The inequitable governance of multinational mining companies in peripheral economies

IMG_3427

Even despite the rise of the BRIC (Brazil, Russia, India and China) countries, the global extractive industry can be placed within the context of Wallerstein’s (1974) world systems theory with the surplus value of raw material extraction in peripheral economies primarily flowing to the core economies of the world system. This occurrence can, largely, be attributed to the form of governance of the large-scale extractive industry, both on an international and a national level, which is both dominated by neoliberalism and corporate corruption. This situation can be largely attributed to the nature and structure of the governance of the large-scale extractive industry, within and outside nation states.

Wallerstein’s World Systems theory (1974) posits that nation states exist within a broad economic, social, political and legal world system based upon a two-fold division of labour where different nation states are given differential access to goods and services on the world market. These are differentiated as core, semi-periphery and periphery economies. Core economies concentrate on “higher skill, capital intensive production; they are militarily strong; they appropriate much of the surplus value of the whole world-economy” (Lechner, 2001:2; Wallerstein, 1974:401). The periphery areas are the least economically developed; they are exploited by the core economies for their cheap labour, raw materials and agricultural production (Wallerstein, 1974).

A world system is any “historical social system of interdependent parts that form a bounded structure and operate according to distinct rules” (Lechner, 2001), or a “unit with a single division of labour and multiple cultural systems” Wallerstein, 1974:390). The world economy is a world system that operates on “the primacy of the endless accumulation of capital via the eventual commodification of everything” (Wallerstein, 1998:10).

The surplus value from multinational mining production in peripheral states primarily flows to a number of specific countries in the core, these include (but are not limited to): Australia; Canada; China; France; The United Kingdom (more specifically the City of London); the United States of America; and Switzerland (Bush, 2007; Campbell, 2010). The increase in multinational production in peripheral states, throughout sub-Saharan Africa, parts of South America, South East and Central Asia and peripheral states in Europe has necessarily paralleled the growth in the demand of natural resources since the year 2000. For example, this voracious demand has seen the value of most metals skyrocket, thus increasing the overall value of the mining industry. For example, the value of the global metal and industrial minerals industry has increased from US$214billion in 2000 to US$644billion by 2010, a process known as the ‘commodity super cycle’ (ICMM, 2012).

Consequently, multinational extractive companies based in core industrialised countries are some the largest and richest economic entities in the world economy. For example, Shell, the Anglo-Dutch oil giant is listed as 26th of all economic entities, a list that includes the economies of Argentina (29th), Austria (30th) and the United Arab Emirates (31th) (White, 2012; Mitchell, 2014). Moreover, Rio Tinto, the Anglo-Australian mining major with operations on 6 continents, generated revenue of US$51.1 billion in 2013 (Rio Tinto, 2013), which is more than twice the GDP of Madagascar, a country in which it has an iron ore mine (Global Finance, 2011; Mitchell, 2014).

Owing to the fact that natural resources are non-renewable and have a finite lifespan, to serve the growing demand in the world economy (with the rise of China and India in particular) multinational exploitation has expanded into more and more peripheral developing states, often taking over from dwindling production in most industrialised core countries (with the exception of Australia and Canada). For example, by 2011, in terms of total value of mineral production, Europe (excluding Russia) and the United State of America were only contributing 3.5% and 4.2% respectively, while resource-rich developing countries were contributing over 22% (ICMM, 2012).

Yet, these resource-rich developing peripheral countries (with a few exceptions: see the case of Botswana for example) are not necessarily benefiting (in terms of socio-economic development or poverty reduction) from the increase in multinational exploitation within their borders. For example, the continent of Africa has grown rapidly recently driven largely by the growth of the extractive industry. Between 2000 and 2008 for example, GDP grew on average at 4.9% throughout Africa, more than twice the pace of growth in the 1980s and 1990 (Mckinsey Global Institue, 2010). Yet, the proportion of people living on less than US$1.25 a day has remained stagnant between 1981 and 2005 at around 50% (Chen and Ravillion, 2008).

