Do the recent moves by the government to encourage prospecting and exploration of the mineral estate risk turning NZ into the Nigeria of the South Pacific?

By Jason Krupp*

The resource estate is a controversial economic topic in New Zealand.

The government has made significant strides in developing a regulatory framework to encourage extraction, but this flies in the face of vocal opposition from various groups.

With an estimated onshore value of $200 billion, and potentially the same offshore if another major oil and gas discovery is made, it is easy to see why the government is eager to ramp up the mineral sector’s contribution to the economy.

Yet one of the strongest rational arguments against mineral extraction, beside the environmental impacts, is that it would invite the resource curse.

This is the phenomenon where countries with great mineral wealth, or who go through a minerals boom, seem to perform worse economically than their resource-poor peers.

The common sense proof of this can be seen in the Arab world, where the gross national income per capita was US$7,167 in 2012, whereas it is was almost five times higher in the Euro Zone despite vast disparity in mineral wealth.

So will New Zealand risk becoming an Iran or a Saudi Arabia if we strike a big oil and gas find or rapidly upscale onshore mineral extraction?

There is certainly evidence to suggest that the mineral curse does exist, which has been well researched in economics, although it comes in different forms.

There is the Dutch Disease, where high wages on the back of a mineral boom suck skilled workers out of the manufacturing and agricultural sectors, and the resulting influx of commodity earnings drives up the value of the domestic currency.

Countries reliant on minerals exports are also likely to experience declining terms of trade, having to export an ever greater number of natural resources to acquire a fixed basket of imported goods due to the competitive nature of commodity markets.

The volatility of commodity markets themselves are thought to make economic planning difficult, and can create fluctuations in tax revenues and the domestic currency as prices swing with demand cycles.

Lastly, the more dependent an economy is on minerals as a share of GDP, the more likely it is to encourage rent seeking behaviour (or lobbying for political favour), which may ultimately be to the detriment of other productive sectors in society. Similarly, conflicts over the distribution of mineral profits may also promote corruption, civil unrest, and wars.

If you buy into this reasoning it would be better to leave the gold in the ground, which is what many anti-mining and environmental groups advocate. Indeed Greens MP Catherine Delahunty has damned mining a boom-and-bust industry.

Fortunately debate is more complicated than this. Recent research suggests that minerals are not the curse they appear to be, otherwise countries like Australia, Canada, Finland, and Norway would linger at the bottom of the economic development league tables instead of near the top, where they are now.

Some now think that it is the quality of institutions which determine whether a country with a large mineral endowment will incur the resource curse.

Economist Peter Kaznacheev uses the Fraser Institute’s Economic Freedom of the World (EFW) Index as a measure of institutional quality. This is based on five factors, namely rule of law and property rights; size of government and taxation; soundness of money; trade regulation and tariffs; and regulation of business, labour and capital markets.

Looking at the latest EFW ranking it is immediately clear that a large mineral endowment does not consign you the economic scrap heap, with resource rich countries like Australia, Canada, Chile, Malaysia and Norway all featuring in the top quartile for institutional quality. These countries also featured in the top quartile of the United Nation’s Human Development Index for the most part, with Malaysia falling into the second quartile.

On the other end of the EWF ranking were countries like Zimbabwe, Chad, Angola, Burundi and Nigeria - all rich in resources but ranked among the lowest in the world for institutional quality and economic and social development.

This may suggest that a better way of rephrasing the problem is as an institutional curse, namely that countries with weak institutions are likely to produce less than desirable economic and social outcomes regardless of resource endowment. Cape Verde, for example, is a tiny archipelago lacking any significant resources, and is ranked 121st on the EFW Index and 123rd on the Human Development Index.

So why do institutions matter?

It is not because countries like Canada and Norway do not face some of the forces described above. They certainly do, but the research suggests that the quality of their institutions allows their economies to be flexible and efficient enough to cope with these pressures.

The good news for New Zealand is twofold.

First, the mineral estate makes a comparatively minor contribution to GDP, one or two percent in any given year, and output would need to be ramped up significantly to incur some of the resource curse effects, which start when extractive industries account for around 25 percent of GDP.

Second, even if this were the case, New Zealand ranks among the best in the world for institutional quality across a number of measures, such as the EFW (3rd), the World Bank’s Doing Business Index (3rd), and the World Economic Forum’s Global Competitiveness Index (17th).

Overall, this would suggest that New Zealand is well placed to handle a greater contribution from the minerals sector without turning into a Nigeria.

The controversial environmental side of the mining equation still hangs out there, but here quality of institutional and regulatory structure have a significant role to play, as have changing technologies and business models among miners.

It seems the only real obstacle left is the perception of mining as an industry that only brings costs to local communities and leaves nothing behind besides a giant hole in the ground. And this too can be addressed with policy, but the discussion on incentives in the mining sector must be left for another article.

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* Jason Krupp is a research fellow at public policy think tank The NZ Initiative. The NZ Initiative contributes a weekly column for interest.co.nz.

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12 Comments

There is also the social cost to take into account once the mine has dried up. A lot of families will move into the area for the years when there is work, and they will have subsequent families and so on, and other industries will establish themselves that feed off the mining income. Eventually you have an established town that relies on the mining industry.
What institution does NZ have that starts working on a plan before the mine dries up? Or will it suddenly dry up, leaving thousands unemployed, and another small town for the country to take care of via benefits, plus all of the associated social problems?
This of course is not a reason not to do it, but there needs to be some planning, including using the wealth generated for the government to be used towards capital assets, not just increased operating expenditure that becomes entrenched.

