Why Do Some Resource-Rich Countries Stay Poor? (0011)

Full transcript

Why Do Some Resource-Rich Countries Stay Poor? Imagine waking up tomorrow to discover like a trillion dollars buried in your backyard. Oh, wow. Just right there in the dirt. Right there. The news cameras are on your lawn, your neighbors are cheering, and the math seems incredibly simple. You dig it up, you sell it, and you are set for life. Yeah, I mean, that is the ultimate dream, right? It is. But then let's say 10 years pass. Okay. Your yard is now a toxic crater. Your plumbing doesn't work. Your local grocery store went bankrupt and you are somehow deeper in debt than the day you found the treasure. Which sounds like a cursed fairy tale, honestly, but it is the exact brutal reality for dozens of nations around the world. It really is. We inherently want to believe that geology equals destiny. That if the wealth is under the ground, it will naturally, you know, just flow above the ground. Right, which brings us to the massive stack of sources you sent over to unpack today. I did some quite a bit. Yeah, a lot. Ranging from international energy agency data to World Bank analysis, OECD handbooks, and IMF research on macroeconomic traps. And the mission for this deep dive is to figure out why this keeps happening. Exactly. So to really get into the mechanics of this, I want you, the listener, to picture two towns into completely fictional countries. Right. Let's set the stage. Under each town sits a newly discovered highly valuable copper deposit. We are going to track exactly why these two towns end up with wildly different but equally disastrous fates. Okay, let's look at town one first. Go for it. So the headline breaks, the deposit is confirmed, but the mine never actually opens. Never. Never. The copper stays trapped in the bedrock forever. There is no reliable electricity grid to power the crushers. There is no affordable, viable railway to move the ore to a deep water port. So they're just stuck completely. And the mining company is trapped in this Kafka-esque nightmare, facing total uncertainty about when or even if their operational approvals will be decided by the government. It's a complete paralysis of development. Yeah, exactly. Which brings me to my favorite part of the desk today. I have my imaginary notebook sitting right here. Oh, I know that notebook well. It's titled, and then what? Because in town one, every time someone proposes a solution, nobody answers that question. Right. And unfortunately, the heavy export route for town one runs right through my imaginary folder, which is titled, unfortunately, Ruth has a point. I am glad we have that established early on. I'm Ruth, by the way. And I'm Luke, and welcome to the open question. So you've got town one stuck in paralysis, but then you contrast that with town two. Right. Town two is where things actually happen. The mine opens successfully. The massive dump trucks are rolling out every single day. And the export revenues probably look staggering on paper. Oh, totally staggering. The national GDP shoots up like a rocket. So on the surface, it looks like a triumph of international investment. It does. Yeah. Until you zoom in. Because the local school in town two still loses power three times a week. Oh wow. Yeah, the municipal water system is entirely unreliable. The everyday citizens are breathing in the dust kicked up by those mining trucks and wondering, you know, where the billions of dollars actually went. So we have the exact same initial promise resulting into entirely different systemic failures. Right. One country struggles to turn a natural resource into actual revenue. That's town one. And the other town two struggles to turn that revenue into a better life for its citizens. Exactly. So having valuable resources underground absolutely does not guarantee prosperity above ground. And before we just default to blaming corrupt politicians or greedy multinational corporations, which is such an easy, lazy way out of this conversation. It really is. Before we do that, we have to establish what a headline deposit value actually means in reality. Yes. Because there's this massive gap between the geological map and the reality of a functioning economy. When a news outlet reports that a country is discovered, let's say $100 billion worth of copper, everyone instantly assumes there is a massive vault of cash sitting there. Right. Just waiting to be allocated to new hospitals and highways, multiplying the estimated tons of metal in the ground by today's commodity price is a terrible, just mathematically illiterate way to estimate what a government can actually spend on schools. It really is. If you dig into the minerals analysis we have from the international energy agency, the IEA, they lay out the absolute gauntlet a project has to run. It's intense. That deposits estimated value is purely theoretical at first. To realize even a fraction of it, you first have to establish what is technically recoverable. Because it's not just sitting there in shiny blocks, right? Exactly. Copper is dispersed in rock. Sometimes the grade of the ore is so low that you literally have to move three tons of earth to get a handful of copper. Which means you are burning through millions of dollars in diesel and explosives just to separate the dirt from the metal. Right. And if the cost of that extraction process is- higher than the selling price of the copper, that $100 billion deposit is economically worthless. Just very expensive rock at that point. Just rock. And beyond the grade of the OR, the IEA points to sheer geographical distance. Like, is the deposit in a mild climate near an existing highway? Or is it isolated in some frozen tundra or a high altitude mountain range? Exactly. Because if it is, you have to invent and deploy specialized extraction technology. You have to secure billions in international financing before a single shovel even hits the dirt. And then you have to operate this massive industrial site safely for decades. Plus, you carry the heavy legal and financial obligation to close the site responsibly at the end of its life. Right, restoring a landscape. All while