Benefits to the Fore | Tony Addison

If it’s not grown, it must be mined. Our societies rely heavily on the supply of metals and minerals. From copper to aluminium; from plastic to cement; mining is all around us.  Yet, mining is not loved - to say the least.  Are the extractives good or bad? 

In this episode, we are joined by Tony Addison, recently appointed Professor in Economics at the Development Economics Research Group (University of Copenhagen), and formerly Chief Economist of UNU-WIDER.  We discuss how to assess what the industry is doing for us - including the good, the bad and the ugly.

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Transcript

Åsa Borssén:
If it’s not grown, it must be mined. We rely heavily on the supply of metals and minerals. From copper to aluminium; from plastic to cement; mining is all around us.  Yet, the mining industry is not loved - to say the least.  Are the extractives good or bad?  My name is Åsa Borssén and this is the Highgrade Podcast.

JINGLE

Åsa Borssén:
Hi, and welcome to Highgrade, the media platform where we unravel the world of natural resources. Today, I’m joined by Tony Addison, Chair with the Development Economics Research Group at University of Copenhagen, and until just now, Chief Economist of UNU-WIDER.  We will discuss how to assess what the industry is doing for us - including the good, the bad and the ugly. Tony - thanks for joining The Natural Resources Podcast.

Tony Addison:
Thanks Åsa, great to be here. It’s excellent.

Åsa Borssén:
We like our audience to get to know the person we interview, who they really are, their trajectories and what has led them to where they are today. And your case is particularly colourful because you've been connected to the extractives from a very young age. Tell us about your childhood, where did you grow up?

Tony Addison:
My family comes from the northeast of England, from County Durham, which is the coal mining region. And the Addisons have been working in coal mining since the 19th century. So my father, he went down the pit at the age of 14 as an apprentice carpenter in 1930. And that was the era when Britain had over a million workers in coal mining.

Åsa Borssén:
Oh, wow. That's quite a difference from today.

Tony Addison:
Yeah, it's still had half a million when I came along in the 1950s. I mean, now it's well, around a thousand maybe. So the communities were very hard hit when it all started to shut down in the 1980s. But then my family, we emigrated to Australia in the 60s. My father worked for BHP Whyalla, which at the time was exporting iron ore and steel to Japan. Of course now Australia exports it all to China.

Åsa Borssén:
What do you say? Did your dad appreciate or resent mining?

Tony Addison:
Well, it was very much what you did. It was very much in the family. If I had been born earlier, it would have been who had been down the mine for me. Fortunately, I was born in the 1950s when social mobility for children in the UK in the 1950s onwards was very, very high. So I'm a kind of example of the social mobility that we had in Britain. I think the strength of the mining communities was that they all supported each other; very strong trade union movements to impose better health and safety standards.     

But it was a tough existence. And of course, the life expectancy with lung disease and so forth was not good. Finally got my grandfather and probably his great grandfather before him. It was a tough life, a really tough life.

Åsa Borssén:
And you ended up with a brilliant academic career where, at least in recent years, the extractives played a central role, albeit in front of a computer rather than down the shaft. Would you say that is coincidence or does it have something to do with your background?

Tony Addison:
Well, I've always been interested in economic issues. And because I spent part of my childhood in Australia, I actually started travelling from a very young age. So I think it got into the blood of the sort at nine years old. But I actually started my career in Tanzania in 1980 when Tanzania and the rest of Africa was going through a really ferocious economic crisis. And that really started me working on Africa for 40 years, really. And at that time, of course, you know, Africa, the number of countries with oil economies was fewer. Mining, of course, was present in South Africa and so forth. But Tanzania, for example, hadn't really started on much. Certainly not the prospects of gas revenues that it hopes for today.

Åsa Borssén:
And then when did the extractives catch your interest as an academic?

Tony Addison:
Well, as an academic, as devolvement economists, and, you know, in all the teaching that I've done over the years, we've often treated the extractives sector as basically the resource curse. And, you know, Dutch disease, the idea that economies have got a very strong chance of going backwards rather than forwards if they have oil wealth or a rich mineral deposit - for very familiar reasons, that have also been discussed by other people in your series. And so, you know, a lot of academic economics has kind of proven that point, that shows that you have a very high probability of disaster, the so-called oil curse, the resource curse and so on. But the trouble with that is, well, what do you actually say to countries and governments that have this wealth? Do you just say, okay, you've got a high probability of disaster, good luck and cheerio? Development economics is not about that. It’s very policy orientated. So developing economics is about, you know, trying to find solutions by which we know we can reuse these resources for some good and for development and poverty reduction. So that really, really piqued my interest. The idea that we can't walk away from the issue, no matter how difficult it really is.

