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Local communities can reap better benefits from mining if market and fiscal channels are strong

July 2017

Chuhan-Pole, P., Dabalen, A.L. Local communities can reap better benefits from mining if market and fiscal channels are strong. GREAT Insights Magazine, Volume 6, Issue 3. July/August 2017.

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Transforming resource wealth into well-being remains an important issue in Africa’s resource-abundant economies. Most benefits from extractives in Africa are likely to flow through national treasuries. But do local communities situated close to extraction sites gain any additional benefits? Evidence from the boom in large-scale gold mining in three countries in Africa suggests that mining communities experience on average positive, but limited welfare gains in the near term. The benefits that come from opening a mine (or mines) are mostly transmitted through the normal functioning of markets, primarily through labour and land.

The upswing in commodity prices that began in 2000 fuelled Africa’s boom in extractive commodities (oil, gas, metals, and minerals), lifting economic activity in the region’s resource-abundant countries. The resource boom, however, was less successful in benefitting the millions of people living in poverty in these countries. Furthermore, the low price environment that has characterised the end of the commodity price super-cycle is putting significant pressures on the budgets of commodity exporters. Nevertheless, the contribution of the extractive sector to exports and fiscal revenues in commodity-rich countries is expected to remain large.

Thus, the issue of how to transform resource wealth into economic development and higher well-being continues to be compelling in the region. Although most benefits from extractives in Africa are likely to be felt through revenues to the central government, there is growing interest in understanding the impact of the resource boom on communities living close to mining centres—namely, whether welfare improves with proximity to a mine.


The benefits (or costs) of large-scale extractive activities flow to local communities through market and fiscal mechanisms and the environment


Extractive activity can affect local communities through at least three broad channels: market, fiscal, and environmental.

The market channel works when the incomes of members of the local communities rise because they obtain employment with local mining firms, command higher wages, or supply them with goods and services through backward linkages with other sectors. In addition to these direct benefits, local communities can also benefit indirectly from the presence of extractives through infusion of dynamisms into previously low-activity local factor markets, such as land and credit markets.

Resource activity can translate into a revenue windfall that eases the hard budget constraints of local governments. These additional resources can be welfare improving if they are used to provide more and/or better quality of much-needed public goods, such as transportation, modern power, water and sanitation, education and health. These positive effects are by no means guaranteed, and depend on well-functioning local institutions.

Extractive activities generate well-known negative externalities. Foremost amongst these is environmental degradation and pollution, which can adversely impact the health of local populations, the livelihoods of workers, and agricultural production.


The local effects of mining show gains in nonfarm activity, but mixed outcomes for child health


A robust analytical approach (one going beyond descriptive statistics) is needed to evaluate the benefits—in terms of occupations, asset accumulation, access to infrastructure, child health, etc.—flowing to mining communities.

One such approach is to consider mining as a quasi-experimental event, where the areas in the vicinity of a mine (described as a distance cut-off, district, municipality, region)—that is, the “treatment” areas—can be viewed as benefitting from the opening of the mine and areas further away—that is, the “control” areas—as not benefitting. A difference-in-differences analysis is then applied to compare welfare outcomes in “treatment” and “control” areas. The first difference is the change in outcomes in treatment areas—comparing the benefits before and after a mine starts production—while the second difference is the change in outcomes in control areas. By obtaining the difference of the differences, the size of the benefit is quantified.

The analysis of large-scale gold mining in three African countries finds that mining activity has impacts on individuals living close to a mine or in a mining district. The size of these impacts varies across socioeconomic outcomes.

A notable result is that there are incipient signs of structural transformation—that is, a shift toward wage and nonfarm activity—associated with mining activity, especially for countries where gold mining is more established. Employment in nonfarm occupations such as services, mining and manufacturing rises, while that in agriculture declines.

The expansion into nonfarm employment opportunities is particularly striking for women. In some countries, estimates of the increase in the probability of women living close to a mine and working in sales and services range from 17 percentage points to as much as 30 percentage points; and estimates of the decline in agricultural participation range from 10 to 20 percentage points. Proximity to a mine also raises the likelihood of working throughout the year for women. Where wage data are available, there is evidence that total household wages increase in mining communities, with larger gains in women’s wages.

Amongst other dimensions of welfare, households living close to a mine also enjoy a higher likelihood of owning or having access to assets such as improved flooring, radios, and cars. Results of improved access to adequate infrastructure are weak, however, in some instances due to migration into mining communities. One area of improvement is the higher likelihood of a private toilet facility for households close to a mine.

An important element of welfare is child health. Mining activity can affect children’s health in different ways. On the one hand, improvement in household income can translate into better nutrition and health care. On the other, environmental degradation can adversely affect health status, including diarrhea, cough, and cognitive development. Overall, the local effects of mining on child health are mixed and far from uniform across countries. For example, infant mortality and the prevalence of cough decline in some countries, but not all; a decline in stunting and diarrheal disease is not observed across all countries; and the incidence of underweight increases in some mining communities. The empirical analysis finds that improvements in access to health care yield better child outcomes.


Policies and interventions to achieve better outcomes for local communities


Overall, the evidence points to positive but modest welfare benefits for mining communities in the near term. The benefits mostly emanate through the market channel, as the size of fiscal inter-governmental transfers to local communities has been limited. Market and fiscal channels will need to be strengthened if local communities are to capture greater benefits.

Local content laws are seen as a mechanism to enhance market effects by deepening backward linkages. Although these measures are becoming widespread, they have yielded mixed results to date. To improve benefits to local communities through these local content programmes, governments may be well advised to focus on improving business conditions, such as greater access to affordable and reliable power, better transportation services, access to finance, and regulatory reforms, so as to facilitate linkages between mines and the local economy.

There is considerable potential to improve local welfare through larger intergovernmental transfers that can provide resources to local governments to invest in basic infrastructure and in human capital development. This in turn can help to lift worker productivity, improving the prospects for deepening market linkages of the mining activity. Of course, the quality of governance at the local level—that is, the capacity of bureaucrats and policy makers to deliver public spending programs—will be critical to unleashing these benefits.

Through corporate social responsibility (CSR), mining firms have directly invested in community development: for example, building schools and health clinics. The mixed results of CSR are shifting attention toward supporting more sustainable projects that can help diversify the local economy of mining communities and improve the long-term prospects of these communities.

Strengthening the market and fiscal channels so communities can benefit from a boom in extractive activities will not be enough. As noted earlier, mining can cause severe, long-term environmental damage, which can be injurious to health and livelihoods. The negative externalities of mining need to be understood, minimised and carefully managed so that local communities are not left to fend for themselves, especially once the mining boom is over and mines have closed.

This article is based on Chuhan-Pole, Punam, Andrew L. Dabalen, and Bryan Christopher Land, 2017, “Mining in Africa: Are Local Communities Better Off?” African Development Forum series, Washington DC: World Bank.


About the authors

  

Dr. Punam Chuhan-Pole (left) is Lead Economist in the World Bank’s Office of the Chief Economist of the Africa Region and Andrew Dabalen (right) is Practice Manager in the World Bank’s Poverty and Equity Global Practice.


Photo: Community health worker documenting the weight and growth of children at the Marechal Health Centre, Kinshasa, DRC. Credits: World Bank Congo EDIT002 via Flickr.


This article was published in GREAT Insights Volume 6, Issue 3 (July/August 2017).

Economic Transformation and TradeExtractive SectorsMining

External authors

Dr. Punam Chuhan-Pole

Andrew L. Dabalen