policy point of view then, the decisionto invest mineral rents in financial or real assets abroad as an alternative to'over-spending' them domestically, is one that must receive the close attention

1/ Such own-use preservation is most fervently being carried out by India andVenezuela, but is generally advocated,but not necessarily followed, by manymineral economies.

2/ The Economist (1975).

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of those mineral economies in this very fortunate position, including themoderate capital group countries. For mineral economies whose 'over-spending'is fuelled by foreign borrowing, these strictures are equally, if not more,applicable.

IV.4 Mineral Taxation and Development Policy

From the point of view of the mineral economies, the objective ofmineral taxation is simple: to capture all scarcity, differential, monopo-listic and windfall rents, while letting the investor make the return necessaryto induce him to invest. As noted earlier, this is difficult in an imperfectlycompetitive and uncertain world, and one in which the taxing government'sknowledge of the industry is inferior to that of the investor, and transferprices are the rule that prove the exception. In principle the easiest way tocapture all these rents is for the government to run the mines, a decisionMexico took in 1938. Although the participation of state-owned enterprisesin mining is increasing, it is not surprising that countries differ substantially.Among the non-fuel mineral economies, Zambia and the Congo People's Republicown more than 90 percent of their mining industries while the proportion in Jamaicawas, until recently, under 10 percent, and that in Bolivia, Chile and Indonesiais around 50 percent. 1/ Not only do high entry barriers in the marketingsphere limit such participation, but the efficient operation of mining activityis itself very demanding. And even though it is increasingly possible to contractout the difficult parts of the production process, e.g., the managerial andtechnical inputs, the latter markets are still highly underdeveloped and it iscertainly not easy to combine disparate inputs efficiently. Thus the role ofFMCs is likely to remain significant in the mining industry, and hence also therole of taxation as an instrument of exacting rents. 2/

The oldest form of mineral resource tax is the royalty. Specificroyalty taxes are simply based on tonnage, and their main advantages are:

(a) ease of assessment and administration;

(b) stability of revenue, since production tends to bemore stable than profits.

But the specific royalty tax, being independent of ore quality and price,is able to tap only the scarcity rent Element. The ad valorem royalty taxesdifferential rent and is therefore preferable. It is also relatively easilyadministered, although somewhat more demanding than the specific royalty; it islikewise relatively stable, though again less 80 than the specific royalty.

1/ Gillis in Gillis (1978).

2/ Reference may be made to mineral processing as an additional way`'f exactingrents. But this route is plagued by various barriers to entry that weredescribed in Section II.3.

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Its major disadvantage is that it drives a wedge between private and socialcosts and therefore discourages optimal exploitation of the mine and the optimalreprocessing of material discarded at an earlier processing stage.

As a means of capturing mineral rents and at the same time minimizingthe excess burden of taxes, income and excess profits taxes score eminently.Their main advantages are that they impose fewer constraints on operating decisions,are more sensitive to rents and can allow for exploration and development expendi-tures. Their main disadvantage is that it is difficult to calculate income andexcess profits, and hence to tax away the rents, because of the twin problems ofuncertainty and transfer pricing. They have the further disadvantage of leadingto revenue instability, as was clearly shown by the experience of Zambia in 1971. 1/The efficiency and rent-sensitivity of income and excess profits taxes must beweighed against their relative instability and greater administrative demands.

It is clear that whatever the method of rent exaction, there will besome effect on investment, discovery and output. But newer forms of revenuecollection have been designed which preserve the spirit of the income and profitstax, retain the advantages of private operation and reduce political risks, henceincreasing potential taxable rents. These are production sharing and contracting,and were first used in Indonesia, and more recently in Peru, in both cases forpetroleum. In production sharing, the foreign investor supplies foreign exchangeinvestment, management and export markets; the repayment of capital, interestand profits is predetermined and takes the form of a share of output at agreedprices; and ownership and control remain in national hands. Production contractingis a variant of the latter, with contractors operating parts of the miningactivity on an output-share basis. Both approaches overcome some of the diffi-culties of estimating operating costs and prices; but they are not finely tunedto costs and hence to rents, and are therefore most appropriate where rents arerelatively high. Their major disadvantage is that they require extremely skill-ful and sophisticated negotiation, and supervision.