Åsa Borssén:
And that is the perfect segue way into digging deeper into the extractives. The extractives itself, it's not very sexy. Other than maybe engineers nobody really likes an oil rig or a mine pit. And the industry has better press than, say, tobacco but maybe not much better. Yet, there is mining because there are people and people need stuff. We need water pipes. We need electricity, buses and trains. Now me personally, I don't like a big hole in the ground, but I do find it a little unsettling how we disassociate our perception of the industry from our own consumption. It is a little like blaming the messenger, isn't it?

Tony Addison:
Well, the industry doesn't have a great story to tell. Oil and gas extraction and mining are seen as toxic by many people. And that's for good reasons, there has been a terrible environmental and social impact across the world for a couple of hundred years at least, and that is before we get to climate change and fossil fuels or mines running themselves from electricity, from coal fired power stations. And then, you know, you got the infamous resource curse, which you just talked about. And then you end up with conflict and war. I mean, countries like Libya today where warlords struggle over essentially control of the oil and gas reserves. So yeah you can blame the messenger. But on the other hand, the message has not been good.

Åsa Borssén:
In terms of mineral resources, people actually not companies are the owners of mineral resources. Companies are granted the privilege to extract and process and market them. Do you feel that this is something that is well understood?

Tony Addison:
Well, I don’t think it is well understood. But the reason why it's not well understood is that often in many countries with this resource wealth, the average citizen sees so little benefit from the mine or the oil and gas well that what the companies and the governments do with the profits and the revenues feels quite disconnected from their own lives.

Åsa Borssén:
And how can we say whether an industry is benefiting society? How do we measure contributions from a business?

Tony Addison:
Well, an industry can benefit the community and locality around it. And there's been a lot of attention paid to that, quite rightly. But we know the industrial mining, I speak here mostly of industrial mining rather than artisanal mining, and certainly oil and gas production, it's a very capital-intensive business. And some of your previous interviews and programs have discussed how, you know, automation is really raising the capital intensity and the skill component and so forth. So I think we know we're going to have more of a problem going forward about social licence to operate because, you know, the direct employment benefits of these extractive industries probably is going to become less with automation and technology. So then, you know, convincing the communities, the local communities and also the nation, that this is a really a good thing, then it sorts of boils down to, you know, well, two really big benefits. First, the fiscal side. Are the revenues actually being spent on stuff that's important to the people, particularly the poorer citizens? So, that bigger fiscal benefit, which, of course, needs a very good system of public finances and transparency to deliver. And then secondly, the bigger economic benefit that you need to see is whether the extractive industries are linking up effectively to other sectors, which is really down to policy and investment. So, you know, for example, is transport infrastructure being built to expand opportunities for smallholder farmers around the mining area to get their crops out to better markets. Are you getting local content in manufacturing, for what there's a lot of attention. But to actually get that done, you need you need good projects. It's not simply good enough to have a project. You have to have a project that has an economic value. Otherwise, it's a waste of the actual revenue itself, it’s a waste of public money. So those are two really big ones.

Åsa Borssén:
Yeah. And I was going to ask because we've been talking about this for a long time, I feel like, moving away from this enclave economy to linkages. Are we're making progress in that area?

Tony Addison:
To a degree. There's a lot more attention paid to the issue and, you know, you can see some examples in southern Africa of more attention paid to what economists call the multiplier effects of these sectors. But we actually must be said that it's not just the fault of the people in the mining ministries and the oil and gas ministries and their companies. There's also a problem, a basic problem in economics, which is we're not really very good still at understanding the impact of very large infrastructure projects on national economies, you know, so that rail link that you spend billions on transporting, say, copper to the port, you know, and the projects you develop around that for agricultural industry, you know. Has that got a good economic rate of return? We're really not very good as economists at understanding that stuff. And there actually is a reason for that goes to the profession of development economics. And the reason is that, you know, in recent years, we've got pretty good at understanding the impacts of education and health. Schools and clinics. Particularly on poverty. That's a really good thing, you know, we need more of that. You know, we had the Millennium Development Goals and the Sustainable Development Goals, and they're very much focused on what we call the social sectors. And seeing what the benefit is in terms of enrolments and the other benefits of education and health.

