World Monitor Magazine June #3 | Page 58

EXPERT OPINION The economy’s dependence on commodities vs. value of the extractive industries Lee Kuan Yew: “I thought then that wealth depended mainly on the possession of territory and natural resources, or valuable minerals, or oil and gas. It was only after I had been in office for some years that I recognized that the decisive factors were the people, their natural abilities, education and training.” 1 Victor Kovalenko Senior Manager, Head of Climate Change and Sustainability Services in Kazakhstan, Ukraine and Belarus, EY Ilyas Kadyrov Expert, Climate Change and Sustainability Services, EY 52 world monitor Every year, countries with developed market economies consume more natural resources than they produce. The main suppliers of raw materials for those countries are emerging markets, which in turn creates a significant dependence of their population’s living standards on natural resources. Local people, the authorities and other stakeholders present on the territory of the mining companies often criticize and fail to see the full picture of the socio-economic and environmental contribution. This situation prompts the mining companies to think about the role their business actually plays in the development of the countries they operate in. After all, mining industry players, especially large ones, not only earn money, but also make an important contribution to economic development by building networks and relationships through purchasing goods and services and interacting with local suppliers. To make the right decisions and achieve the set goals, it is necessary not only to evaluate and measure an industry’s performance, but also to understand and explain to all the stakeholders, especially to the local population and experts, the true value the industry brings. Due to its employees’ purchases and consumer spending, each company, regardless of its size and profile, significantly affects other areas and sectors of the domestic economy and ensures additional jobs in contracting companies, which allows the latter to generate income and salaries to their employees, as well as additional tax revenues to the country’s budget. To completely appreciate the importance of an industry for the economy and evaluate its impact on the country’s socio-economic development, it is necessary to take into account not only its direct contribution, but also the indirect and induced impacts. What is the ‘total’ contribution? The total socio-economic contribution comprises three components (impacts): • Direct. A contribution created by the industry itself: the number of employees in the companies, taxes they pay and their salaries. • Indirect. A contribution created in other sectors of the country’s economy due to local content (purchases of goods and services). • Induced. A contribution created in the economy due to consumer spending by their own employees a s well as indirect workers. The economic substance of each impact is illustrated below. KZT 100 of the product created by the industry (for example, sold ore/concentrate) comprises (hypothetically) the following: purchases of raw materials and supplies (food, fuel and clothes) – for example, KZT 40;