The resource rent tax is the type of mineral tax that has most recentlybeen advocated. 2/ It focuses on the observation that rent is inversely relatedto risk of loss, and risk of 'Loss is increased if the spectrum of probabilitiesassociated with the rate of return is increased. It is argued that each oi theuIsual tax systems--specific and ad valorem royalties, proportional and progressiveprofits tax, etc.--increases the risk of loss because it renders the rate ofreturn uncertain. Tne resource rent tax, by allowing for an appropriate rate ofreturn, does not increase risk beyond what it would be in the absence of taxation.Thus, it maximizes potential rent. It is a profits tax that begins to be levied(at a very high rate) when a certain threshold rate of return on investment has beenrealized, and may be made progressive. The Papua-New Guinea bauxite project uses

1/ In 1971 the first year of a change over from royalties to income taxes,Zambian mineral-tax revenues almost halved dueto the fall in profits resultingfrom a fall in copper demand.

2/ See Garnaut and Ross in Crommelin (1977).

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such a tax scheme, although somewhat simplified. The advantage of the resourcerent tax is obvious. It is administratively similar to an income tax, and isjust-as variable; however, like the latter, it may be combined with royalties.It is less demanding of administrative resources than taxes that have to benegotiated frequently, but it requires a strong direct tax administration.Its major disadvantages are that it tends to grant long tax holidays whichare politically unpopular in many mineral-economies and, as with income taxes,profits may easily be shifted to tax havens.

Other forms of taxes on minitg activity -and minerals abound; ofthese, only two will be mentioned here. Jamaica has pioneered the levying oftaxes on the value of the final output, by taxing bauxite in proportion to themarket price of aluminum (a step that was necessitated by the absence of anopen price for bauxite). The similarity of this tax to those based on postedprices is apparent. Auctioning exploitation rights is a device that theoreti-cally assures host countries of all rents. It is infrequently used firstbecause of uncertainty about the size and quality of reserves, and secondbecause very often the bidders are dismally few in number. It is a more viableoption in petroleum due to the more standardized technology, the ease ofmarketing and to the large number of potential bidders.

A recent study of comparative mining taxes showed wide variancein the reliance on these modes of taxation. 1/ At one extreme was Bolivia, wit!almost exclusive reliance on royalties and no taxes on income, although thelargest mining company is government owned. Liberia, Zaire and Jamaica differlittle from Bolivia in this respect, although they differ in the degree ofgovernment ownership in the industry. On the other hand, Indonesia boasts ofa combination of royalties, income and excess profits taxes, three wholly ownedgovernment corporations and sophisticated production sharing and contractualoperations. Zambia, Chile and Peru belong with Indonesia, although the formertwo have ceased to charge royalties.

It is obvious that the choice between the available mechanisms forexacting mineral rents cannot be made on qualitative grounds alone. The benefiand costs associated with alternative means of tapping rents will differ some-what among countries. But some general statements may still be made:

(a) Given that an essential policy problem is the identifi-cation of rents, some reliance on royalties is to beencouraged in spite of its drawbacks; in addition to itsease of administration, the relative stability of royaltiesis a major argument for combining it with other forms oftaxation;

(b) The rent-sensitivity and efficiency of the income andexcess profits taxes render them highly desirable instru-ments of mineral taxation; increasing attention tothese taxes in countries such as Bolivia, Zaire andJamaica is to be encouraged; investments in strengtheningthe tax administration in this direction would pay offhandsomely;

1/ See Bucovetsky, Gillis and Wells, in Gillis et. al. (1978).

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(c) A major factor limiting the exaction of rents bygovernments is their relative ignorance of theintricate details of the technology, management andmarketing of their minerals; given that learningwill tend to follow doing, and that supervision iseasier from inside than outside, government or domesticparticipation in the mining industry through such newinstruments as production sharing and contracting isto be encouraged, albeit at a cautious pace;

(d) The resource rent tax can, in principle, be operatedby any country that has an income or profits tax;although it gives rise to tax holidays, it may becombined with a specific royalty in the early yearsand still retain its advantage of decreasing commercialrisk; and it has the further advantage of encouragingexploration and development;

(e) Since countries that attract FMCs by offering lowertax rates are likely to be giving up rents, theimportance of producer coordination in tax policy isobvious;

(f) Since changes in bargaining strength between the FMCand the host government are generally exploited tochange contract terms, it is advisable to allow forsuch changes at the start; this renders the dispositionof rent variable in the medium term and fixed in theshort term, thus allowing flexibility but reducingrisk of loss for the FMC (and hence increasing potentialrent). 1/

IV.5 Cooperation Among the Mineral Economies

Cooperation among the mineral economies has most commonly taken theform of producer cartels aimed at increasing monopolistic rents. But it maytake at least two other forms; first, tax policy may be coordinated, eitherovertly or following the 'price leadership' model. Thus, the 1974 tax increaseon bauxite by Jamaica was quickly followed by similar increases in the otherCaribbean bauxite economies. Secondly, mineral economies may attempt economicintegration of common activities such as mineral processing, and research anddevelopment (R & D) related to their minerals. There are as yet few examplesof such integrated activity. But the rationale for joint processing is evidentgiven scale economies, and that for joint R & D may be argued on the basis ofthe high and uncertain costs associated with such activity. 2/

1/ See Smith and Wells (1975).

