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Resource curse: How being located near mines hurts manufacturers

Geoff Riley

30th August 2016

Producers of tradable goods close to areas of mining activity have lower sales because of infrastructure bottlenecks and competition for workers, but the revenue that mines generate improves the local environment for businesses. These are among the conclusions of research by Ralph De Haas and Steven Poelhekke, presented at the annual congress of the European Economic Association in Geneva in August 2016.

Their study combines European Bank for Reconstruction and Development (EBRD) and World Bank business data from 22,150 firms in eight countries with large manufacturing and mining sectors (Brazil, Chile, China, Kazakhstan, Mexico, Mongolia, Russia and Ukraine) with a geographical database of 3,793 mines producing 31 different metals and minerals.

The data show that many firms complain of competition with the mines for access to inputs, labour and infrastructure. They also experience congestion and infrastructure bottlenecks. Proximity to mining stunts their growth: moving a producer of tradable goods from a region without mines to a region with average mining intensity would reduce sales by 10% on average. Local firms that supply mines or use their outputs benefit, but they tend to be small enterprises.

The overall impact is negative, consistent with the theory of 'Dutch disease', in which resource booms drive up costs for firms in the traded (manufacturing) sector. On the other hand, mining revenue spent on goods, services and public goods in the region improves the business environment in a distance band of between 20km and 150km around firms.

The authors conclude: 'To minimise negative spillovers from mining, policy-makers could think about ways to let local producers share extraction-related infrastructure. Policy-makers can also help firms to become 'fit to supply' local mining-related supply chains.'

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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