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Economics

Study Notes

Resource Nationalism and Development

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Resource nationalism has become a common feature of state policy in many developing countries in recent years.

The Rise of Resource Nationalism

“Resource nationalism has become a contagion impacting the mining & metals industry across the globe. The industry needs to become more engaged in the analysis and management of this risk which can place a heavy burden on existing operations and influence future decisions on where to invest.”

Andy Miller, Global Tax Leader — Mining & Metals, Ernst & Young

Examples of Resource Nationalism in Action

South Africa (Coal and Platinum)

  • •50% windfall tax on super profits
  • •50% capital-gains tax on sale of prospecting rights

Ghana (Diamond and Gold)

  • •35% company tax
  • •10% windfall tax on super-profits
  • •5% royalties on output

Australia (Iron Ore, Nickel, Coal)

  • •Government plan to implement a Mineral Resource Rent Tax
  • •(MRRT) on iron ore and coal. Set to raise $8bn a year.

Peru – Copper

  • •Use it or Lose it’ - With a fall in commodity prices companies tend to have lower capital expenditure which can lead to a revoking of their license

Since the financial crisis of 2008 many countries have struggled to maintain manageable budget deficits as their economies contract. With revenue down from reduced economic activity and increasing expenditure on items such as social welfare, governments around the world are either tightening their belts or finding new sources of revenue. In a number of producer nations, concerns over ‘Dutch disease’ or two-speed economies have led to plans to tax resource extraction more heavily, and provide tax relief or subsidies to other sectors.

The Dutch Disease refers to the fact that once countries start to export oil or other natural resources their exchange rate appreciates making other exports uncompetitive and imports cheaper. At the same time there is gravitation towards the natural resource industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports.

Those that have natural endowments such as minerals and other commodities have been continually assessing how they can acquire more revenue from these resources. This could be done by various means – taxes, royalties or full-scale state-ownership – however they need to be vigilant in that significant charges to overseas companies might inhibit foreign direct investment (FDI) which is crucial to many countries that have plentiful natural resources.

Furthermore the initial capital investment in mining, etc., is usually substantial and governments have to be careful not to implement drastic revenue-making means that curtail further investment. This is especially common when you consider the volatility of commodity prices and the cyclical nature of the mining sector.

In 2011 accountants Ernst & Young identified at least 25 countries that increased or intended to increase government revenue by taxing those companies involved in the commodity industry. On average at recent commodity prices these increases have raised the average effective tax rate by approximately 5%. According to their research, nationalism places a large cost burden on mining and metals companies and can influence the decision of where to invest in a particular country.

Today Governments are searching for new ways to extract more out of foreign-owned firms that are doing very well financially from what lies beneath the soil. Those countries that are prepared to implement higher rents and taxes on overseas mine companies run the risk of the loss or the reduction in some long-term investments. Although existing mines are not mobile the level of extraction, reinvestment, and expansions are and the temptation to divert resources to another country are highly plausible when you consider the mobility of capital resources.

A lot of this depends on high commodity prices which encourage the exploration of potential sources of commodities. However, with lower prices and increasing government fiscal demands

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