One of the main connections between the mistranslation of multinational exploitation in peripheral states into socio-economic development and poverty reduction is the nature and structure of the governance of the global extractive industry and the governance of multinational companies within borders. In terms of the governance of the mining industry more generally, the mining industry in peripheral states exists in a kind-of ‘race to the bottom’ situation whereby developing countries are competing against each other to attract foreign-direct investment in the form of multinational mining company capital, as they lack the resources to extract in a large-scale way (Banerjee, 2001; AMV, 2010). Furthermore, the neoliberalisation of peripheral states via structural adjustment and other means (in Greece for example via the Troika reforms as will be explained later), particularly in the African and South American continents has led to highly favourable investment conditions (often systematically enforced by the World Bank and International Monetary Fund) being offered in the form of tax concessions, relatively low royalty rates, indefinite carry-forward of losses, limited import duties and reduced environmental legislation. Additionally, there is often a financial, organisational and human capital disparity between the highly capitalised multinational extractive companies, with their legions of lawyers and the often impoverished, indebted and dysfunctional host developing states, meaning that developing country host states are often at a disadvantage when it comes to the negotiation of extractive contracts and legal issues (Banerjee, 2001; AMV, 2010; Mitchell, 2014).

Thus, this results in multinational companies producing vast amounts of profit that are effectively exported from the host peripheral nations via deregulated capital flows, reinvested in the core countries on the main commodity stock exchanges (for example, the main metal and mining stock exchange is based in the City of London, the second in Toronto), or transported to tax havens such as Switzerland. Often, downstream production, where the most value lies, occurs in the core countries rather than in the host states (Bush, 2007). Within this neoliberal political economic framework, countries like Switzerland, with no copper mines have become one the largest copper producers in the world, as it is home to a vast multinational copper miner and commodity trader – Glencore Xstrtata (Commodity HQ, June 30th, 2013).

How the tax haven of Switzerland became one of the largest copper producers in the world should be one of the cautionary tales of our (neoliberal) time. Glencore Xstrata, a notable copper miner on the Zambian copper-belt, is enabled under the structure and governance of the global economic system to effectively transfer copper between a web of subsidiaries. This technique, known as ‘transfer pricing’ enables Glencore Xstrata to not declare any form of profit as they sell the copper (to themselves) at well below market value thus escaping corporation and royalty tax – the only real tangible way Zambia can benefit from its natural resources (Al Jazeera, 18th June, 2011). In 2008, the value of copper passed through Glencore Xstrata in Switzerland was US$11.4billion – six times higher than what was reported to the Zambian tax authorities (ibid). One should bear in mind that the entire GDP of Zambia in 2008 was a mere US$14.3billion (ibid). Ultimately, Glencore Xstrata have benefitted from the deregulation of global capital, the deregulation of inward foreign direct investment in Zambia, the forced privatisation of Zambian copper mines via structural adjustment, the vast disparity between the capacity of its accountants and those of the tax officials in Zambia, and the general apathy of the IMF when it comes to disciplining multinational companies.

Aside from the inequitable global economic structure within which the natural resources extractive industry situates, there appears to be a statistical relationship between the reliance of natural resources within an economy and corruption. Auty (1993) first identified an inverse statistical relationship between resource abundance and negative economic growth. While this has not been established a firm economic rule, as countries can grow wildly in terms of GDP as a result of natural resource exploitation (Nigeria and Angola for example) it was expanded to include a relationship between resource abundance and a number of outcomes, including: authoritarianism (Ross, 2001; Papaioannou and Siourounis, 2008; Aslaksen, 2010); poor political institutions (Mehlum, Moene and Torvik, 2006); civil war (Collier and Hoeffler, 1998); and, poverty (Ross, 2003). According to economic analyses, the dependence on the extraction of minerals seems to increase the likelihood on rent-seeking behaviour by political elites. Busse and Groning (2011) find a relationship between the export of natural resources and political corruption. Although the one-dimensional economic regression analyses do not explain the rationale between the relationships, rather they just establish there is one. Ultimately, the governance structure of peripheral economies, both within and outside, may increase the likelihood of corruption.

