Mining Revenues and Inclusive Development in Guinea

IMF Working Papers, April 29, 2023

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What are the potential benefits of increasing the taxation of a foreign extractive sector?
Case study: Guinea.
Method: multi-sector macro-inequality model with heterogeneous agents.
Quantifies the long-run equilibrium impact of additional taxation when proceeds are invested in:
- human capital,
- inclusive infrastructure,
- social transfers.
Focus of analysis: GDP, labor formalization, poverty rates, Gini coefficients, rural/urban inequality, and sectoral reallocation.

The three forms of investment (human capital, inclusive infrastructure, social transfers) are complementary.
Infrastructure investments:
- favor formal production in the urban area.
Growth and government transfers:
- boost the demand for food.
Combined effects:
- help support the rate of return to education,
- protect job formalization through higher wages and prices of informal goods.
Education policy:
- boosts labor supply in rural and urban areas.
Overall, additional taxation of the foreign extractive sector, when invested across these three channels, yields long-run equilibrium gains across macroeconomic, labor-market, and distributional metrics.

Investing increased mining revenues in human capital, inclusive infrastructure, and social transfers can:
- sustain GDP growth,
- promote labor formalization (especially via infrastructure-induced formal urban production),
- reduce poverty through higher demand for food (augmented by transfers and growth),
- mitigate inequality by supporting returns to education and protecting formal jobs.
Complementarity across investment types is essential: infrastructure promotes formalization; education increases labor supply and returns; transfers support consumption demand, especially for food, reinforcing rural incomes.