2/ Girvan (1971).

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The exploitation of possible gains from cartelization has beenviewed with renewed enthusiasm since the 1973 OPEC price increase. 1/ Thus,bauxite producers who are members of the International Bauxite Association(IBA) have also successfully increased their annual earnings by a few hundredpercent since 1974. 2/ On the other hand, the success of the phosphate rockproducers has been mixed. Morocco trebled its phosphate prices in January 1,1974 and most other producers, including the U.S., followed suit. The successof this move hinged in part on the increased price of hydrocarbon-based ammoniafertilizer which accounts for 55 percent of the fertilizer market (phosphate-based fertilizer accounts for 25 percent, and potash-based fertilizer for theother 20 percent). But demand for phosphate rock nose dived in mid-1975, andprices have not recovered since. 3/ A phosphate rock cartel formed amongMorocco, Jordan, Tunisia, Togo, Senegal and Algeria in late 1976 was largelyunsuccessful in 1977 in maintaining prices, and Algeria and Togo have sincewithdrawn from the group. Clearly the factors affecting possible gains fromcartelization vary across minerals. However the success of the bauxiteproducers attests, at least, to the fact that oil is not an exception. 4/

One of the most sophisticated analyses, to date, of gains toproducers from the cartelization of exhaustible resources studies the prospectsfor oil (OPEC), bauxite (IBA), and copper (CIPEC). 5/ Using a dynamic frame-work, potential monopoly profits were calculated on the basis of:

(a) estimates of demand and supply elasticities;

(b) the effect of adjustment lags in demand and supply onshort-term monopoly profits.

The most important results were, first, that the relative gains are madeprimarily in the first five years, and second, that the gains from carteliza-tion are highest for bauxite (60 to 500 percent over the competitive solution,depending on the rate of exhaustion), next highest for oil (50 to 90 percent)and least for copper (8 to 30 percent). The most significant factors explain#ngthe poorer performance of copper are the lower market share of CIPEC, and thequick response of the secondary copper market to price changes. An additionalrevealing fact is that, at all times, IBA's monopolistic bauxite price iswithin a few dollars of the "limit price" at which the production of alumina

1/ But cartelization attempts have a long history; see Eckbo (1975), Krasner(1974).

2/ Bergsten (1976).

3/ The Economist (May 1974; August 1975).

4/ The argument that oil is the exception has been most forcefully made byKrasner (1974), while contrasting arguments are made by Mikdashi (1974)and Bergsten (1973), (1974).

5/ Pindyck (1978); see also Blitzer et. al. (1975) and Fischer et. al. (1975).

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from other areas becomes economical. The major limitation of the study is itsneglect of the effect of higher prices on exploration and hence on the discoveryof new reserves. All the same, it too supports the view that oil is not anexception, although it does not refute the view that both oil and bauxite areexceptions.

Three broad factors may be said to determine possible gains fromcartelization: the degree to which the cartel dominates the market, substi-tution possibilities and the political problem of achieving producer cooperation.The degree to which the cartel dominates the market determines, in part, theshort-run supply elasticity. Substitution possibilities determine the elasti-city of demand as well as, in part, that of supply; and the two factors togetherdetermine the potential for short-run monopoly gains which, as noted above,seem to account for a large proportion of cartelization gains. Moreover, ithas been observed that price raising may be a good idea even if it encouragessubstitutes,provided the short-run gains are large enough to allow diversifi-cation of the producer's economy and increase its flexibility. 1/ Furtherit is possible through subtle pricing and marketing strategies to increaserents without pushing consuming countries to develop substitutes which requireheavy initial investments and start-up costs, or to use available but higherpriced substitutes. 2/ Of course substitution among minerals can be avoidedby supra-cartels; however, these are likely to be extremely difficult to holdtogether.