the global selling price of copper is just bouncing around based on completely unpredictable geopolitical events. Right, so a mine might look incredibly profitable when copper is trading high. But if the market crashes three years into your 10-year construction phase, your financial modeling completely disintegrates. Right. Which means financial viability is only half the equation. Even if the mining company can make the math work for their shareholders, we still have to determine if the project creates a net benefit for the host society. Because the financial interests of a corporate board in Toronto or London do not automatically account for the local impacts. They really don't. And this tension brings us directly to the permit office. Ah, yes. If a project clears the economic hurdles, it hits the bureaucracy. Which brings up the strongest arguments for and against the administrative state. I want to firmly defend the existence of that permit office. I knew you would. Well, I mean, it is incredibly popular to bash bureaucracy and dismiss environmental reviews as mere red tape. But a massive open pit mine is not a software startup. You cannot adopt a move fast and break things philosophy when you are dealing with millions of tons of displaced earth, cyanide leaching processes and highly toxic tailings ponds. Right. Because the stakes are just too high. A single tailings dam collapse can wipe out an entire ecosystem. It affects water, land and communities. Exactly. When a corporation digs a mine, they are fundamentally altering the local water table. They are generating waste that has to be managed for centuries. And the company's financial interests don't automatically internalize those costs. They don't. That is precisely why the OECD published their handbook on environmental due diligence in mineral supply chains. The core premise is that permits establish clear public responsibilities before the money is even spent. Creating credible rules. Right. And those credible rules are what responsible investors actually want. Institutional capital needs predictability. They need to know exactly what environmental and social obligations are attached to the project. Okay. I will grant you the theoretical idea of a competent permit office. Thank you. But let's look at the catastrophic weakness of the system as it actually functions in reality. Let's look at town one where the copper stays trapped on the ground forever. Okay, laid out. Imagine you are a mining operator trying to do things by the book. You submit your plans to the Ministry of Environment, the Ministry of Mining, and the local regional water authority. A standard jurisdictional overlap? Sure, but they don't talk to each other. The Ministry of Environment demands that you design your tailings facility as a dry stack to conserve water. Makes sense from an environmental perspective. Right, but then the Ministry of Mining rejects that design demanding wet tailings to prevent toxic dust from blowing into the neighboring town. Oh, wow. Okay. And then the regional water authority demands zero discharge into the local river, which makes the wet tailings impossible to manage. So they are issuing mutually exclusive regulatory demands? Exactly. And they refuse to sit in the same room to hash out a compromise. So you have three different departments demanding overlapping studies, issuing conflicting instructions, and never agreeing on a final decision. Just freezing the project completely. Right. And having accountability for a single file on a desk does not equal accountability for a defensible decision. This paralysis is catastrophic. It really is. And from a purely analytical standpoint, a clear, definitive no from a government is actually much more economically useful to a country and to investors than an indefinite endless maybe. I think a lot of people listening might find that counterintuitive. And no means the country gets zero copper and zero revenue. How is that better? Because certainty has immense economic value. If a government looks at a proposal and says, no, the risk to the aquifers too high, the investor can write off their early costs and redirect their capital to a different project. The capital is freed up to do useful work elsewhere. Exactly. The host nation preserves its environment, ends the speculation, and can focus on developing other industries. But an indefinite maybe traps that capital. Right. It freezes the development of the region. And most importantly, it fundamentally alters the underlying mathematics of the project. Which brings in our first specialist. perspective from the sources today. We have this fictional resource economics agent named Daniel to help us crystallize these concepts. Right. I'm just going to read his message here. Daniel asks, quote, what does another year of uncertainty do to the investment? So the answer, Daniel, we first have to draw a very strict line between the natural timeline of building a mine and actual administrative delay. They are not the same thing. No, they're not. According to the IEA data, the natural discovery to production pipeline includes initial geological exploration, feasibility studies, arranging financing, waiting for market prices. Right. All of that can easily take a decade or more. That is just the physical reality of building heavy infrastructure. We can't treat those unavoidable physical timelines as bureaucratic delays. Right. But when we talk about the costs of a voidable administrative delay, that endless maybe you described, that has a brutal cost. Companies burn cash paying highly specialized engineering staff and legal teams. And they still have to serve as the massive debt they took on to get the project to this point. Exactly. They are bleeding money while the revenue date just moves further and further away. Because as you listener need to remember, there is a time value of money. The core rule of finance is that expected future income is worth less today when it arrives later. Yes. But let me push back on that framing just a bit. Okay. An additional year of study that agonizing delay is the exact thing that uncovers a critical geological flaw. Like what? Well, what