Yves here. This article discusses the high probability of seeing the resource curse reappear in the form of suboptimal exploitation of new essential minerals like lithium and cobalt. One might ask to what extent the resource curse can be avoided. For example, one could say that it is present in the United States, but on a regional scale. Look at how West Virginia, which was exploited for coal, became poor and polluted, or how areas that underwent hydraulic fracturing suffered contamination of aquifers, to the point where tap water can be set on fire.
By Rabah Arezki, Senior Fellow of the Foundation for International Development Studies and Research (FERDI); Research Director of the National Center for Scientific Research (CNRS); Senior Fellow of the Harvard Kennedy School; and Frederick Van Der Ploeg, Professor of Economics at the University of Oxford. Originally published on VoxEU
Global powers are racing to secure access to critical minerals to fuel the world’s energy and digital transitions. The extraordinary growth in demand for critical minerals is putting upward pressure on prices and spurring the discovery of new critical minerals around the world. However, in developing countries, this new windfall presents both opportunities and significant risks. This column argues that without a change in governance, the rush for critical minerals risks creating a “new critical mineral curse.”
While both the energy transition and the digital transition rely on technologies that require critical minerals, it is the clean energy transition that is most often associated with the intensive use of these minerals. Technologies such as wind turbines, solar photovoltaic panels, power grids, electric vehicles and nuclear power require minerals such as copper, lithium, nickel, silicon, cobalt, rare earths and uranium. Demand for these minerals is expected to grow very rapidly as the clean energy transition accelerates.
In the face of this demand growth, the limited supply of critical minerals is already putting upward pressure on their prices. The International Energy Agency (2021) projects that demand for minerals for clean energy technologies will increase at least fourfold by 2040 to meet climate goals, with particularly high growth for minerals needed for electric vehicles. Graphite, nickel, lithium, and rare earths are expected to see explosive demand in the climate-achieving scenario. In this column, we argue that the mining bonanza in developing countries creates both opportunities and significant risks, particularly for developing countries (Arezki and van der Ploeg 2023).
Production of critical minerals is relatively dispersed. But the key question is where the residual production of critical minerals net of domestic consumption (i.e. exports), particularly of raw critical minerals, is concentrated. Production of critical minerals is widespread in the major economic blocs – China, the United States and the EU. These blocs generally consume more of what they produce, making them dependent on exporters of raw critical minerals. Australia, Russia, Kazakhstan, the Democratic Republic of the Congo, Mozambique, Chile, South Africa and Zimbabwe, among many others, are major exporters of raw critical minerals and are therefore courted by superpowers seeking to ensure a secure supply of these minerals.
The geography of mining in relation to the processing of critical minerals is very telling. China completely dominates the treatment copper, nickel, cobalt, rare earths and lithium, but it only dominates in the production rare earths. Chile and Peru dominate copper production, Indonesia dominates nickel production, the DRC dominates cobalt production, and Australia and Chile dominate lithium production. It is mind-boggling that China is the dominant producer in the global economy of offshore wind, onshore wind, solar, and electric vehicles, and holds 40–45% of the global share in the production of fuel cell trucks, heat pumps, and electrolyzers (Leruth et al. 2022).
Many developing countries, including Zimbabwe, are trying to maximize the value of their raw critical minerals by creating cartels. Historically, in response to the perceived unfair share of critical minerals, developing countries have formed cartels of producers, such as OPEC. While these cartels can extract higher prices for critical minerals and add revenue to government coffers, in practice advanced economies end up finding alternative suppliers (e.g., non-OPEC producers) or developing alternative products (such as synthetic palm oil or shale oil). Moving up the value chain would be preferable, but this has also proven difficult. The risk of cartelization is another concern for major economies that rely on developing country exports. The uneven distribution of critical mineral production, however, is likely to dissipate as high prices drive investment efforts in exploration and eventually lead to more discoveries (Arezki and van der Ploeg 2019). Lithium production is a typical example, where the price has plummeted after fears of shortages arose in the face of extraordinary growth in demand.
The intensification of mining activities around critical minerals will have serious environmental, health and social consequences. Indeed, mining activities can cause irreversible damage to the environment and are also a significant source of greenhouse gas emissions, undermining climate goals. Extracting critical minerals requires intensive water use and can also contaminate water, particularly in places where standards and controls are weak. Moreover, in places where labour standards are weak, working conditions can be very harsh and child labour is also endemic. Such places include the Democratic Republic of Congo, but the DRC has become the darling of the US and the EU, despite enormous governance challenges, due to the negotiation of contracts far from China.
The risk of environmental damage is exacerbated by the NIMBY (not in my backyard) policies of industrialized countries that are abundant consumers of these essential minerals. International companies, especially those headquartered in industrialized countries, have ample opportunity to step up their efforts and adhere to their national standards to avoid an environmental and health catastrophe in the most vulnerable countries where these minerals are extracted. If left unchecked, these environmental degradations will leave behind the populations of developing countries where these essential minerals are extracted.
The new geopolitical environment that sees developing countries becoming the focus of attention of the great powers threatens to slow down, or even reverse, the democratization process in many developing countries. Indeed, new “geopolitical rents” are returning for leaders who align themselves with the superpowers. This does not bode well for citizens and the prospects for improved economic governance in developing countries.
Leaders in countries like the Democratic Republic of Congo have been courted simultaneously by China and the United States, despite their poor records on governance and human rights abuses. But the windfall of critical minerals is not necessarily good news. Developing countries have historically mismanaged the revenues from the exploitation of their natural resources. This has been at the expense of their citizens. The new geopolitical environment could make things worse.
Developing countries have indeed had a poor track record in managing their natural resources, so much so that the term “resource curse” has been coined to describe the paradox whereby resource-rich countries fare worse than resource-poor countries. The macro-institutional implications of traditional resources offer lessons on what to avoid when managing critical mineral booms. Moreover, national-level regulation has often failed to address the problems of overexploitation of natural resources, displacement, environmental degradation, and biodiversity risks that are often better managed by local communities. The work of the late Elinor Ostrom provides important insights into the design of self-organizing user communities to achieve sustainable exploitation of natural resources, which may be important for the good governance of critical commodity booms.
Several existing international initiatives have focused primarily on transparency, such as the Extractive Industries Transparency Initiative (EITI). The development of environmental, social and corporate governance (ESG) standards has its roots in the socially responsible investment movement that began in the 1970s. It is unclear whether and how ESG standards can be enforced, given their voluntary nature. One encouraging sign is that consumers in advanced economies appear to be changing their environmental behavior. But investor behavior, particularly in developing countries, may not be as open to change. The challenge for all these international initiatives is the difficulty of translating them into the right context and fostering ownership, particularly at the local and national levels.
To avoid a new critical minerals curse, developing and advanced economies must build a new model of international governance that takes into account the interdependencies of peace and stability, global health, and environmental and climate issues in an increasingly bloc-based world. While externalities must be internalized, a new mode of international governance will effectively transfer technologies from advanced to developing economies to provide the tools needed to address the threat of climate change and achieve climate goals, including by shifting critical minerals value chains. Such international governance should also promote effective access to international capital markets, for example through green, nature, or blue bonds, instead of opaque resource-backed loans. Developing countries must also change their domestic governance to ensure that foreign direct investment guarantees local content, environmental protection, and job creation to address growing discontent in communities where mining and other extractive industries operate.
See original message for references