But, you know, on the jobs front, and jobs are a key priority for governments, we still really don't have a very good handle, as development economists or indeed economists working in the advanced economies, on how infrastructure actually works for economies. So it can be really hard to actually choose the right quality of investment. And therefore, so easy to pour money into stuff that kind of looks okay on paper. But, you know, turned out actually not to be very effective.

Åsa Borssén:
We've talked a little bit about the benefits. And for all the benefits there are costs to society. And how can you evaluate the trade-off between economic activity and all other impacts. In particular, an industry like mining with high environmental footprint: how much economic benefit justifies what level of environmental damage?

Tony Addison:
Well, I think it has to be said that no economic benefit justifies irreversible environmental damage. Because once it's gone, it's gone. You know, once you've lost biodiversity, you know, that's it. And, you know, you don't need to be Sir David Attenborough to realize that these days as we look around, you know, the kind of wanton environmental destruction that we see. So fundamentally, no economic benefit justifies massive environmental damage. And fundamentally as well, the problem is that societies overvalue the non-renewable resources like minerals and oil and gas. And they undervalue the renewables. You know, all of the planet's wonderful biodiversity. You know, the seas, the rivers, the fisheries and the forests. You know, these provide livelihoods and food for billions of people.

Åsa Borssén:
And is this a market failure then?

Tony Addison:
It's a market failure because we still don't have something like a carbon tax rolled out globally. I mean, the industry itself and actually many of the companies would like to see carbon taxes and sometimes actually use carbon pricing internally just to understand their own vulnerability to this. The climate change agenda, of course, you know where it's very unsteady progress. But, you know, what you have to think about as a country if you look at it from the perspective of the country. OK, you need the revenues, you know, you want the revenues now. You hopefully want the revenues now to spend on poverty reduction and improving the lives of your citizens. And that's, you know, very, very worthwhile. And you can see the political imperative in that. But, you know, in 50 years’ time, you know, hopefully sooner fossil fuels will have no value. You know, they will be as we call it in this business, stranded. What will still be of value is the biodiversity, the seas, the forests and the soils. So, you know, as a country, you got to think, well, in 50 years’ time, I'm going to be needing those for my agricultural sector, for my tourism, for my food supplies and so forth and so on. And the planet is going to be needing those trees and everything else because the planet needs decarbonisation and is all part of the net zero transition. So, you know, it's not just the countries having to value these things, it's also the planet. Unfortunately for poor countries, you know, they're imperative is often very short term. You know, they really want the revenues now. So I really think we've got to move in a much more fundamental way on environmental assessment.

Åsa Borssén:
I mean, especially as you said, you don't know what the value is 50 years from now. So there is a risk with leaving it in the ground. There might be no value to the mineral resources that have value today.

Tony Addison:
That's right. And we can't forecast 50 years from now. But I think my big prediction will be that there won't be a coal mine left on the planet that will be working. That you might need some oil production. But hopefully they will have moved to net zero within the next 10 years on their own emissions. You will certainly need mining because you're going to need all that cobalt and copper and nickel and all of those rarer metals for a renewable energy system. But again, you know, it should all be net zero. But one thing, you know, we will know for certain is, you know, the ghost of [David] Attenborough and indeed my ghost will come back to haunt everybody, we're going to need those forests and animals and seas and fisheries and clean air and all that wonderful stuff.

Åsa Borssén:
Most companies, they report their economic contributions to society. They'll tell you the taxes they pay and the jobs that they provide, the local suppliers that they use. And it's quite tricky to conclude whether they are doing something good or something bad. What is a reference point? For example, how do extractives companies compare to other sectors?

Tony Addison:
Well, I think whichever sector or company you look at say, you know, you're comparing mining with manufacturing or with large scale agriculture. The key question is this: is the economic contribution in proportion to the size of the investment in the project and the profits it generates for the company and the revenues it generates for the company. So, you know, I think it's nice to have companies, you know, as they do now feature social projects and environmental projects in their annual reports. You know, the classic thing is say, you know, women farmers growing vegetables in gardens to feed the mine canteens. Or a community school or a health clinic in the mining community. And that's, you know, that's great. And, you know, I don't criticize that, but really, you know, the companies have got ask themselves and in fact, would do themselves a big favour in terms of their public reputation by doing a very thorough evaluation of their contribution to the economy as a whole. So, you know, it's a big scale effects as I was talking about earlier.

