Social Policy and State Revenues in Mineral-Rich Contexts

The expansion of extractive industries in developing countries, dominated by large investments, has produced divided opinion and reaction among scholars, policy makers and civil society with regard to its impact on host countries’ economic performance, governance and peace. Facing that division, the expectation is that the inflow of resources produced by the industry might create opportunities for mineral-rich developing countries to use social policy, both to mitigate the potential negative effects of mineral production, as well as to enhance their citizens’ social welfare. This paper looks at the political economy features of mineral expansion and reviews the “resource curse” literature through a social welfare lens. The authors address the linkages between mineral expansion and social policy, examining three aspects that underpin the basis for the above expectation: first, the extent to which state revenue and mineral export dependence are connected; second, the likely effects of mineral wealth on social expenditure levels and composition, and on the promotion of new social policy initiatives; and, finally, the role that the quality of government plays in determining mineral revenue capture and expenditure.

The approach followed for the examination combines correlation, regression and cluster analysis applied to 74 countries in which the level of export dependence on minerals (fuel and metals) has been superior to 10 per cent in the period 1995–2005. Results of that analysis suggest that there is no conclusive evidence of a general pattern among mineral-rich countries with regard to the linkages between mineral wealth, state revenue and social welfare. However, the negative association between state revenue and level of mineral export dependence, and the positive association between state revenue and social policy found in that analysis—together with insights from case-based literature—point to the necessity of analysing the relationship between mineral wealth and social policy within an integrative approach.

This paper concludes by outlining this approach and bringing together concepts developed around welfare regimes and factors produced in a mineral-led development strategy. It also suggests that the inflow of mineral taxes could produce the basis for transformative social policies and social development, which would overcome the underinvestment in social services and social protection so far seen in most mineral-rich countries. In order to achieve this in a sustainable way, states need also to consider the use of these financial inflows in transforming their economic and institutional structures.