Mining Revenues and Inclusive Development in Guinea

Abstract

Introduction As Guinea prepares for its transition back to democratic elections, it continues to face a number of challenges for economic development and social inclusion. Guinea consistently ranks among the lowest 12 countries worldwide in the World Bank's Human Capital Index (HCI) without meaningful improvements over the past decade (see Figures A1-A2 in Appendix 1) and, in health and education, it lags behind the average Sub-Saharan African country and behind the average Low-Income Country (LIC) (see Figures A3-A4, Appendix 1). However, these challenges are not devoid of opportunity. Guinea's mining sector embodies revenue potential that could generate substantial fiscal space in the short and long run. Mining accounted for 84 percent of Guinea's total exports and 21 percent of its GDP as of end-2021. With an estimated 7.4 billion tons, Guinea has the world's largest reserves of the bauxite mineral , which is an essential input for producing aluminum. 1 How could any additional revenues from mining translate into more inclusive economic growth and social development? This paper seeks to quantify the potential impacts of plausible development policies that could be financed with the additional fiscal space generated by mining revenues in Guinea, including the following policies: • Human capital formation through early and basic education; • Inclusive infrastructure investments; and • Social protection via cash transfers. The educational human capital policies we consider are key for our research because we can incorporate them in a simple way into our model and calibrate their impact and costs to well-established empirical returns measures. Furthermore we can use the educational policy as a rough stand-in for other fundamental human capital policies such as those improving child mortality, nutrition, health and longevity indicators. We leave a precise analysis of health investments in Guinea for future work. The infrastructure investment we consider is inclusive because it impacts the total factor productivity for a broad set of economic activities. Our baseline assumptions for the productivity of infrastructure investments contrast starkly with the infamous "white elephant" investments that have conspicuously, albeit occasionally affected African economies during times of abundant financing. In fact, we base our assumptions on the sectoral impact of infrastructure on 1 In the short-run, the adoption of more transparent pricing schemes by multinationals can generate substantial revenue. In the long-run, applying the existing mining code to new contracts while limiting corporate income tax exemptions for mining producers would raise substantial revenues for the country. See Mogues (2021) for further discussion. 2