Mining Revenues and Inclusive Development in Guinea

MiningRevenueandInclusiveDevelopmentinGuinea AlejandroBadelandRachelFredmanLyngaas WP/23/90 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 APR ©2023InternationalMonetaryFundWP/23/90 IMFWorkingPaper AfricanDepartment MiningRevenuesandInclusiveDevelopmentinGuinea* PreparedbyAlejandroBadel,andRachelFredmanLyngaas AuthorizedfordistributionbyOlafUnteroberdoersterApril2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Whatarethepotentialbenefitsofincreasingthetaxationofaforeignextractivesector?ThispaperappliesthisquestiontothecaseofGuineabyusingamulti-sectormacro-inequalitymodelwithheterogeneousagents.Wequantifythelong-runequilibriumimpactofadditionaltaxationwhentheproceedsareinvestedinhumancapital,inclusiveinfrastructure,andsocialtransfers.OuranalysisfocusesontheresponseofGDP,laborformalization,povertyrates,Ginicoefficients,rural/urbaninequalityandsectoralreallocation.Thethreeformsofinvestmentarecomplementary.Infrastructureinvestmentsfavorformalproductionintheurbanareawhilegrowthandgovernmenttransfersboostthedemandforfood.Theseeffectshelpsupporttherateofreturntoeducation,protectingjobformalizationthroughhigherwagesandpricesofinformalgoods,astheeducationpolicyboostslaborsupplyinruralandurbanareas. RECOMMENDEDCITATION:Badel,Alejandro,andRachelFredmanLyngaas,2023.“MiningRevenuesandInclusiveDevelopmentinGuinea,”IMFWorkingPaper23/90.Washington,DC:InternationalMonetaryFund. JELClassificationNumbers:D31,E62,H23 Keywords:Infrastructure;growth;output;inequality;calibration;heterogeneousagents;incompletemarkets. Author’sE-MailAddress:abadel@imf.org,rlyngaas@imf.org *WethankClaraMira,OlafUnteroberdoerster,RolandKpodar,PatrickPetit,seminarparticipantsattheIMF-AFRResearchTherapyseries,theIMF-AFRResearchAdvisoryGroup,LiLiu,AristideMedenon,andtheGuineanauthoritiesfortheirusefulcomments.ThisresearchispartofaMacroeconomicResearchinLow-IncomeCountriesproject(ProjectID:60925)supportedbytheUK’sForeign,CommonwealthandDevelopmentOffice(FCDO).TheviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheIMForFCDO. Introduction AsGuineapreparesforitstransitionbacktodemocraticelections,itcontinuestofaceanumberofchallengesforeconomicdevelopmentandsocialinclusion.Guineaconsistentlyranksamongthelowest12countriesworldwideintheWorldBank’sHumanCapitalIndex(HCI)withoutmeaningfulimprovementsoverthepastdecade(seeFiguresA1-A2inAppendix1)and,inhealthandeducation,itlagsbehindtheaverageSub-SaharanAfricancountryandbehindtheaverageLow-IncomeCountry(LIC)(seeFiguresA3-A4,Appendix1). However,thesechallengesarenotdevoidofopportunity.Guinea’sminingsectorembodiesrev-enuepotentialthatcouldgeneratesubstantialfiscalspaceintheshortandlongrun.Miningaccountedfor84percentofGuinea’stotalexportsand21percentofitsGDPasofend-2021.Withanestimated7.4billiontons,Guineahastheworld’slargestreservesofthebauxitemin-eral,whichisanessentialinputforproducingaluminum.1Howcouldanyadditionalrevenues fromminingtranslateintomoreinclusiveeconomicgrowthandsocialdevelopment?Thispaper seekstoquantifythepotentialimpactsofplausibledevelopmentpoliciesthatcouldbefinancedwiththeadditionalfiscalspacegeneratedbyminingrevenuesinGuinea,includingthefollowingpolicies: •Humancapitalformationthroughearlyandbasiceducation; •Inclusiveinfrastructureinvestments;and •Socialprotectionviacashtransfers. Theeducationalhumancapitalpoliciesweconsiderarekeyforourresearchbecausewecanincorporatetheminasimplewayintoourmodelandcalibratetheirimpactandcoststowell-establishedempiricalreturnsmeasures.Furthermorewecanusetheeducationalpolicyasaroughstand-inforotherfundamentalhumancapitalpoliciessuchasthoseimprovingchildmortality,nutrition,healthandlongevityindicators.WeleaveapreciseanalysisofhealthinvestmentsinGuineaforfuturework. Theinfrastructureinvestmentweconsiderisinclusivebecauseitimpactsthetotalfactorpro-ductivityforabroadsetofeconomicactivities.Ourbaselineassumptionsfortheproductivityofinfrastructureinvestmentscontraststarklywiththeinfamous“whiteelephant”investmentsthathaveconspicuously,albeitoccasionallyaffectedAfricaneconomiesduringtimesofabun-dantfinancing.Infact,webaseourassumptionsonthesectoralimpactofinfrastructureon 1Intheshort-run,theadoptionofmoretransparentpricingschemesbymultinationalscangeneratesub-stantialrevenue.Inthelong-run,applyingtheexistingminingcodetonewcontractswhilelimitingcorporateincometaxexemptionsforminingproducerswouldraisesubstantialrevenuesforthecountry.SeeMogues(2021)forfurtherdiscussion. panelregressionsemployingbroadyearandcountrysamples.Finally,oursocialprotectionviacashtransferspolicyemphasizetheeaseofimplementation:alumpsumtransfertoallhouse-