if the local water authority by dragging their feet discovers that the proposed tailings dam is sitting on an unstable fault line? I see. The financial cost of that two-year delay is a rounding error compared to the catastrophic cost of a dam collapse. We have to compare the value of new critical information against the cost of waiting. Okay. I hear that. For my notebook for Town 1, what does a competent, practical administration actually look like to solve this? Well, what do you think it looks like? To me, it looks like clear submission requirements published in advance. Coordinated concurrent reviews where these different ministries are actually forced to sit at the same table. Right. Published reasons for their decisions. And a clock that tells the truth about both sides. The government must be held accountable for its timelines, but the clock also needs to pause when the applicant is the one delaying by providing incomplete information. That's a very fair system. So let's assume Town 1 actually fixes its bureaucracy. The permits are perfectly cleared. The project is approved. The copper is still trapped. Still. Still? Because you cannot export a regulatory map. All right. The permit allows you to mine, but it doesn't give you a way to physically move the metal. This is the massive challenge of missing infrastructure. It is stunning how often macroeconomic discussions just gloss over this physical reality. You have the permits, you have the workforce, but you have no electrical grid robust enough to run the crushers. And no heavy haul railway to transport the concentrate to the ocean. Which brings up the second scripted question from our fictional economics agent, Daniel. What does he ask this time? He asks, quote, if nobody finances the connection until the mine commits and the mine cannot commit without the connection, who moves first? It is the ultimate high stakes coordination problem. The World Bank actually focuses heavily on this issue, promoting the concept of shared infrastructure and economic corridors. Right. The theory being that you design the railway or the power grid to not just serve the mine, but to help broader regional development. But let me open my, and then what, no book here. Because if you build a railway for a mine, it doesn't automatically help nearby farmers. No, the rail gauge might be completely wrong for standard freight. Exactly. Or should the public automatically pay for infrastructure that essentially only benefits one private company? So they are deadlocked. And typically, the proposed solution is that the public funds the railway to solve the coordination problem. Right. But and then what happens if the mine underperforms? Oh, that's a nightmare scenario. If the global price of copper crashes and the mine shuts down, who repays the massive sovereign debt? Who maintains the road or the railway? The citizens are left holding the bag. Yeah, that is a massive risk. And alongside physical infrastructure, these projects also have to navigate regulatory infrastructure, specifically the highly contentious issue of carbon pricing. Oh, carbon taxes. This is where things get really complicated. They do. Because there is a dual reality to carbon pricing. On one hand, it imposes a hard, unavoidable cost on emissions-intensive projects. Right. But on the other hand, it serves a deeply legitimate purpose, pricing the environmental harm that was previously externalized for free by these companies. Okay. Let's ground this in town one. Imagine this remote project has to run on massive diesel generators because no clean grid exists. Okay. A carbon tax immediately in severe- really hurts their baseline profitability if cleaner tech isn't immediately available. Because heavy-duty electric mining haul trucks aren't just sitting on a lot waiting to be bought. They are largely still prototypes. Exactly. So the friction here is intense. But I know you're going to say that green isn't an exemption from basic arithmetic. I am because we must compare the costs of clean investments with their actual benefits. This is where our fictional governance agent Maya Chimeson. What does Maya say? Her message is, quote, could the country pair a credible emissions policy with the infrastructure that makes lower emission production possible? That's the ideal scenario. But you, the listener, need to know what the evidence actually says about competitiveness. Right. So we rely on the 2019 OECD review on carbon pricing. And their findings generally did not show significant negative competitiveness effects from the systems they studied. But we have to carefully preserve the qualifications around that OECD research. Those systems they studied had relatively low prices and broad exemptions for trade-dependent industries. Yes. Strict rule here. We are making no unverified claims about current Canadian taxes or new highly stringent regimes. Right. And if a government just slaps a high tax on a diesel-dependent mine without providing a clean grid, we hit my biggest concern, carbon leakage. Unleakage is a fascinating concept. And the OECD addressed this in their 2022 data. Let's say town one imposes a massive carbon tax. And the diesel-powered mine becomes unprofitable and shuts down. The local emissions dropped to zero. But the global demand for copper didn't disappear. No. So a mining facility in a different country, one with zero environmental safeguards in a grid powered by coal, spins up to fill the gap. Taxing a domestic project might just push production to a vastly more polluting producer abroad. That is carbon leakage. But drawing on the 2022 OECD data, it must be measured, not just assumed. Not every domestic reduction is perfectly offset abroad. Fair point. OK, so we've navigated the geology, the bureaucracy, the infrastructure, and the carbon taxes. Let's assume the government gets it all right. The mine is built. So we are now officially looking at town two. Yes. The infrastructure is working. The policies are set. And the money finally starts flowing. The money arrives. Now what? Now we trace the revenue. The company sells the copper. Those sales have to pay operating costs, suppliers, and