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Mining Matters: Natural Resource Extraction and Firm-Level Constraints

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Mining Matters: Natural Resource Extraction and Firm-Level Constraints Journal of International Economics 117 (2019) 109–124 Contents lists available at ScienceDirect Journal of International Economics journal homepage: www.elsevier.com/locate/jie Mining matters: Natural resource extraction and firm-level constraints Ralph De Haas a,⁎,1, Steven Poelhekke b,2 a European Bank for Reconstruction and Development (EBRD), One Exchange Square, London EC2A 2JN, United Kingdom. b Vrije Universiteit Amsterdam and De Nederlandsche Bank, Vrije Universiteit Amsterdam, Faculty of Economics and Business Administration, De Boelelaan 1105, 1081, HV, Amsterdam, The Netherlands article info abstract Article history: We estimate the impact of local mining activity on the business constraints experienced by 25,777 firms across Received 4 July 2017 nine large and resource-rich countries. We find that the presence of active mines in firms' immediate vicinity Received in revised form 15 January 2019 (b20 km) deteriorates the business environment in tradeable sectors. Access to inputs and infrastructure Accepted 16 January 2019 becomes more constrained for these firms and this adversely affects their growth. In contrast, nearby active Available online 19 January 2019 mines have a positive effect on firms in non-tradeable sectors. Moreover, we show that the presence of mines – fi Research data related to this submission: at a greater distance (21 150 km) relaxes business constraints of all rms, in line with positive regional spending https://data.mendeley.com/datasets/ effects. x4btx35vjf/draft?a=40c3a396-9610-4a79- © 2019 Elsevier B.V. All rights reserved. b44b-98a95c4fe3b5 JEL codes: L16 L25 L72 O12 O13 Q30 Keywords: Mining Natural resources Business environment Firm-level constraints 1. Introduction The mining boom has also reinvigorated the debate about the impact of mining on economic activity and welfare. Some regard mines simply The last two decades have witnessed an extraordinary expansion in as stand-alone enclaves without a notable local impact (Hirschman, global mining activity. A surge in commodity demand from industrializ- 1958). Others point to the potentially negative consequences of natural ing countries pushed up the price of metals and minerals. This in turn resource dependence such as real exchange rate appreciation, economic led to substantial new mining investment, an increasing share of volatility, deindustrialization and corruption (see van der Ploeg (2011) which is concentrated in emerging markets (Humphreys, 2010). This for a comprehensive survey). Mines can also pollute and threaten the geographical shift reflects that many American and European mineral livelihoods of local food producers. They often require vast amounts of deposits have by now been depleted and that the long-distance trans- water, electricity, labor and infrastructure, for which they may compete port of minerals by sea has become less costly. As a result, the world's with local manufacturers. Yet others stress the potential for positive largest mines can nowadays be found in Africa, Asia and Latin America. spillovers to firms and households as mining operators may buy local inputs and hire local employees.3 Local wealth can also increase if gov- ernments use taxable mining profits to invest in regional infrastructure or to make transfers to the local population. ⁎ Corresponding author. Our paper informs this debate by estimating the impact of active E-mail addresses: [email protected] (R. De Haas), [email protected] mines on firms across nine countries with large mining sectors: Brazil, (S. Poelhekke). 1 Also affiliated with CEPR and Tilburg University. 2 Present address: University of Auckland, Department of Economics, Owen G. Glenn 3 For example, Wright and Czelusta (2007) argue that “linkages and complementarities Building, 12 Grafton Rd., Auckland 1010, New Zealand. Also affiliated with CESifo, Munich. to the resource sector were vital in the broader story of American economic success”. https://doi.org/10.1016/j.jinteco.2019.01.006 0022-1996/© 2019 Elsevier B.V. All rights reserved. 