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Smarter landowners needed to develop, decarbonize
Governments that allow their natural resources to remain undeveloped impede their own economic prospects and jeopardize the global transition to a green economy. Resource-rich countries must responsibly maximize the value of their oil, gas and metal deposits
Ricardo Hausmann 2 Oct 2022

Landowners are seldom seen as heroes. While workers put in effort, and capitalists put their resources at risk, landowners are often depicted as living off the efforts of others, playing no useful social function.

No wonder many countries – including all of Latin America – prohibit private ownership of the mineral resources in the sub-soil. Such resources belong to the state, which may exploit them directly or grant concessions to private capitalists in exchange for a piece of the action. This practice originated centuries ago, with kings and emperors, and has been maintained and broadly supported as a way to ensure that natural wealth benefits the country rather than foreign imperialists or private corporations.

But to benefit the country, the state must be a responsible landowner. Instead, too many hinder the development of their natural resources and the activities that could be crowded in. And while the harm has been mostly to the countries themselves, the transition to a decarbonized future is increasingly at stake.

A landowner’s ability to extract a rent depends on three factors: the expected surplus – the profit – that using the land can generate after paying for operational costs and capital depreciation; the cost of capital or rate of return that the enterprise must pay to raise the necessary funds; and the degree of competition between potential investors.

Profitability depends on the investment idea, the technology to be used, the capacity of the human resources that can be mobilized, and a supportive ecosystem of infrastructure, contractors, and other providers. Good ideas, combined with the technologies and the capacity to realize them, can make output worth much more than the cost of inputs, leaving a large surplus to be shared between the landowner and the investors.

How much the owners of capital get depends on the price that markets demand for assuming the risk of deploying capital. If the country where a project is located is unreliable, capital markets will invest only if the expected return is high. Simply put, unreliable states face higher capital costs, leaving less money on the table for the landowner to appropriate.

Finally, a smart landowner uses competition between potential capitalists to extract the maximum gain. This is more easily done by making potential investors compete for the right to access scarce natural resources. The greater the competition between suitors, the more they will be willing to pay.

That is what smart landowners ought to do. Unfortunately, while natural resources are scarce, dumb landowners abound.

The poster child for the problem of dumb landowners is the Venezuelan state. When Hugo Chávez gained power in 1999, Venezuela’s oil industry sat atop the world’s largest reserves, and a massive private investment boom had raised output by over 70% over the previous decade, to 3.4 million barrels a day in 1998. But Chávez quickly defaulted on the terms of the private investments and expropriated even private oil services companies. Moreover, he fired the technocrats who managed PDVSA, the national oil company. Today, production has fallen to less than one-fifth of its 1998 level, ceding market share to competitors, such as Russia, China and Brazil. In desperation, the authorities gave Venezuela’s offshore natural gas reserves to Russia’s Rosneft, but not even a free concession could entice the company to develop the resource.

Unfortunately, Venezuela is not unique. Ugandan President Yoweri Museveni has been unable to develop his country’s oil resources because he made production contingent on the developer building a new refinery. He has been waiting for over a decade.

Nor is the problem limited to fossil fuels. Metal and other mineral mining has always required particularly smart landowners, not just to extract the rent, but to manage tensions over the industry’s large water needs and other local environmental implications. Finding appropriate and credible solutions is key to maintaining public support for mining, which many landowners fail to do. Australia owes its emergence as a mining giant not to its natural resource wealth, but rather to a productive ecosystem that can support mining projects and a credible state that can gain the trust of capital markets.

Sub-Saharan Africa lies at the other extreme, with very little prospecting being carried out to find new deposits and develop new mines. For over 20 years, South Africa has been putting the interests of a narrow set of black elites over the interests of the rest of society. Unlike Australia, Chile and Peru, it went through the commodity super-cycle between 2004 and 2014 with no major investments.

Landowner dumbness will be a major impediment to global decarbonization efforts. Any strategy to limit carbon-dioxide emissions requires electrifying anything that can be electrified and producing and storing that energy in green ways. This will require a massive boom in the production of the requisite minerals, which include copper, aluminum, cobalt, lithium, nickel and rare earths. For example, the largest known lithium deposits are in Bolivia. But the Bolivian government’s dumb policies have ensured that they stay in the ground.

In the meantime, Chile and Australia have moved ahead and today represent over 70% of global production. Chile has also moved to create a research centrer for lithium-related technologies. It stands to gain much from improvements in how the mineral is mined, processed and used. But the country has flirted its share of dumb, Bolivian-inspired ideas, including limits to private investment in mining. This has allowed Australia to zip past Chile by 63%, even though Chile’s reserves are more than 2.5 times larger.

A world in which states maximize the net present value of their mineral wealth is a world of richer mining countries and a greener planet. Landowners are not useless. But a world populated by dumb ones makes everybody worse off.

Ricardo Hausmann is a professor at Harvard's John F. Kennedy School of Government, the director of the Harvard Growth Lab, and a former minister of planning of Venezuela and chief economist at the Inter-American Development Bank.

Copyright: Project Syndicate

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