Potential Gains

  • In-country production downstream from extractive industry resources offers benefits for exports, output, and employment.
  • Benefits for exports include increased earnings, as well as more sophisticated and diversified export.
  • More diversified and technologically sophisticated exports also provide secondary positive impacts for growth because they reduce fluctuations in export earnings and increase a country’s growth prospects in the future.
  • Insofar as they are profitable, downstream operations contribute to government revenues in the form of taxes.
  • Because diversification is a long-term process, it is not considered an effective solution to price fluctuations in the short term, and because it often requires subsidies, it is often costly, particularly in the short-to-medium term.
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[1] Ricardo Hausmann and Jason Hwang and Dani Rodrik, NBER Working Paper No. 11905, (Cambridge, MA: National Bureau of Economic Research, 2005)

Key Resources

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Topic Briefing

Achieving in-country production downstream from extractive industry resources has several potential benefits on exports, output, and employment.

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In respect of exports, these benefits include:

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

In respect of growth, the positive impact on exports resulting from moving downstream will, in turn, have secondary positive impacts upon the prospects for growth:

  • Prices of oil and gas and minerals tend to be very volatile. Increases in exports and more diverse and sophisticated exports will reduce fluctuations in export earnings and hence have a positive impact on growth.
  • More diversified and more technologically sophisticated exports are likely to increase a country’s growth prospects in the future.

In respect of employment:

  • Increased employment
  • Skills development and accompanying higher rates of remuneration

In respect of contribution to government revenues:

  • Downstream operations, in so far as they are profitable, will contribute to government revenues in the form of taxes.

 The high volatility of oil and gas and mineral products is well established. Moreover, this volatility results in instability and significantly retards growth. By contrast, countries that export more - and particularly that export more technologically sophisticated goods - tend to grow faster.[1] Finally, there is consensus that the principal route to reducing volatility is ultimately through diversification of exports (although not necessarily exports based on oil and gas or minerals).

There are important factors to keep in mind in pursuing economic diversification through downstream beneficiation:

  1. First, diversification is a long-term process. Diversification is not, therefore, the solution to price fluctuations in the short term. 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 often costly, especially in the short-medium term (see case studies in the key resources below)
  3. Finally, the potential gains may be real, but limited. This is best illustrated in regard to downstream employment gains. The number of jobs created per unit of output is low. In addition, while some of the jobs in downstream processing are highly skilled, the required skills are often relatively specialized and thus not easily obtainable in the short-term in developing countries.

Some examples of downstream employment gains include:

  • South Africa: The number of jobs created per additional unit of output is lowest in the sectors where beneficiation is occurring. Additional employment per unit of output is, for example, ten times larger in wearing apparel as compared to basic non-ferrous metals. See detailed case study South African Trade Policy and the Future Global Trading Environment in the key resources below.
  • Botswana: Government policy to establish cutting and polishing industry has led to an additional employment of 3,750 workers. They earned above the minimum wage prevailing in manufacturing. However, there were subsequently considerable lay-offs. For more details see the key resource Botswana Diamond Workers Bleed found below.
  • Mozambique: After 15 years Mozal smelting facility was established the first significant downstream activities to be established. Midal Cables invested in a semi-fabrication plant to process 10% of Mozal’s aluminium ingots and the company will employ 110 workers directly. The company receives fiscal benefits associated with setting up in the export processing zone. For more details, see the case studies by Castel-Branco and Goldin, and Kaufmann found in the key resources below.