110 R. De Haas, S. Poelhekke / Journal of International Economics 117 (2019) 109–124 Chile, China, India, Indonesia, Kazakhstan, Mexico, Russia and Ukraine. Importantly, mining-induced business constraints have real effects in Our detailed data allow us to get around the endogeneity issues that terms of total employment. Our results indicate that moving a producer plague country-level studies as well as the limitations to external valid- of tradeables from an area without mines to an area with average min- ity of well-identified country-specific papers. Our empirical analysis is ing intensity (2.7 mines) would reduce the number of employees by motivated by the “Dutch disease” model of Corden and Neary (1982) 2.2%. In contrast to firms in tradeable sectors, we find that nearby min- which sets out how a resource boom drives up wage costs for firms ing activity alleviates business constraints for firms in non-tradable in the traded (manufacturing) sector as they compete for labor sectors. with firms in the resource and non-traded sectors. We hypothesize Second, in line with a sub-national “spending effect” we find that mining companies and manufacturing firms also compete for that both tradeable and non-tradeable firms report an improve- other inelastically supplied inputs and public goods—such as transport ment in the provision of public goods if mining activity increases infrastructure and electricity—and that this hurts tradeable-sector in a distance band of between 20 and 150 km around firms. This firms, which are price takers on world markets. indicates that while mines can cause infrastructure bottlenecks We test this hypothesis using three main data sets. First, we use de- in their immediate vicinity and crowd out other firms, they may tailed data on 25,777 firms from the EBRD-World Bank Business Envi- improve transport infrastructure and other aspects of the business ronment and Enterprise Performance Survey (BEEPS) and the World environment on a wider geographical scale. Such improvements Bank Enterprise Survey. These data contain the responses of firm man- may either reflect increased government spending or infrastruc- agers to questions on the severity of various constraints to the operation ture investment by mining companies themselves.5 Two exam- and growth of their business, including access to transport infrastruc- ples, both based on mines in our data set, can illustrate how ture, electricity, land, educated workers and finance. A growing litera- mining can improve regional infrastructure. In Chile, starting up ture uses such survey data to gauge whether access to public goods the Escondida copper mine required large investments in the affects firm performance.4 Firms' perceptions of the importance of ex- local power supply. These investments reduced the cost of ternal constraints on their activity can be used to find out which con- power in the wider Antofagasta region as well. Moreover, new straints affect economic activity the most (Carlin et al., 2010). These roadswereconstructedbetweenthemineandtheAntofagastare- constraint variables measure competition for public goods directly, as gion that were open for public use and hence reduced regional they reflect firms' intended rather than actual use of such goods, and transport constraints (McPhail, 2009). In Indonesia, new roads can therefore be interpreted as the shadow prices of public inputs. We were built when the Minahasa Raya gold mine was commissioned exploit variation across firms in the reported severity of external con- in 1994. These roads improved regional connectivity by better straints to assess how local mining activity, by affecting the quality linking the mining area to Manado, the nearest regional capital. and quantity of public good provision, influences the ability of local The resulting reduction in travel time had a positive effect on firms to grow. the local economy (Mamonto et al., 2012). Second, we use comprehensive firm-level panel data from Orbis. Our baseline results are based on regression specifications that in- While Orbis does not include information on business constraints as clude region-sector-year fixed effects so that we effectively compare— perceived by firms, it does contain data on the balance sheets and profit within one and the same region, sector, and year—firms with and with- and loss accounts of over 100,000 firms for on average five years. This out nearby mines. In robustness tests, we experiment with different allows us to measure the impact of mining by comparing one and the ways to cluster our standard errors, assess the sensitivity of our results same firm before and after one or more mines open in its direct or to excluding individual countries, and control for oil and gas fields. wider vicinity. None of this affects the main results. Third, we use the proprietary SNL Metals & Mining data set, which This paper contributes to a growing literature on the economic contains comprehensive information on the geographical location, op- impact of natural resource abundance. Early contributions point to erating status and production data for individual mines. We identify a negative cross-country correlation between resource exports the latitude and longitude of 5595 mines producing 31 different metals and long-term economic growth (Sachs and Warner, 1997 and and minerals in our country sample. Depending on the year, we observe Auty, 2001). Various mechanisms have been proposed for why the operating status of between 1828 and 2511 mines. resource-rich countries appear
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