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I thought the different ways countries spend the non-renewable oil, gas and mineral industry revenues would also give them different degrees of effectiveness in their reliance on extractive industries. Countries which invest most of these revenues as seed capital in the most important in Global Economy multinational companies would also enjoy most effective reliance on their extractive industries  as the non renewable revenues they generate earn them  fiscal spending  sustainably in the form of indirect profits  rather than the direct nonrenewable and therefore unsustainable fiscal spending which is counterproductive as it switches the living activities of society on to chronic dependence on the nonrenewable mineral revenues. The composite EDI would therefore delivered useful applications if it was a measure of the effectiveness of countries reliance on their extractive industries depending on the three indicators considered plus the share of sustainable profits invested non-renewable oil, gas and mineral industry revenues would earn them indirectly.

The development of an index to measure and presumably rank country dependence on extractives is a great innovation. Moreover, going beyond the simple combination of the three levels of measurement usually employed (as in IMF resource rich listings) is important to be able address the implications of dependency.  However, I am still left wondering how the results will be interpreted once the index is generated.


The underlying question is whether (rising or falling) dependency is good or bad. Take Zambia's level of dependence on mining sector revenue. The structure of the mining fiscal regime in Zambia has, even after several reforms, resulted in tax receipts contributing a relatively low share of GDP and of domestic tax receipts compared to peers (although this has been rising of late). This has been viewed, for the most part, as bad - a reflection of Zambia being cheated of a fair share and ill-prepared to close tax loopholes. If this was remedied, by adjusting the fiscal regime and strengthening tax collection, mining sector revenues as a share of GDP and of total tax receipts could rise. This would be good .. or would it? Over dependence on mining sector revenues would expose the country to higher risk of volatility and might reduce tax effort overall, if taxing other sectors is i) hard and ii) a burden on non-mining sector growth. That would be bad, wouldn't it? Well, this is indeed a concern but maybe, through wise use of mining revenues, the overall performance of the economy could be enhanced, by addressing infrastructure gaps and improving basic service provision ... in this case higher dependence could be good.


The value addition measure is an interesting one, as well.  While it may be broadly correct to associate value addition with sophistication and diversity of an economy, I think one could think of some circumstances in which greater value addition of extractives resources is not associated with greater economic diversification. A focus on beneficiation of a mineral, for example, especially if it were to require significant inputs such as energy, could result in diverting capital away from alternative uses, locking in subsidies in input supply and reinforcing exposure to commodity price volatility (if the benefiating to intermediate product level only). Chile, which exports most of its copper in concentrate form, would probably score low on the dependency index of value added but may, nevertheless, have developed a highly diversified economic base. Good or bad?


So overall, while the index is a very welcome development, careful judgement will still need to be exercised in using it as an indicator of appropriate public policy. Countries may find themselves wondering whether they want to move up or down in the rankings and what policies to use to assure that one or another happens.