sharing in governance of extractive industries
Here is the final version of the paper: The Extractives Dependence Index (EDI)
The Extractives Dependence Index (EDI)
Degol Hailu and Chinpihoi Kipgen
A common measurement of a country’s dependence on the oil, gas and mineral industry is based on the share of earnings from these commodities in total export earnings. Another measurement is tax revenue generated from these same commodities. These indicators, however, do not entirely capture the degree of reliance on the extractive industry, mainly because they are isolated measures and do not give a full picture.
In this paper, we propose a composite index. The three indicators that make up the index are: a) the share of export earnings from extractives in total export earnings; b) the share of revenue from extractives in total fiscal revenue; and c) extractives industry value added in total value added.
Our approach, however, goes beyond a simple creation of an index from the above three indicators. We weigh each of the indicators to capture the productive environment under which the extractive sector exists. First, we adjust export earnings from oil, gas and minerals by the share of high-skill and technology intensive manufactures in total exports. This is because, even if two countries have equal shares of export earnings from extractives, the country with a higher degree of skill and technology intensity is likely to have higher productive capabilities and greater probability of spillover of skills to other industries that are export oriented.
Second, the revenue generated by the extractive sector is adjusted to take account of tax revenue collected from other sources. Countries that generate a significant percentage of their fiscal revenue from oil, gas and minerals are vulnerable to commodity price volatilities. Such vulnerability is best tackled if countries generate revenue from other sources including, for instance, personal income tax, corporate income tax and capital gains tax.
Third, the capacity to domestically process oil, gas and minerals into intermediate and final goods is an important indicator of the difference among countries in terms of their dependence on the extractive sector. In a country where domestic value addition is higher, there are also technological and skill transfers to other sectors. In other words, a higher capacity in value addition is likely to be associated with a higher level of diversification within GDP.
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