Hi, I’m Eve. In this article I argue that the so-called resource curse is likely to re-emerge in the form of similarly suboptimal mining of new essential minerals such as lithium and cobalt. I can’t help but wonder to what extent the resource curse is avoidable. One could argue, for example, that it is happening regionally in the US. Look at how poverty and pollution have plagued West Virginia, which has been mined for coal, or how fracking has polluted aquifers to the point that tap water burns in areas where it has been so heavily used.
Authors: Raba Aretzki, Senior Research Fellow at the Foundation for International Development Research (FERDI), Research Director at the French National Center for Scientific Research (CNRS), Senior Fellow at the Harvard Kennedy School, and Frederik van der Ploeg, Professor of Economics at the University of Oxford. Vox EU
The race to secure access to critical minerals to support the simultaneous energy and digital transitions around the world is fierce among global powers. The phenomenal growth in demand for critical minerals is putting upward pressure on prices and stimulating new critical mineral discoveries around the world. But in developing countries, this new bonanza brings both opportunities and significant risks. This column argues that without a change in governance systems, the rush for critical minerals risks creating a “new critical minerals curse.”
While the energy and digital transitions both depend on technologies that require critical minerals, it is the clean energy transition that is most associated with intensive use of these minerals. Technologies such as wind turbines, solar power, power grids, electric vehicles and nuclear power require minerals such as copper, lithium, nickel, silicon, cobalt, rare earth elements and uranium. As the clean energy transition accelerates, demand for these minerals is expected to grow rapidly.
In the face of this growing demand, limited supplies of critical minerals are already putting upward pressure on prices. The International Energy Agency (2021) projects that demand for minerals in clean energy technologies will increase at least fourfold by 2040 to meet climate targets, with a particularly large increase in demand for minerals needed for electric vehicles. In a scenario in which climate targets are met, demand for graphite, nickel, lithium, and rare earth minerals is expected to explode. In this column, we argue that the bonanza from mining in developing countries creates both opportunities and significant risks, especially for developing countries (Arezki and van der Ploeg 2023).
Critical minerals production is relatively decentralized. However, a key question is where the residual production of critical minerals, especially raw critical minerals, is concentrated after domestic consumption (i.e. exports). Critical minerals production is very widespread in major economies such as China, the United States and the EU. These economies usually consume more than they produce, making them dependent on exporters of raw critical minerals. Australia, Russia, Kazakhstan, the Democratic Republic of Congo, Mozambique, Chile, South Africa, Zimbabwe and many others are important exporters of raw critical minerals and are therefore courted by superpowers looking to secure a stable supply of these minerals.
The geography of key mineral mining and processing is highly indicative: China is completely dominant. process Mineral resources such as copper, nickel, cobalt, rare earth elements, and lithium production Rare earth production is dominated by Chile and Peru. Copper production is dominated by Chile and Peru. Nickel production is dominated by Indonesia. Cobalt production is dominated by the Democratic Republic of the Congo. Lithium production is dominated by Australia and Chile. It is surprising that China is the leading producer of offshore wind, onshore wind, solar PV, and electric vehicles in the global economy, with a 40-45% global share in the production of fuel cell trucks, heat pumps, and electrolyzers (Leruth et al. 2022).
Many developing countries, including Zimbabwe, have attempted to maximize the value of their critical mineral resources by establishing cartels. Historically, developing countries have established producer cartels, such as OPEC, as a response to what they believed to be an unfair share from the mining of these critical minerals. While these cartels could obtain higher prices for these critical minerals and add revenue to government coffers, in reality, developed countries end up finding alternative suppliers (e.g., non-OPEC producers) or developing alternative products (e.g., synthetic palm oil or shale oil). Moving up the value chain is a better route, but this too has proven difficult. The risk of cartelization is another concern for major economic powers that depend on exports from developing countries. However, the uneven distribution of critical mineral production is likely to be eliminated as higher prices will guide exploration investment efforts and ultimately lead to more discoveries (Arezki and van der Ploeg 2019). A good example is lithium production, where an extraordinary increase in demand has led to fears of shortages and a drop in prices.
The expansion of critical mineral mining activities will have serious environmental, health and social impacts. Indeed, mining activities can cause irreversible damage to the environment and are also a major contributor to greenhouse gas emissions, undermining climate goals. Critical mineral mining uses large amounts of water and can also pollute it, especially in places with weak standards and controls. Furthermore, in places with weak labor standards, working conditions are very harsh and child labor is widespread. Such places include the Democratic Republic of Congo, which has become a darling of the US and EU as it negotiates contracts away from China despite major governance challenges.
The risk of environmental degradation is further exacerbated by NIMBY (stay out of your backyard) policies in developed countries that consume large amounts of these critical minerals. There is ample room for international companies, especially those headquartered in developed countries, to step up their efforts and adhere to their own national standards to ensure that environmental and health damage is not done in the most vulnerable countries where these minerals are extracted. If left unaddressed, these environmental degradations will leave people in developing countries where these critical minerals are extracted behind.
The new geopolitical environment, in which developing countries find themselves at the center of great power attention, may slow or even reverse democratization in many developing countries, as new “geopolitical interests” are now resurrected in leaders aligned with superpowers. This does not bode well for developing country citizens or for prospects for improved economic governance.
Leaders of countries like the Democratic Republic of Congo are being courted by China and the United States simultaneously, despite their poor track record in terms of governance and human rights abuses. But big profits from critical minerals are not necessarily good news. Developing countries have traditionally not been good stewards of the revenues from the exploitation of their natural resources. This has come at the expense of their people. The new geopolitical environment could make things worse.
Developing countries have indeed performed below average in natural resource management, so much so that the term “resource curse” was coined to express the paradox that natural resource-rich countries perform worse than resource-poor countries. Traditional resource macro-institutional influences offer lessons on what to avoid when managing critical mineral booms. Moreover, national-level regulations often fail to address issues such as overexploitation of natural resources and migration, environmental degradation, and risks to biodiversity, which are often best managed by local communities. The work of the late Elinor Ostrom sheds important light on the design of self-organized user communities to achieve sustainability in the exploitation of natural resources, which is crucial for getting the governance of critical material booms right.
Various existing international initiatives focus primarily on transparency, for example the Extractive Industries Transparency Initiative (EITI). The development of Environmental, Social and Corporate Governance (ESG) standards has its roots in the socially responsible investment movement that began in the 1970s. Due to the voluntary nature of ESG standards, it is unclear whether and how they can be enforced. One positive sign is that consumers in developed countries appear to be changing their environmental behavior. However, investor behavior, especially in developing countries, may not be as open to change. The challenge for all these international initiatives is the difficulty of translating them into the right context and fostering ownership, especially at local and national levels.
To avoid a new critical minerals curse, developing and developed countries need to build a new international governance model that takes into account the interdependencies related to peace and stability, global health, and environmental and climate issues in an increasingly bloc world. When internalizing externalities, the new international governance mode will effectively enable technology transfer from developed to developing countries, including by shifting critical minerals value chains, to provide tools to address climate change threats and achieve climate goals. This international governance should facilitate effective access to international capital markets, for example through green bonds, nature bonds, and blue bonds, instead of opaque resource-backed loans. Developing countries also need to transform their domestic governance to ensure that foreign direct investment brings local content, environmental protection, and jobs, to address growing discontent in communities where mining and other extractive industries operate.
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