The political problem of achieving producer cooperation is greaterthe more differences there are among the producers with respect to initialconditions (income levels, foreign exchange reserves, ore quality, etc.) andexpectations (including ideological differences). Even so there is likely tobe some trade-off between these difficulties and the potential gains fromconcerted action.

The upshot of these observations is simply that given some marketdominance, the potential gains from cartelization, if any, require detailedknowledge of the industry and of the market. Thus although it is difficult topredict what other minerals may successfully join the ranks of oil and bauxite,it is clear that a prerequisite of such action is the intensive study of themining industry and mineral markets by the producer countries. The objectivesof such a study would be to determine the price levels that would stay clearof "limit prices" at which substitutes become attractive, and to reveal thepotential gains from cartelization as a means of encouraging group cohesion.Until such knowledge becomes available to the producer countries, the exactionof monopolistic rents must remain a highly uncertain proposition.

1/ Johnson (1967).

2/ Bergsten (1973).

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IV.6 A Concluding Note

Prospects for tapping monopolistic rents would seem to exist insome minerals. But it is difficult to avoid the conclusion that the mineraleconomies would do best to first concentrate on exacting the scarcity,differential and windfall rents by devising appropriate tax systems and modesof participation in the mining industry. As their knowledge of the industryincreases, the feasibility of tapping monopolistic rents is likely to increase.Although difficult to prove, it would seem that oil and bauxite lend themselvesmore easily to the exploitation of gains from cartelization than do the otherminerals. If so, then attaching more immediate priority to exacting non-monopolistic rents is not only a more efficient use of resources, but alsofollows the logical sequence because it will help to accumulate knowledge ofthe industry for the more difficult task of tapping monopolistic rents.

On the other hand, (a) min±ng tax policy, (b) joint mineralprocessing, (c) joint R & D efforts and (d) exchanging mineral industryinformation, would each seem to be fertile ground for greater producercooperation than there is at present.

V. POLICY RECOMMENDATIONS iOR THE MINERAL ECONOMIES

V.1 Summary and Conclusions

A. The mineral economies, we have seen, have certain uniquenda2ntages: some measure of their required 'primitive accumulation' is forthem a natural endowment, they have less constraining fiscal and foreignexchange gaps, and can, to some extent, base their industrializationstrategies on mineral processing.

B. On the other hand, relative to non-mineral economies, themineral economies are more susceptible to a number of economic problems;low marginal saving, high unemployment 3nd dualism, high inflation, lowgrowth in agricultural production, high export earnings and fiscal instabilityand poor export diversification performance.

C. Notwithstanding these general tendencies, there is significantvariation in economic performance within the group of mineral economies, whichsuggests tnat their long-term prospects (as judged by their prospects for trans-formation and growth on the one hand, and employment and distribution on theother) aze moderately good:

(i) First, a qualitative analysis of the divergences betweenactual and 'ideal' investment priorities in five types ofmineral economies (small high capital, large moderate capital,small moderate capital, large low capital and small lowcapital) suggests that although divergences are on averagequite high, the 'right' investment priorities tend to beemphasized in some mineral economies in each of these fivegroups. Thus, there is no clear country pattern in theincidence of such divergences. However, there is sometendency for the large mineral economies, and for the moderateard low capital group mineral economies to show greaterdivergences. And, in general, the mineral economies tendto overemphasize mineral processing, underemphasize agri-cultural production and labor-intensive manufacturing,while paving appropriate attention to import substitutionand edtucation and training. For lack of information, it isnot possible to judge the priority attached to R & Dcapability and to small-scale enterprise development, butit is likely that these needs are being underemphasized,particularly in the high capital group and large countriesrespectively.

(ii) Second, a 'verbal corre'Lation' analysis of the relativemedium-term economic perforomances of the mineral economies,using groupings based on six independent criteria, showsmixed results. The encouraging findings are that: agri-cultural production has grown faster in the large countries,and in the countries with high agricultural potential;marginal saving rates are higher in the large countriesand in the middle mineral exploitation stage, and export

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diversification has been most successful in the moderatecapital countries. The discouraging findings are that:inflation has been high in the high capital group, andnot much lower in the moderate and low capital groups, andhas been higher in the early and late mineral exploitationstage countries than in the middle stage countries; agri-cultural growth has been lower in the low and moderatecapital groups relative to the high capital group; andmarginal savings have been lowest in the low capital group.In a nutshell, the performance of the mineral economieshas been mixed with respect to agricultural production,saving and export diversification, but poor with respectto inflation.

