Maximising the Positive Socio-Economic Impact of Mineral Extraction on Regional Development in Transition Economies: A Review of the Literature Abstract

The capital-intensive production function of mining tends to limit backward, forward and final demand linkages. Moreover, the impact of the capital intensity constraint on backward linkage is reinforced by the existence of localization economies for input supplies. These constraints on linkage are stronger the remoter the mine location, the earlier the stage in the mining cycle and the lower the PCGDP of the host economy. Consequently, fiscal linkage often furnishes the strongest economic contribution from mining. Fiscal linkage is likely to increase over time if capital cost recovery is frontloaded. However, weak national governments may forfeit fiscal linkage to mining firms, workers and consumers, while weak regional governments may concede fiscal linkage to the centre. Therefore, local and regional communities may bear severe social and environmental costs with little compensation. However, mining companies increasingly regard improved regional welfare as a pre-requisite for viable investment. But they risk moral hazard if they extend their remit beyond their commercial mandate so improved governance is fundamental to securely boosting regional welfare. Governments must determine whether a mine should function as a transient vehicle for the acquisition of spatially transferable skills or as a catalyst for a sustainable regional economy. But policy intervention to force linkage growth (through mandatory joint ventures and local content ratios) is a second best solution because of the risk of policy capture, which is likely in the presence of deficient governance. A more effective policy to boost mining’s regional linkage may come from attracting competitive investment into Early Reform Zones that are ring-fenced against predation and in which world class infrastructure, institutions and efficiency incentives immediately