In effect what you are talking about is strip mining and a flat earth outlook.  So historically humans descend on a mineral resource, pillage it in some years and move on to another resource, rinse and repeat.  The problem is with a finite planet and 7 billion you cannot keep doing that for ever.
On top of that there seems to be little consideration that the mineral "wealth" is there for multi-generations and not just one.  Take the UK, its used up all its coal, iron etc and now has 70million people and well its fsckd IMHO.
My saying for the day is,
In the end, only three things matter: how much you loved, how gently you lived, and how gracefully you let go of things not meant for you.
-Buddha
Think of the above in  the context of the planet  and mineral wealth for future generations.
 

I take your point Steven, but would note should humanity vanish and not another single unit of resources be consumed, the plant would still be finite and disappear in the fullness of time. That said, I am chastising myself for venturing into the hyperbolic.
I wouldn't argue with you that weaning the UK from domestic coal was trouble free, but would dispute that the UK is "fsckd". Thanks to strong institution the UK economy managed to transition to a service-based one, to the point where London is now one of the financial centres of the world. But a strong case could be made that without onshore mineral wealth the industrial revolution would never have taken place in the UK, and the UK would not be where it is.

Finally there is the wealth and environment argument. That as people emerge from poverty they prefer acquiring wealth to protecting the environment. But as wealth increases they are willing to defer wealth in favour of protecting the envrionment (check out the Kuznets curve)

Yes,  we can't protect the environment until we have destroyed most of it.

So, OK I think you are deluded here on a service economy.  take a step back, on the ascent of mankind we have transitioned to better forms of energy.  From wood to animal products to coal to oil, each in turn more a dense energy.   We produced actuals goods but as we found in the 1970, yes this took too much energy so we "transitioned" to financial services.  Now the problem with that is most of the economy cant be financial services, there has to be a real economy underneath it to support it, when there isnt we supported this with debt.
So when you say service industry that really is just churn and its parasitic.  All that happens is we sell each other more and more services and even then that takes more and more energy.
"But a strong case could be made that without onshore mineral wealth the industrial revolution would never have taken place in the UK" so we agree and if we include trade powered by steam coal the UK grew to be the most powerful nation in the world at one stage.  So what is left now? 
Wealth and environment, the problem here is as we breed there is always yet more ppl wanting to live like us.   So in the 1920s there was about 2 billion ppl.  Today there is about 2 billion ppl in the developed world with 5 billion wanting to be were we are.
What has improved? nothing except we are getting close to maximum global food output, oh but doing so we are degrading the soil and drawing down pre-historic aquifiers, that isnt sustainable. 
"a Kuznets curve graphs the hypothesis that as an economy develops, market forces first increase and then decrease economic inequality."  Frankly its more than likely to be rubbish because the model is inadeqaut and incomplete even if its workable.   ie it ignores the real world if nothing else, plus its a "hypothesis" so there is no real world proof/data it is even fact.
regards
 
 
 
 
 

Your point is noted and there are two elements to dealing with this. The first is something soft sustainability, where firms know the resources are finite and invest in the local economy over the life of the project so that it is economically sustainable after the mine has pulled out.

That said, not all mines are able to do this. In the Pilbara, for example, there is no rational reason for 50,000 people to be living in the middle of the Australian desert without a major extractive project. In this case you recognise that the resources are finite, and plan for the eventuality of closure and retraining. Still, the economic literatire suggests that the overall economic contributions outweight the costs of closure.

"the overall economic contributions outweight the costs of closure."
but the mine will close, there is nothing left to mine.  Plus the costs of closure is really passed to the Nation's economy to deal with and not by the extarctors.  The term privitise the profits but socialise the losses springs to mind.  Of course if the tax taken from the endevour more than covers these social costs then all well and good. We are of course ignoring sustainablity etc. Plus exhausting affordable resources.
regards
 

Steve, I'm cautious about this line of thinking because it treats mining differently from other businesses, namely because resources are finite and the mine will close we should never start mining these resources in the first place.

If we applied this logic to general businesses we would never start any enterprise because they will fail eventually. The survivorship rate among Fortune 500 companies is dire. Helipro just went into receivership, putting jobs and livelihoods at risk, therefore they should never have been allowed to start a business to begin with. Clearly this is obtuse, but you get my point.

An advantage with mining is that the lifespan of the ore body is known. The Martha Mine at the base of the Coromandel Peninsula is set to close in 2021, and Newmont Waihi Gold has clearly signalled this. This is where so-called soft sustainability comes in. This is a term coined by the UN to describe the conversion of natural capital into other forms of capital that can generate long term sources of wealth. So a mining town moves on to become a manufacturing centre, or one with a big tourism sector - something to replace the mine when it is gone.

Obviously some regions will never stand on their own economically without a mine, eg. the Pilbara. But since the business and workers know the ore is finite, and know when it will run out, they can plan and resource for this (retaining funds etc.). Again, it is far from perfect with lots of room to fall through the cracks.
As for affordable resources, this gets into the philosophical arena of what is a resource (not my greatest strength). By definition it is only a resource once you exploit it. And scarecity drives up prices, which opens up the potential of some resource (oil sands in Canada for example). 

 
 

"Countries reliant on minerals exports are also likely to experience declining terms of trade, having to export an ever greater number of natural resources to acquire a fixed basket of imported goods due to the competitive nature of commodity markets."

Add to that that mines are finite,  the more you pull out the faster you run and the less you get for it.    

such resources should be strategically managed, not just Key'd off to the first bidder

Totally agree!

As does Norway

Don't talk about NZ's approach to extraction and Norway in the same breath. We will do it for a few shekels of royalty and allow foreign companies to take the real spoils, Norwegians use their brains and do it themselves, that way they can extract at a considered pace, whereas we'd have to go hell for leather for royalties to make any difference.