Ultimately, aside from the price volatility of natural resources on the world market that may decrease scrutiny of appropriate taxation measures, the inequitable governance structures of peripheral economies may increase the likelihood of corruption. Multinational power and political collusion have been consistent bedfellows in the era of neoliberalism.

Bibliography

African Mining Vision. (2010). African Mining Vision 2050. [ONLINE] Available from: http://www.africaminingvision.org

Al Jazeera. (18th June, 2011). ‘Transparency’ hides Zambia’s lost billions’. [ONLINE] Available from: http://www.aljazeera.com/indepth/opinion/2011/06/20116188244589715.html

Aslaksen, S. (2010). Oil and Democracy – More than a Cross-Country Correlation. Department of Economics, University of Oslo. [Online] Available from: http://www.esop.uio.no/research/publications/Oil_and_democracy.pdf

Bannerjee, S. (2001). Corporate Social Responsibility: The Good, the Bad and the Ugly. Critical Sociology January 2008 34: 51-79.

Bush, R. (2007). Poverty and Neoliberalism: Persistence and Reproduction in the Global South. London: Pluto Press.

Busse, M. and Groning, S. (2011). The Resource Curse Revisited: Governance and Natural Resources. Hamburg Institute of International Economics.

Campbell, B. (2009). Mining in Africa: Regulation and Development. Pluto Press.

Chen, S. and Ravillion, M. (2008). The Developing World is Poorer than we thought, But No Less Successful in the Fight Against Poverty. Quarterly Journal of Economics, 125(4):1577-1625.

Collier, P. and Hoeffler, A. (1998). ‘On the Economic Causes of Civil War.’ Oxford Economic Papers, 50:563-73.

Commodity HQ. (June 30th, 2013). The World’s Biggest Copper Producers. [ONLINE] Available from: http://commodityhq.com/2013/the-worlds-biggest-copper-producers/

Dunn, C., Kawana, Y. and Brewer, B. (2000). ‘Trade Globalization since 1795’, American Sociological Review, Vol. 65.

ICMM: International Council Mining and Metals. (2012). Trends in the mining and metals industry. [ONLINE] Available from: http://www.icmm.com/document/4441
Idem, Law 2957/2001, Art. 2.

Lechner, F. (2001). ‘Globalization Theories: World-System Theory’. [ONLINE] Available from: http://sociology.emory.edu/faculty/globalization/theories01.html

McKinsey Global Institute (2010). Lions on the Move: The Progress and Potential of African Economies. [Online] Available from: http://www.mckinsey.com/mgi/publications/progress_and_potential_of_african_economies/pdfs/MGI_african_economies_full_report.pdf

Mitchell, J. (2014). Essay submitted for the module entitled ‘Natural Resources and Sustainability’ SP 50227 at Bath University, under Dr. Roy Maconachie. Bath, Bath University.

Papaioannou, E. and Siourounis, G. (2008). Democratisation and Growth. The Economic Journal, 118, 1520-1551.

Ross, M. (2001). ‘Does Oil Hinder Democracy?’ World Politics 53 (April): 297–322

Wallerstein, I. (1974). The Modern World-System 1: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century. New York: Academic Press.

Wallerstein, I. (1997). The Capitalist World Economy. New York City: Cambridge University Press.

Wallerstein, I. (1998). Utopistics: Or, Historical Choices of the Twenty-First Century. New York: The New Press.

White, S. (2011). The top 175 global economic entities, 2011. [ONLINE] Available from: http://dstevenwhite.com/2012/08/11/the-top-175-global-economic-entities-2011/

SOURCE: http://jamesmitchellmining.wordpress.com/2014/10/14/the-inequitable-governance-of-multinational-mining-companies-in-peripheral-economies/