financing. Right. And then investors take their returns and governments collect royalties and taxes. But this is where we hit the resource curse. Yes, based on research from the IMF and at Sujeeimi. A lot of people assume a foreign investor making a profit is inherently exploitative. But based on what we just discussed, they supplied the capital and took massive risks. They did. However, the presence of investment doesn't prove the bargain was fair. The host country might have signed away the rights for a shockingly low royalty rate because they had weak contracts or lacked the legal expertise to negotiate. Right. Which forces us to ask, where the public receipts actually go? Do they go into effective public services? Or do they go toward private enrichment for the political elite? This is exactly where your annoying bureaucracy is vital. Yes. Competent administration protects public wealth. You need transparent procurement, rigorous audits, and enforceable contracts. The goal isn't fewer forms. It's fewer pointless steps and vastly stronger accountability. Exactly. But even with perfect administration, a massive influx of commodity wealth can inadvertently damage the rest of a country's economy. Yes. Which brings us to the phenomenon of Dutch disease. Let's explain Dutch disease for the listener using the IMF research. How does this actually happen? Okay. So a resource boom brings in a massive flood of foreign currency. The buyers are paying for the copper in US dollars or euros. To pay local workers, the mine exchanges those dollars for local currency, which artificially strengthens the real exchange rate of that domestic currency. Meaning the local money becomes much more valuable. Exactly. Imagine a local coffee farmer in town too. Their currency just spiked. Suddenly their coffee is incredibly expensive on the global market and they become totally uncompetitive and go bankrupt. Plus, the mine is hoovering up all the local labor because they can afford to pay massive wages. Right. The coffee farm can't compete with minuages. So adjustments create severe winners and losers. Higher minuages aren't bad, but they have massive macroeconomic side effects. And it creates dangerous commodity dependence. If the copper price crashes, the whole country goes into free fall. This is why managing volatile commodity dependence is so critical. People always point to Norway's petroleum fund as the golden standard. Oh, they save their oil proceeds in a sovereign wealth fund to manage fluctuations. Right, to preserve the wealth. But I'm going to push back against blindly copying Norway. We have to use them strictly as a limited institutional example. Why is that? Because Norway was already a highly developed, wealthy nation when they found oil. A developing country with urgent, present day infrastructure needs, like town two with its failing water system, shouldn't save every available dollar abroad in European stock markets. I agree completely. Present needs and future security both count. You can't tell a citizen without clean drinking water that you're saving the money for their grandchildren. Exactly. And while the capital city manages this macroeconomic policy, the actual physical disruption happens locally. Who actually gets to say? This is where Maya, our governance agent, sends her second message. She asks, quote, the capital city receives revenue, a nearby community bears disruption. What makes that arrangement legitimate? It has to come down to consultation and applicable rights. But we can't invent legal requirements for universal consent, or assume everyone in a community agrees. No, communities are divided. Right. Some want the high-paying jobs, the mind brings, others fear the environmental damage to their ancestral lands. Right, both sides are valid. Unresolved interests must be addressed early, with credible information, not when the project is already built and considered too advanced to change. Absolutely. So as we look at all of this, I think it's time for us to make some mutual concessions. I think you're right. I will go first. Okay. I can see that while I focused heavily on the wealth lost when countries failed to build, faster approval alone can simply accelerate a bad deal. I am taking that and placing it firmly in the, unfortunately, Ruth has a point, folder. A project is not a national success merely because somebody profits. Private profit does not prove public benefit. That is a crucial point. And for my concession, I can see that delay is not neutral. It can completely destroy economic opportunities and postpone wages and revenues that communities desperately need. Right. Defending environmental safeguards does not ever excuse an administration that cannot reach a definitive, competent decision. Okay. With those concessions made, how do we build a better test than simply shouting, build it or ban it at each other? We need a checklist for any government wanting to turn resource potential into lasting prosperity. Let's review it. First, is the project technically and commercially credible? Second, what physical infrastructure is needed and who actually pays for it? Third, are the environmental and community effects transparently addressed? Fourth, do the taxes and carbon policies work together sensibly without causing carbon leakage? Fifth, can the country actually verify the exports and collect the money transparently? And finally, sixth, what survives after the resource is gone? Are you building skills and businesses that outlast the mine? That is the ultimate test. So returning to our fictional towns. In town one, the deposit remains underground. We must find out if it's a poor project, missing infrastructure or a catastrophic government failure. And in town two, the exports continue. But we must ask who actually receives the substantial national benefits because owning a resource is only the beginning. Which leaves us with our final open questions for you, the listener. If the wealth is under your country's soil, which should its people be entitled to? And what would you need to see before believing a project will actually deliver it? I'm Ruth. I'm Luke. This has been The Open Question. ---