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Poverty Reduction and FDI; can small-scale victories improve the big picture?

Extractive FDI is often considered a vessel through which to generate wealth. However, as we dig deeper, what picture emerges? Does the creation of this wealth necessarily lead to the reduction of poverty?

In fact, it is commonly held that mining does not contribute to poverty reduction. Jeffery Sachs helped popularize this opinion in 1995 when he demonstrated a negative correlation between resource export and economic growth [1]. This position is explained by the facts that mining in developing countries is often a capital-intensive enclave industry, foreign-owned, operated largely by expatriates, and uses inputs purchased abroad [2].

However, advocates of the mining sector, including the World Bank, maintain that, under proper institutional conditions, mining can help alleviate poverty and promote growth [3]. Supporters describe that mining improves the economic conditions of local populations through the provision of taxes, the creation of employment, and the generation of economic linkages [4] [5].

The real story falls somewhere in between. It is perfectly true that extractive operations can help improve the livelihood of populations that reside within the locality of mines. This has been evidenced through several case studies, including one of the Yanacocha mine in Northern Peru [6]. Mines employ locals, provide vocational training, and can help increase real wages. However, the national impacts are much more diluted.

Botswana, the poster child for mineral-led development in Africa, is an interesting example. Despite its thriving diamond industry and its classification as a “Middle Income Country,” over one third of its population lives below the poverty line and approximately 20% of its population is unemployed [7]. The economic growth fostered by its resource industry has not translated into poverty reductions [8]. This is partly explained by the mismatch between the extractive sector’s shares of employment and its contributions to GDP [9]. Though mining contributes 39% of the country’s GDP, the industry has never employed more than 7% of the country’s workforce [10]. Furthermore, the contribution of the extractive sector to Botswana’s GDP is comprised primarily of exports, the income of which is very small for the poorest members of society [11]. Thus, despite the extractive sector’s contribution to overall economic growth, the direct impact on poor people is quite weak.

Thus, FDI’s effect on the economies of host countries remains ambiguous; while there are positive effects on the micro-level, it is less clear whether there are any effects on the macro-level. Turning this back to our readers, do you think that the relationship can be improved? Do you believe there is a greater responsibility for mines to contribute to national poverty reduction? If so, why?

[1] Sachs, Jeffery. “Natural Resource Abundance and Economic Growth.” NBER Working Paper Series 5398 (1995). Print. P 1.

[2] Pedro, Antonio M.A. Mainstreaming Mineral Wealth in Growth and Poverty Reduction Strategies. Rep. Economic Commission for Africa, 2004. Print. P 26.

[3] Weber-Fahr M, Strongman J, Kunanayagam R, McMahon G, Shelton C. Mining and poverty reduction. Washington, DC: The World Bank; 2001. P 10.

[4] Weber-Fahr, Strongman, Kunanayagam, Shelton, Mining and Reduction, P 3.

[5] Weber-Fahr, Strongman, Kunanayagam, Shelton, Mining and Reduction, P 9.

[6] Aragon, Fernando M., and Juan Pablo Rud. “Natural Resources and Local Communities; Evidence from a Peruvian Gold Mine.” (2001). Print. P 3.

[7] African Development Bank. Botswana 2009-2013 Strategy Paper. Rep. South Region A. 2009. Print. P 35.

[8] African Development Bank, Botswana, P 10.

[9] African Development Bank. Namibia 2009-2013 Strategy Paper. Rep. South Region A. 2009. Print. P 6.

[10] African Development Bank, Botswana, P 10.

[11] Ross M.L. Extractive Sectors and the Poor. Washington, DC: Oxfam America; 2001. P 12.

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