So it's not just, you know, are they providing a funding for a clinic or a school in their immediate vicinity, but of the extra revenue that's going to the government, you know, how much of that is really helping roll out really good quality primary education system nationwide? Or, you know, is it helping clinics expand in poor areas and so forth and so on? You know, how much of the poverty reduction we're seeing in a country, assuming we are seeing poverty reduction, is down to getting thousands of people out of poverty due to the economic rents and the revenues coming from the extractive sector? You know, not just calculating maybe the hundred or so people who are better off around the mine or the site of the oil wells. Again, it's a question of scale. And as I say, you know, the companies would restore a lot of trust or at least start building a lot of trust for themselves with public and the international community if they could actually show some of those scale benefits that they can generate with good policy, good investment for countries, and for poor people. It's surprising that they just don't kind of grip on to that story more than they do.

Åsa Borssén:
And why do you think that is? Is it because it's a more complicated message than that image of the farmer providing food to the canteen?

Tony Addison:
Well, it's a more complicated message, but it's also a kind of legacy of the difficulty of not being seen to interfere with national goals and priorities. But, you know, every country in the world is now signed up to the Sustainable Development Goals. You know, and there are national development plans. So I wouldn't say it is particularly controversial for companies to go out and particularly actually fund data collection, because, you know, often the argument around the impact is down to, oh, we don't have the data.

Well, guys, you know, why don't we just fund more data collection or anthropological research? You know, how are you going to do it? And then we would have, you know, a time series, a baseline, and then, you know, more data over time. So we could actually see whether poverty had gone up or down or, you know, whether there were more jobs or not. And you know how the economy was changing because of the extractive sector.

Åsa Borssén:
There are now external surveys or rankings of mining companies’ performance. Do you think these kinds of indices or surveys are helpful for, well, the government perhaps, or the general public in assessing the performance of a mining company?

Tony Addison:
Well, I think that's, you know, okay. And for example, I suppose the ESG community, you know, investors in the environmental and social impact and governance space, you know, do find these things useful, although we do know that there is some confusion around the different rankings of companies in that regard. But, you know, I certainly think fundamentally companies some of the more responsible ones, and there are more responsible ones these days, do have an interesting story to tell. But the story they have to tell is how they are working with government and communities on really getting the benefits to scale. You know, you have to move beyond the rather kind of lazy thing of, we'll have nice photographs of, you know, some nice schoolchildren, a nice school in the mining community. I really want to see you show from the work that you're doing in a country that, for example, you're rolling out a renewable energy system nationwide or the mine is generating electricity for communities and a whole region, not just the community itself. Those kinds of bigger, bigger impacts.

I mean, if you went out to ESG investor and said, I can really show you that my mining industry is really tangibly benefiting this country, I can show it to you with data and I can show it to you over time. And by the way, this is being done by independent, verified research, not just people recruited by the company itself. Well, that would be a kind of gold standard for investors., wouldn't it?

Åsa Borssén:
It sounds very interesting. I hope there are plenty of mining companies listening to this.

Tony Addison:
Yeah, I hope there are. That was my kind of direct appeal.

Åsa Borssén:
Tony, we are recording this podcast in mid-May, in times of a full-on pandemic. You described the impact of Covid-19 as a terms of trade shock. What do you mean by that?

Tony Addison:
Well, obviously, the global economy is just taking a massive hit. I mean, the numbers coming out are just extraordinary in terms of the collapse in GDP globally. And what's important to realize is that, you know, if you exclude China itself, particularly from the poorer countries, the main effect in the first few months of the crisis, it's really been through the indirect transmission mechanisms onto economies. So, you know, rather than the lockdowns and the actual virus itself, much of the effect has been obviously through the reduction in tourism income, remittances. But also, as I as you said, from a big hit to the terms of trade of countries. And what we mean by the terms of trade is basically export prices and import prices. You know, what you're using your foreign exchange that's generated by your exports to import. So if you look at the oil producers where that's just been quite remarkable. I mean, the oil producers have been told for years to diversify their economies and they kind of go, yeah right, okay, well, we've got a plan. Well this is the old sort of Mike Tyson quotation, you know, everybody has a plan till they get hit in the face. And this this is just kind of one enormous hit in the face. I mean, the oil price, if you look say let's say Nigeria, Nigeria needs a Brent oil price of about fifty-seven dollars or so to balance its fiscal budget. So in other words, you know, not to cut spending and not to take on more debt. And, you know, we've seen Brent oil go down to as low as twenty-one dollars.

