Resource nationalism: killing the goose that lays the golden eggs, or a sensible development strategy?

The boom in the price of gold, coming in the wake of a recovery in the price of oil and other commodities, has lead to a renewed discussion of the rise of “resource nationalism.” This refers to governments taking steps to capture more of the rents from the extraction of natural resources – either through taxes and license fees, or by imposing local content requirements, or by taking an ownership stake in extraction projects.
According to a new Ernst and Young (E&Y) report Business Risks Facing Mining and Metals 2011-2012, resource nationalism is now the biggest risk facing international mining companies, up from #9 in 2009. Mike Elliott, global mining and metals leader at Ernst & Young, told The Australian on August 8 that “We have seen more than 25 countries in the last year either change, or announce potential changes to, their fiscal arrangements around mining,”
In a August 22 article on (“The N-word: Nationalization“), Alena Mikhan and Andrey Dashkova explain that “Because the mining and metals sector rebounded quickly from the global financial crisis, it became an early target to help restore treasury conditions.” Earlier this month President Rafael Correa of Ecuador announced a plan to hike mining royalties from 5% to 8%, while Peru – a leading producer of copper, silver, and tin – raised taxes after leftist President Ollanta Humala came to power at the end of July. Russia has been pursuing a staunch policy of asserting state control over the energy sector under President Vladimir Putin. Most recently, the Russian application to join the World Trade Organization is now reportedly being held up because of Russian insistence on 30% tariffs on auto imports unless the manufacturers meet stringent local content requirements. Even in Australia, a country committed to economic liberalism, there has been a lively debate about whether expanding Chinese ownership in its coal and iron ore deposits poses a strategic threat.
The cardinal example of resource nationalization was the Mexican government’s nationalization of foreign oil companies in 1938. Their example was followed by subsequently followed by Saudi Arabia and all the major oil-producing states. International companies complain that resource nationalism cuts into their profits and deters future investment by adding an unnecessary element of political uncertainty. National governments don’t see why foreign companies should benefit from windfall profits that result from a surge in commodity prices.
Also, some sort of state-led industrial policy is usually necessary to lift countries out of poverty, as noted by respected economist Daniel Rodrik in an August 23 commentary in the Financial Times, “Don’t expect China et al to save the world,” he writes: “Sustained growth, of the type that a handful of countries in Asia have managed to generate, requires more than conventional macroeconomic and openness policies. It requires active policies to promote economic diversification and foster structural change from low-productivity activities.”



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