This heterogeneity suggests that the long-term prospects of themineral economies lie in between alternative pessimistic and optimistic ideal-type scenarios. It is clear however that much will depend on an improvedperformance in keeping down inflation, increasing agricultural growth ratesand, in the low capital group, improving saving performance. Further, althoughsuccessful export diversification in some mineral economies suggests that itmay be within reach of the others, it would clearly depend on an improvementin the choice of investment priorities, particularly in the large and in thelow and moderate capital group countries.

The task ahead is not an easy one; but the rewards to informedeconomic choices and policies are likely to be high.

D. Finally, an analysis of comparative mining taxes and miningsector policies suggests that the mineral economies have considerable scopefor reforming these policy areas in their attempt to increase their share ofscarcity, differential and windfall rents. The fiscal linkage, as we have seen,is after all the major externality of the mining industry. Cooperation amongproducers to increase their share of monopolistic rents is seen to be a muchmore uncertain route to increasing mining rents, not least because it requiresdetailed knowledge of the entire mining industry. However, producer cooperationin the fields of joint R & D activity,joint mineral processing and miningtax policies, although still uncommon, is likely to pay handsome dividends.

The policy recommendations offered in various parts of the paperare summarized below.

V.2 A Policy Framework for the Mineral Economies

Various policy objectives and policy instruments have been identifiedfor the mineral economies. 1/ The different policy objectives relate to thegoals of growth and transformation on the one hand, and employment and

1/ Throughout, and in this section, policy recommendations are offered on thebasis of the 'rational actor' model of policy making. An alternative, andmore realistic conceptualization of the policy making process is the 'incre-mentalist' model which recognizes, in particular, that policy making isplagued by uncertainty and conflict. Although the paths of reform are narrowit is to be hoped that Hirschmanian reform mongers in the mineral economieswill rise to the occasion. See Lindblom (1958) and Hirschman (1973).

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distribution on the other, in many ways. In particular, one .cannot over-emphasize the critical importance of the level, sequence and sectoral allocationof investment in determining the mineral economy's success with the above goals,and hence of the policy environment for medium-term economic decision making.

The policy instruments may be classified into three kinds: micro-economic, macro-economic and institutional. Three observations are in orderhere. First, as stressed earlier, there are two 'prices' whose influences arepervasive throughout the mineral economy, and which must receive early attentionif the consequences of their neglect are to be reversed. These are: a) 'the'mining sector wage rate; and b) 'the' exchange rate. Their pervasiveness is amajor reason whay they are likely to be difficult instruments to use. But thelong-term prospects of most mineral economies are bleak if an appropriateincomes policy and a carefully designed foreign trade regime are not institutedas early as possible in the mineral rent cycle.

Second, although mineral processing is not the panacea it is oftenclaimed to be, it can contribute to the industrialization of many mineral economiesboth because its benefits exceed its costs and because of its potential linkageeffects. Nonetheless, as stressed earlier, important barriers to entry in theindustry are: in particular, tariff barriers in importing countries, anddiscriminatory pricing against processed commodities by shipping conferences.This is a second pervasive problem area; but its solutions lie more in theinternational arena.

Third, as an examination of the charts below suggests, a staggeringlyhigh proportion of the policy instruments are institutional. In a developingeconomy, institutional change is important. The problem is that it is muchmore difficult to bring about institutional change than to modify a few prices.The task ahead is therefore a difficult and uncertain one. This can only increasethe importance that must attach to the mining wage rate and the exchange rate.

The chart below, in addition to listing policy objectives(andcorresponding policy instruments), identifies sub-groups of mineral economiesto which each of these policy objectives is most relevant, and gives countryexamples.

At the end of three major studies of economic policy making inLatin America, an astute observer wrote: "in fine, the roads to reform arenarrow and perilous, they appear quite unsafe to the outside observer howeversympathetic he may be, but they exist." 1/ The success of the mineral economiesin attaining their goals rests in large measure on the size of their respectivemineral reserves, but perhaps even more importantly on whether they can treadthe roads to reform that are summarized below.

1/ Hirschman (1973), p.275.

