Background and Context
In the last two decades, the growth of the economies in the global south has mainly been driven by the commodities boom (McKinsey Global Institute, 2017). This was attributed to the explosion of industrialization in Asia, especially in China. The rapid growth of industries created a huge demand for commodities such as oil, coal, gas, iron, and copper. This period of the commodity boom was an opportune time for the development of the countries in the global south. It led to the development of their infrastructure as the conditions of their citizens improved. Investors mainly directed their funds into these ventures to fully exploit the mineral resources of the countries. The global south is rich in minerals both in reserves and diversity.
The demand created at the time led to the high prices of the commodities, encouraging countries to conduct mineral exploration within their lands. Asia had become the center of industrialization and production due to the cheap labor and low costs of production. The demand for their products globally spurred further growth of industries, creating a ripple effect in the global south.
As the value of the mineral exports grew, governments were able to raise much revenue from the taxes levied on the products or directly from the sale of government-owned companies. They recognized the opportunity offered by mining. This encouraged more investments and exploration as some governments shifted their focus to the production of a single product (Balakrishnan & Toscani, 2018). Other sectors of the economy were given less attention as they were hardly as lucrative as the mining sector. However, some countries recognized the temporary nature of the boom and used the proceeds to diversify their investments.
As expected, the commodity boom reached its peak and began its slide (Karp, 2018). Over the years, countries had increased their capacities in production. Other governments, not necessarily in the south, had also set up mining facilities in their countries. This led to an oversupply of the products in the market. Industrial growth had also slowed down in Asia as labor costs started to rise and the demand for their products fell across the world. One of the main mineral exports was oil. The drop-in oil prices in the last five years were detrimental to the oil producers in the global south whose reserves are not as extensive as that of the countries in the Middle East.
The falling of prices created a vicious cycle where the large oil-producing countries increased their supply and reduced their rates to price out smaller competitors. There has also been a shift in attitudes towards fossil fuels, where both oil and coal are classified. They have been blamed for the increased global warming. Countries like China and India have been faced with extensive air pollution, especially in cities where industries predominate. With these developing challenges, they have adopted a clean energy approach, attempting to reduce their reliance on fossil fuels. This implies fewer imports from countries that mine these fuels.
This paper recognizes the need for countries in the global south to adapt to these inevitable changes. Due to their reliance on mining, new strategies are necessary to enable them to navigate the economic crises that may face them. These strategies are outlined below and measured for their practicality and utility in the different economies. Finally, the best policy will be chosen dependent on its suitability and recommended to the governments of these nations.
Strategy and Policies of Managing the Declining Revenue
Increasing the royalties or taxes on the mineral products
Some nations in the global south such as Peru have been undergoing the paradox that despite the increase in mining activity, their revenues are hardly growing (Mulé, 2018). During the years of expansion of mining activities, most governments gave tax concessions to these companies to encourage their investment. They were also subject to tax refunds which they used as credits against the income taxes they owed the governments. The overall aim of the governments at the time was to encourage mining activity which would then spur the development of the areas where the extraction industries were located. This policy functioned until the drop in the prices of commodities. The industries could no longer invest in the community and the tax that they remitted to the governments drastically reduced.
Government revenue can be increased through the collection of more taxes (MulĂ©, 2018). These industries have enjoyed at least a decade of minimally taxed activity ensuring their productivity. As they have invested and become efficient, it is only pragmatic that the tax rates be increased for the government to benefit to a greater degree from their countries’ resources. This will ensure that the government is able to support development in the mining areas even when commodity prices are low. This will provide an environment for the growth of other businesses/ economic activities. The growth of tax revenue can be analyzed through a comparison of the budget deficits or surplus of the preceding years. It can also be measured through analysis of the government debt and the prevailing interest rates.
Privatization of public mining companies
As revenues from the commodities drop, state-owned mining companies begin to face efficiency issues (Estrin & Pelletier, 2018). This implies that the government may have to inject funds generated from other activities or taxes collected. The inefficiency becomes a burden on the government as the companies are unable to achieve profitability. State-run companies are not subject to the agility of private enterprises as decisions may have to be approved by law-making institutions. This reduces their adaptability, especially in tough economic environments. Privatization involves ceding majority equity or selling the entire company to private investors.