I mean, this is just an extraordinary fiscal hit. So all of those great things I've been saying about poverty reduction may come under real stress at this time. So, you know, that's one side of the coin of the terms of trade. Obviously, the slump in the oil price benefits oil importers and many developing countries are importers. But, you know, some of them are getting hit because they’re metals producers. So, you know, they're getting hit like, you know, for example, copper has been weak. Obviously, if you been producing a rare metal like gold, you’ve been okay. Iron ore has sort of bounced on the hope that China is going to build a lot more infrastructure in the economic recovery because it uses lots of steel and iron ore, therefore. But it's a pretty bad time, you know, if you are an extractives producer for your export earnings. And this is a time when, you know, you need to import more medical supplies, when you're having now to start to suppress the virus by locking down the population, restricting movement, restricting people's mood to access to livelihoods. So, you know, they're going to be hungry because they can't earn. So you need more food imports. A lot of these countries are big food importers. Your currencies are going down along with the terms of trade, you know, because the currencies tend to weaken. So this, you know, this is a really bad situation. It just reminds me so much of Africa in the 1980s where I began my career in the midst of a just a humongous economic crisis

Åsa Borssén:
And renewables, they were doing well before this pandemic. But then you mentioned the collapse in the oil price. Do you think this will harm the rise of renewables? Well, basically the transition to a greener and cleaner future?

Tony Addison:
Well, that is a fascinating question. If you take oil and gas, there's an interesting split now between, say, the oil producers and the gas producers. So the gas price weakened, but it was already quite weak last year because of oversupply. But the forecast for gas is still quite good. And, of course, you know, we're running those gas fired power stations to supply the electricity to keep the technology running that you and I are using for this interview and all that working from home. The oil sector is in big trouble. So I could see the oil economies, you know the Angola's and so forth, doing pretty badly. But some of the new gas producers perhaps being okay in the medium to longer run. Weather, you know, everybody is going to go back to, well, just using fossil fuels because the prices is in the dumps versus renewable energy? Again, you know, we come down to policy and we come down to this thing that everybody's talking about now: How can we really make the recovery from the pandemic green? You know, how do we really insert a green dimension so that we don't just recover from this, we actually transform economies and societies to make them more resilient in the longer term? And that's going to be down to policy.

I would say, though, you know, the prospects are not entirely gloomy. You know, as an economist, I'm a kind of gloomy person by disposition, we've historically been labelled the dismal science. But what I do see positively coming out of this, this pandemic is a vast investment in science and a flow of younger people's talent into science. And clearly, you know, obviously into the medical and virology and epidemiological areas because that's our immediate crisis. But, you know, into the use of data. So, you know, we could be on the cusp of a great scientific revolution because, you know, when we look back in history, wars - and we're not in a war, we're on a war on a virus, but we don't have bombs coming through the roof - but, you know, wars have always been associated with massive technological leap forwards. You know, the technologies that we use now. Nuclear. The jet engine. You know, a lot of these technologies came out of the Second World War. So the question really is, you know, can governments and the private sector put a massive amount of investment not only into medical research, but now into the to the whole field of renewable energy and electric vehicle research and so forth, and in ways that really help the poor countries. And then we might get the prospects of a green revolution, you know, a green recovery coming from all of this. So that's my kind of optimistic position.

Åsa Borssén:
And finally, just looking at the extractives in particular, what are the key issues, do you see, moving forward?

Tony Addison:
Well, I think the key issue is obviously to eliminate or drive to net zero their own emissions. That is a very tough task, a very tough challenge given the energy demand that they have. And they have to be embedded in a national energy system, which is often too much focused on coal fired power generation. So that is an enormous challenge. I think the oil companies have really got to own up to their scope three emissions. And, you know, obviously that means much more carbon offsetting even as their own operations shrink. The tricky thing there, of course, is, you know, that company CEOs are looking now for every cost saving they can find. But we need to hold them to account on that. I think in governments, the big challenge on the extractive sector is to really understand the benefit or not from the sector and to pursue very rigorous analysis of projects around the sector, particularly as they impact poverty to really thoroughly involve and involve yourself in the environmental impacts and to understand that and to build the national capacity to do that. But I know it's going to be a really tough environment because companies want every dollar of profit they can make. Governments want every dollar of revenue they can get. It's going to be a tough couple of years.

Åsa Borssén:
Tony. It's been fascinating to talk to you. Thank you very much for joining Highgrade.

Tony Addison:
Thank you very much. Delightful to be on the program.

Åsa Borssén:
And thank you for joining us today. I hope you enjoyed this critical assessment of the extractives impact on our societies.  This podcast was done with support from the German Federal Ministry for Economic Cooperation and Development, through BGR, and the Inter-American Development Bank. Make sure to subscribe to our channel on whichever podcast platform you are using. We will be back very soon. Until then, so long!