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List of Policy Instruments Recommended

No. Type Policy Instrument Section No-

1 Micro/macro Mining wage-rate/Incomes Policy II.5

2 Micro/macro Exchange-rate/Foreign Trade Regime II.9

3 Institutional Appropriate Sequencing of Investments III-4

4 Macro/Institu- Short-run macro-economic management andtional Reserve Fund. II.1; II

5 Institutional Measures to reduce sectoral wage-gaps II.5

6 Institutional Reform of Labor Markets II.5

7 Institutional Agricultural Extension, Credit Infrastructureand Research III.3

8 Micro Producer prices for Food II.7

9 Micro/Macro Interest Rate Level and Structure II.4

10 Institutional Infant Industry and Wage Subsidies II.9

11 Institutional Increased reliance on Income and ProfitsTaxes, Resource-rent taxes and ProductionSharing and Contracting IV.4

12 Instititional Widening of Tax Base II.4

13 Micro Taxes on luxury goods II.4

14 Instititional Reform of Financial Institutions andInstruments II.4

15 Instititional Producer Co-operation in processing, R&Dand tax policy IV.5

16 Institutional Rate of Exploitation and Investment inAssets Abroad IV.3

17 Institutional Mineral Price Stabilization II.8

18 Institutional Government Recurrent Expenditure Budgeting II.4

19 Institutional Allowing for Periodic Tax Renegotiation inOriginal Contracts with FMCS. IV.4

POlicy Reccmendations for the Mineral conomies

Becific Policy Objectives Code for Pblicy Innstrmnta Recomended Grou fMinel Economies most Country Eampleas

A. Plcel And foreign ehangse stability 2; 3; 4; 10, (1) Non-Mal mineral exporters. Bolivia, Chile, Guinea, Guyana,Jamaica, Liberia, eauritania, Morocco,Peru. Zare, Zambia.

B. igh Mrginal Savings 1; 91 12; 13; 14; 18, Ci) Low-capital group;(II) Late bploitation-stege group; LLberia, Nigeria, Zailre, Peru, Syria,

(III) mall countries. Congo P.R., Scuador, BolivlawIndonesta Togo.

C. Eaploymnt 1; 2; 5; 6; 7; 8; 10. (1) Lw- and mderate-cepital groups; Guyan, Iraq, Morocco, Jamaica, Iran, Chile(11) L4rge countries. Zanbia, Trinidad & Tobago, Liberia, Nigeria,

Zaire, Indonesia, Congo P.R.

D. Priee Stability 1; 2; 3; 4; 7; 8; 18. (t) AU mineral soononies, but ftrdiffeat remons, not applicable.

E. Agicultural Growth 1; 2I 5; 6; 7; 8. (1) Low- and saderate-capital groups; Iraq, Horocco, Jamaica, Chile, Nigerla Zaire,(tt) em.L countries. Algria, Peru, Congo P.R.

f. Export Earnings ftability 2; I; 17. (1) Low- end moderte-capital Sroups; Guyana, Morocco, Jamaica, Chile, Zmbia,Peru, Bolivia.

0. Export-Diveraification 1; 2; 3; 10. (1) AU minaral economies not applicable.

N. Not Owerstressing Hinersl-bazed Processing 1; 2; 5; 61 10. (1) Low- nd lloderate-Capital group. Guyana, Iraq, Morocco, Jamalca. Iran, Chile,(and Institutional) Trinidad & Tobago, Nigeria. Zaire, Algeria,

Congo P.R., Indoneaia.

1. Appropriste Priority to Labor-intensive 1; 2; 5; 6; 9; 10. (Ci Low- Sd nodarate-capital groups; Guyana, Iraq, Morocco, Jamaica, Iran, Chile,Hanufacturing (11i Lrge countrise. Trinidad & Tobago, Nigeria, Zaire, Algeria, F

Congo P.R., I ndonesia.

J, Appropriate Prlority to B all-acals 1; 2; 5; 6; 9. (i) Low- and aDderate-capital groupm; Guyana, Iraq, Morocco, Jamaica, Iran, ChileEnterprisc Dsvelopeent ('i) Lrge contries. Trinidad & Tobago, Nigeria, Zalre, Algeria,

Congo P.R.. Indonesia.

K. Appropriate Priority to R & D tponditure (Institutional) (1) Nigh and aoderata-capital groups; Kuwalt, S. Arabia, Libya, Iraq, Iran, Venezuela.

L. Mulislng Mineral-rent taction U; 15; 16; 19. (i) All mineral economies. not applicable.

M. Susnuxting Entry Barriers In Mineral-processing 15. (1) PlI mineral economies . not applicable.

j/ S" eacompnying chart.

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HG3881.5 .W57 W67 no.3

54 c.3

Nankani, Gobind T., 1949-

Development problems of

mineral-exporting countries