Column: Mind the jinx in mining

Written by Michael Walton | Michael Walton | Updated: Nov 14 2009, 02:21am hrs
Mining is a dangerous fruit. It is often extraordinarily abundant but can also have the capacity to damage, distort and corrupt. In Jharkhand, ex-chief minister Koda has been accused of extracting large sums from the allocation of mining leases.

Mining wealth can shape politics. In Karnataka, the Reddy brothers have used their mineral wealth to help win elections in Bellary district, and then to challenge chief minister Yeddyurappa. The CM is still in power, but most observers see the brothers as succeeding in consolidating control over their fiefdom.

So, is there something intrinsic to mining that makes it dangerous And can anything be done to harvest the fruit in a way more conducive to equitable development and the deepening of democracy At first glance, international experience suggests this is tough. Mining attracts controversy throughout the world for its links to social displacement, environmental damage and corruption.

There are two features of the economics of mining that make it particularly prone to distorting effects. First, mining usually has collateral effects that are not reflected in the core economics of the production and market process. People are displaced, water may be polluted, forests cut down, mining workers families moved to locations with poor schooling and so on. Rich Lands, Poor People, by the Centre for Science and the Environment provides a survey of the woeful effects. Since these are externalities in economics jargon, there are no incentives for the firm to act on them, and government intervention is called for to ensure decisions are aligned with overall development goals. This is basic welfare economics, not a pro-regulatory position.

Second, mining involves natural resource rents: prices are determined by the market, costs by the production process. Competition does not automatically bid profits down, and sometimes there are vast returns to be earned and shared. This is doubly true in periods of commodity booms, recently fuelled by the seemingly insatiable Chinese demand for minerals.

So heres the crux. Even if regulations are sound, mining firms and government actors have big incentives to collude and share the gains, at the cost of workers, affected households and the environment. Collusion is easier when institutions are weak: when regulatory, governmental and judicial processes are vulnerable to influence and corruption. This is especially problematic for India because of geography: some of the richest mining resources lie in areas of forests, relatively marginalised adivasi populations and weak governments. Some are also domains of Naxalite activity, which both feeds off and magnifies the failings of the state.

The wrong, distorting kind of mining prospers in weak institutional environments. Where mining, in turn, spurs corruption or distorts political finance, this can lead to further institutional debilitation, precisely when the Indian state needs to be strengthened.

So what can be done Protest groups seek to stop mining altogether. But stopping mining is neither realistic nor desirableat least if it can be embedded in processes that incorporate the full effects, with equitable sharing of benefits. Indeed, part of the problem lies in the polarisation of debate.

The government is expected to update the regulatory framework for mining in the forthcoming Parliamentary session. All observers agree the existing regulations are outdated. The question is whether new regulations will be shaped primarily around streamlining decisions, or are also used to develop processes that ensure mining firms compete, and concessions are awarded, based on full social and environmental effects. Some of this relates to specific designs: to promote open competition in concession allocation, and develop alternative mechanisms for consultation and sharingequity stakes for affected families is just one example. But the incentives will always be to subvert regulations. In the end the issue is a fundamental one of deepening democratic process, in the broadest sense of the word. Accountability structures work best when there is complementarity between internal government mechanisms and structured societal processes, representing the interests of mining workers, affected families and environmental concerns, underpinned by much greater transparency and public debate.

This may sound utopian. But the fact that an ex-chief minister can be under investigation is a good sign. And some international experiences are positive.

Australia and Chile managed, over the long term, to use the fruits of mining to support long-run economic and human development. Peru, mineral-rich but institution-poor, now has structured sharing of part of the rents with local governments and communities. There is still controversy, but the level of public scrutiny is transformed from an earlier generation of mining. The fact that India is a consolidated democracy at a low income level should provide an opportunity to leapfrog: what is needed is serious debate, not on whether mining is good or bad, but on how to put in place the processes that align mining with the inclusive, sustainable development that the government has a mandate to seek.

The author is at the Harvard Kennedy School, the Institute of Economic & Social Change, and the Centre for Policy Research