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Tuesday, 11 September 2012

Resource Blessing

Joseph Stiglitz on how resource rich countries, like Zambia, can maximize from their rich mineral endowments:
There are well known antidotes to each of these problems: a low exchange rate, a stabilization fund, careful investment of resource revenues (including in the country’s people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out). But there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing.”

First, these countries must do more to ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimize what they pay, while the latter need to maximize it. Well designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar – as they have repeatedly – the windfall gain does not go only to the company.

Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources’ value to private foreign companies. But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax. All over the world, countries have been doing this. Of course, natural-resource companies will push back, emphasize the sanctity of contracts, and threaten to leave. But the outcome is typically otherwise. A fair renegotiation can be the basis of a better long-term relationship.
You can read the entire article via Project Syndicate. On auctions, that would be more useful in the context of where government has assume a greater role in exploration activities. At present the one who finds the minerals on the ground proceeds to apply for a mining license and starts digging. Unless they are guaranteed that they may dig for it eventually they wont undertake the exploration. So when do you set up the auction?  Clearly only after government has undertaken exploration - but if government has no resource capacity to do that or it regards it as too speculative, or "it is in a hurry to develop", you end up with a bounty hunter system - which is what we have at present. My view is that Government should restrict exploration activities for the private sector to areas where it is speculative. Surely someone knows which area is likely to have certain minerals. Well, if that's the case then we should undertake exploration in those areas ourselves, which would then enable us to undertake auctions down the line. 

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