# **III. Evolution from commodity discovery to production**

Resource discoveries matter to the economy only insofar as they can be developed into production. However, since 1950, less than 60 percent of gold, zinc and lead discoveries have made it to eventual production, and less than 40 percent of copper and nickel discoveries (Schodde, 2014). Once developed, the market value of discoveries can be large compared to the size of LIC and MIC economies. For copper mines, for example, production in 2014 alone accounted for 6 percent of LIC GDP and 2 percent of MIC GDP, on average (Figure 3).

Depending on the commodity and the size of the discovery, during the lead time between commodity recovery and extraction, countries can accumulate sizeable vulnerabilities as investment rises and external liabilities grow. In the data set used here, investment growth increased sharply in the five to ten years before actual extraction of the resource began (Figure 3). This effect was only apparent in low-income countries. Since their economies tend to be smaller than middle- and high-income countries, the development of a large mine can create significant domestic demand pressures. Using a global database on giant oil discoveries (those exceeding ultimately recoverable reserves of 500 million barrels), including in Africa, Arezki et al. (2015a) find that investment growth rises immediately upon discovery and current account deficits widen. GDP growth and private consumption growth respond only once extraction begins. The full increase in GDP growth materializes with commercial production, when vulnerabilities unwind as exports expand.

The size of vulnerabilities depends on three factors: how mine construction is financed, whether governments borrow in anticipation of rising commodity revenues in the future, and whether private consumption and investment rises in anticipation of rising incomes. If rising imports and current account deficits are financed by FDI, which tends to be less prone to sudden stops than debt financing, short-term vulnerabilities are more limited (Levchenko and Mauro 2008). Nevertheless, a sudden stop in FDI projects could also disrupt foreign exchange markets and sharply dampen activity. In particular, expectations of greater FDI (including as a result of recent natural resource discoveries) can encourage long-maturity non-resource investment projects. If these expectations are not validated, a sudden stop could follow and trigger fire sales of long-term assets and a collapse in activity (Calvo 2014). Additional, fiscal risks arise if governments expand spending and borrow against future commodity revenues.

The following examples illustrate the heightened vulnerabilities associated with lead times in a number of LICs.

- **Sierra Leone:** The discovery of major iron-ore deposits in 2009 led to a substantial upward revision in growth forecasts to over 50 percent in 2012 as mining production came onstream. However, work stoppages and a breakdown in the railway system delayed the start of the mine, so that actual growth outcomes were much lower than initial projections. Since then, a collapse in global iron ore prices by 50 percent between 2011 and 2014 has led to severe financial difficulties at the country’s two foreign-owned and highly indebted mining operators, with one declaring bankruptcy and the other halting operations (World Bank 2015e, IMF 2012b and 2015a). This and the outbreak of the Ebola epidemic set back activity, with the economy estimated to have contracted by 20 percent in 2015.

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