As the revenues from mining decline, the governments can decide to privatize the industries. It is able to raise a lot of revenue from the direct sale of these ventures. With privatization, the industry is given the flexibility it needs to survive in the current global market of declining prices of commodities. Privatization also introduces competition in a sector where the government was previously a monopoly. As privatization takes place, regulatory policies should be formulated that ease the process of setting up mining ventures to ensure healthy competition. As the employees are experiencing a change in management, the new policies must also serve to protect their rights. With privatization, production is likely to be increased which generates more tax revenue for the countries.
Privatization can be assessed by measuring the return on equity. This will dictate how much dividends the governments are earning if they only ceded part of their stake. It can also be assessed through the changes in income and cost, the productivity of labor, and output growth. This allows the comparison of the performance of the companies at the time they were government-owned to their current private status (Estrin & Pelletier, 2018).
Diversification of the economy
Low-income countries have been associated with limited diversity in their economies (Fruman, 2017). Thus, they are more susceptible to adverse events in the sectors in which they are heavily involved. The shortfalls of these countries have arisen from their impractical approach of continuous heavy investment into the dominant instead of investing in strategies that influence the positive growth of lesser developed sectors of the economy. Their inability to expand the range of their export products leaves them highly exposed in the event of a global economic slowdown.
It is thus imperative that these countries think about the diversification of their economies (Fruman, 2017). As the commodities prices look to stagnate or decline soon, they should encourage investments into other sectors that offer better returns and opportunities (Fruman, 2017). For instance, a country heavily invested in mining can encourage agriculture through the provision of subsidies of farm inputs. The products can be exported or processed before sale to foreign buyers. Diversification can be easily assessed through a comparison of the revenues generated from the different economic activities. As time passes on, the percentage of total revenues that are from mining should be reduced. It can also be assessed through growth in the Gross Domestic Product (GDP) and the changes in the income level, i.e. the proportion of people living in poverty.
Embracing the clean-energy technologies
The countries that have been considerably affected are those heavily dependent on the extraction of fossil fuels such as coal and oil. The world is adopting a clean-energy approach as the effects of global warming increase in severity (Adesina, Anzai, Avalos, & Barstow, 2017). Traditional markets mainly China are heavily polluted warranting a change in their attitude and usage of fossil fuels. There has been a shift towards cleaner sources of energy such as solar, wind, and hydroelectric power.
In recognition of the above factor, these countries should begin scaling down on their production of these fossil fuels. Instead, they should invest in cleaner sources of energy. An alternative is increasing the efficiency of production such that the environmental harm generated from these extraction activities is reduced to a minimum. In countries that have significant natural resources, they can invest in the establishment of industries that are used to produce materials used in the production of clean-energy sources (Adesina et al., 2017). This ensures their relevance over the long term. Diversification should be carried out concurrently as the use of fossil fuels is reduced. These alternative sources are also cheaper, lowering the cost of living.
This policy can be measured through the reduction in the value of fossil fuel exports. It can also be analyzed through the growth in the use of clean energy sources in the countries involved. Lastly, the increase in exports of raw materials used in clean energy sources can also be measured periodically.
Recommended Policy
The policy of diversification of the economy is the most beneficial and will be most effective. It ensures that as one sector of the economy is declining, others are being enhanced to cover for the shortfall. It is sustainable as it requires maximal government input during the initial stages and becomes self-sufficient over time as the citizens realize productivity from the various activities. This policy also envelops elements of the other recommended strategies, thus clearly displaying its comprehensive nature. It is the best long-term strategy due to its self-sustainability over this period. As competition from mining grows globally, countries especially low-income ones need to learn from the previous experiences of developed ones on the need for a diversified breadbasket.
References
- Adesina, O., Anzai, I., Avalos, J., & Barstow, B. (2017). Embracing biological solutions to the sustainable energy challenge. Chem, 2(1), 20-51. Web.
- Balakrishnan, R., & Toscani, F. (2018). How the commodity boom helped tackle poverty and inequality in Latin America.
- Estrin, S., & Pelletier, A. (2018). Privatization in developing countries: what are the lessons of recent experience? The World Bank Research Observer, 33(1), 65-102. Web.
- Fruman, C. (2017). Economic diversification: A priority for action, now more than ever. Web.
- Karp, P. (2018). Mining company tax payments will fall and then climb to $12bn, research says. The Guardian. Web.
- McKinsey Global Institute. (2017). Where will Latin America’s growth come from?. Web.
- Mulé, D. (2018). The Peruvian paradox: Surging mineral production, lagging tax revenues.