Potential Gains

With respect to exports, these benefits include:

•  Increased export earnings.
• More sophisticated (technologically advanced) exports.
• More diversified exports.

Moving downstream would, in turn, have secondary, positive effects on a country’s prospects for growth:

• The prices of oil and gas and minerals tend to be very volatile. A larger volume of more diverse and sophisticated exports would reduce fluctuations in export earnings, and hence have a positive impact on growth.
• More diversified and technologically sophisticated exports can enhance a country’s growth prospects.

With respect to jobs, benefits include:

• Increased employment.
• The development of skills and accompanying higher rates of remuneration.

Downstream operations, insofar as they are profitable, also contribute to government revenues in the form of taxes.

The high volatility of oil and gas and mineral products is well established. This volatility results in instability and significantly retards growth. Countries that export more—and particularly that export more technologically sophisticated goods—tend to grow faster.^[1] Many studies concur that the principal route to reduced volatility is diversifying exports (although not necessarily exports based on oil and gas or minerals).

For policy makers pursuing economic diversification through downstream beneficiation, several key factors are important to bear in mind:

1. First, diversification is a long-term process. Diversification is not, therefore, the solution to short-term price fluctuations. In the short term, there are other means to reduce the impacts of price fluctuation, namely via monetary policy.
2. Second, diversification often requires subsidies and is costly, especially in the short to medium term (see case studies in this topic page).
3. Finally, the potential gains are limited. This is best illustrated by downstream employment gains. The number of jobs created per unit of output is In addition, while some of the jobs in downstream processing are highly skilled, the required skills are often relatively specialized and thus not always easy to find in the short term.

Real-world examples of downstream employment gains include the following:

• South Africa. The number of jobs created per additional unit of output is lowest in activities downstream of the extractive industry. Additional employment per unit of output is, for example, 10 times larger for clothing apparel than for basic nonferrous metals. (For more details, see South African Trade Policy and the Future Global Trading Environment in the case studies in this topic page).
• Botswana. After the government helped set up a domestic diamond cutting and polishing industry, jobs for 3,750 workers were created, at earnings higher than in manufacturing. However, this was followed by large numbers of layoffs. (For more details, see Botswana Diamond Workers Bleed in the case studies in this topic page.)
• Mozambique. After 15 years of planning, the country’s first significant downstream activity—the Mozal smelting facility—was established. Midal Cables invested in a semi-fabrication plant to process 10 percent of Mozal’s aluminum ingots, and the company employed 110 workers directly. The company received fiscal benefits associated with setting up operations in the export processing zone. (For more details, see the case studies in this topic page by Castel-Branco and Goldin, and Kaufmann and Krause.)