The socio-economic impacts of natural resource concessions in Liberia

International Growth Centre

For developing countries, the evidence to suggest that foreign direct investment (FDI) into natural resources leads to economic growth is mixed at best. This project, using evidence from Liberia, suggests governments can employ a new strategy to increase the impact of FDIs in their country.
Under its previous administration, the Liberian government allowed a large number of foreign investors to invest into natural resources in the country, but crucially on the condition that these companies help provide public goods, like roads, power plants, and health centres to relevant communities. In this project, researchers used data collected on individual natural resource investments (or ‘concessions’ made by the government) and matched these with satellite data on night-time light growth around the area of the concession to estimate its effects on economic growth. Researchers found that local economic growth depended on who was doing the investing, and what industry they were investing in. For example, Chinese investments raised growth, whereas US investments did not. Mining concessions, specifically in iron ore, tended to raise local growth, whereas agriculture and forestry concessions did not. This could be explained by the fact that there were more demanding requirements to provide public goods for investors in mining, as this sector tends to be much more profitable over the long term than agriculture or forestry.
This approach of requiring public good provision from foreign investors potentially solves a Catch-22 problem: to attract investment, public goods are needed, which can only be built using tax revenues from concessions, i.e. after investment has happened.