Focus on Private Sector: Make firms revive local economies

Miner in South Africa.jpg
Copyright: Alfredo Caliz / Panos

Speed read

  • Mines across Sub-Saharan Africa are reducing capacity, causing economic downturns
  • Governments increasingly make firms restore environment to pre-investment state
  • They should also compel companies to do economic rehabilitation

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China’s economic slowdown is proving especially painful for countries that depend on Chinese investment. The Chinese are set to invest less in foreign countries this year, as their government takes steps to reduce the flow of its currency into overseas markets. Resource-rich countries in Sub-Saharan Africa, like Zambia, are suffering as a result.
This pattern calls for urgent action to diversify and bolster local economies against the impact of corporate retreat. And foreign companies are duty-bound to help here.
Resource-producing countries are having a rough year. The news agency Bloomberg reports that 18 of the 22 commodities it tracks are down over 20 per cent from their recent highs. Glencore has announced an 8-month shutdown of its copper mines in the Democratic Republic of Congo and Zambia, while South Africa’s platinum producers are all expected to lay off workers this year.
This crisis isn’t just about jobs. The nature of resource extraction is that companies cluster around oil reserves or mineral deposits, creating an environmental impact that squeezes out other economic activity. They become one-shop mining or oil towns — and so a slowdown can cripple a whole region.
As a result, not only will individuals lose their jobs but local authorities, deprived of tax revenue, will cut state services. If the decline is prolonged, people will migrate elsewhere, leaving behind ghost towns.
This won’t be the first time towns in the global South suffer at the hands of foreign companies. A glance back at history reveals a similar pattern of corporate exploitation, withdrawal, and economic decline.

“If single commodity regions are to survive after multinationals move elsewhere, more pressure must be put on them to put such measures in place. ”

Maha Rafi Atal, University of Cambridge

In Kolmanskop, Namibia, the discovery of diamonds led the colonial mining company KBG to invest in local services like transport, power, and housing. [1, 2] After the closure of the mine in the 1930s, the company stopped providing these services, and residents, unemployed and unable to access basic services, moved away. Humberstone, a former saltpetre mining town in Chile, tells a similar story: its dependence on saltpetre was so extreme that a small investment drop during the First World War was sufficient to collapse its economy. [3] This kind of crisis faces resource-dependent towns like Rustenburg, South Africa, today.
So what can be done? In some places, extractive industries are required to restore the local environmental damage after they move on. Environmental rehabilitation is already an obligation in Australia where mining and oil companies provide financial assurance to cover its costs before they receive their licences to operate. Among developing countries, both Bolivia and Peru have introduced legislation on mining rehabilitation
They should be compelled to restore communities to a minimum level of economic viability, too.

In South Africa, local authorities in the platinum mining belt are beginning to plan for the day — in 30-50 years’ time — when the platinum runs out. Plans include government programmes to stimulate other industries, and using mining donations to improve infrastructure before it’s too late.
But these measures are being driven by government. The mines should play a direct role.
Jacky Kola, director of local economic development for the Rustenburg local municipality, South Africa, wants to see resource-sector firms invest in local businesses in wholly unrelated sectors “like tractors, or commercial bakeries”. Government would impose “a social responsibility requirement on those businesses…to employ local people,” he says.
This view is widely shared among local officials in mining areas, but has limited traction at a national level, where much post-apartheid economic reform has centred on increasing black employment within the mining sector rather than planning for its decline. [4]
But if single commodity regions are to survive after multinationals move elsewhere, more pressure must be put on them to put such measures in place.
Maha Rafi Atal is a PhD candidate at the University of Cambridge, United Kingdom, where she is researching the political effects of multinational firms acting as public service providers in the developing world. She was previously a journalist, including at Forbes, where she covered the intersection of business, development and international affairs. You can contact her on [email protected] or follow her on Twitter: @MahaRafiAtal