MINDEX: A Deeper Look at the Extractive Wealth of Nations

Sigmund Freud wrote that “it is impossible to escape the impression that people commonly use false standards of measurement.” The case of natural resource wealth measurements is no exception, as these estimations have been plagued by biases, statistical misconceptions and a misleading tendency to lump very different countries together as “resource-rich.”

Improving how we conceptualize, and measure, resource wealth and dependence is central to helping countries decide what role resources should play in their development. Better measurements will also help countries to navigate the global transition toward cleaner energy, which poses threats to some resource producers and creates opportunities for others.

This need led to the recent creation of the Multidimensional Indicator of Extractives-based Development (MINDEX), which provides a new and improved approach to measuring resource wealth and dependence. The MINDEX:

• Distinguishes between resource dependence (i.e., what proportion of key economic indicators comes from the resource sector) and resource (i.e., how rich a country is in natural resources per capita). 
• Provides a framework for analyzing six different variables of resource wealth and dependence together, leading to a number of “case scenarios” that describe the role of resources in a country’s economy and the challenges that it may be facing to make the most of them.
• Differentiates between extractive resources, which allows us to see how policy challenges can vary from one extractive commodity to another.

In this post, we draw key lessons from a recent collaboration through which we’ve applied the MINDEX methodology to build profiles for six pilot countries (Algeria, Chile, Colombia, Democratic Republic of the Congo, Mongolia and Nigeria) that shed light on the varying dynamics and challenges countries face in managing their natural resources. (Access the profiles here.)

Challenges of acute mono-resource dependence: Nigeria

Nigeria ranks as the world’s 12th largest producer of oil and holds the largest natural gas reserves in Africa. Though the country also holds reserves of a variety of minerals (especially iron ore), the mining sector remains nascent, with insignificant contributions to the country’s export basket and fiscal revenues. As of 2021, Nigeria displayed a heavy dependence on oil and gas, but with relatively modest resource production per person, given the country’s large population. As can be seen in the figure below, in per capita terms, Nigeria has low extractive resource production (as approximated by rents), exports, revenues and reserves, but nevertheless a high share of extractives in total exports. Nigeria therefore should shift its focus from simply diversifying within the oil and gas sector to broadening its overall economic landscape. With a large and rapidly increasing population, relying solely on linkage development around oil and gas on e.g., processing oil and gas in-country may not meet diversification needs.

Unlike countries that are dependent on a variety of extractive resources, Nigeria’s over-reliance on oil and gas also exposes the country to severe risks related to the energy transition. Nigeria ranks 3rd globally for the highest carbon intensity in gas production and 22nd for oil. As carbon taxes rise, and consuming firms and investors increasingly prefer oil and gas that was produced with fewer emissions, Nigeria’s dependence on its relatively dirty oil and gas sector puts it in a challenging spot, underscoring the urgency with which government officials and other stakeholders should rethink its resource strategy.

Lessons multi-resource abundance: Colombia and Mongolia

The challenges of resource-based development can be very different across extractive sectors even within the same country. It can therefore be helpful to look at how a country’s resource wealth is divided between different extractive commodities. The cases of Colombia and Mongolia are informative in this regard.

Though Colombia holds and extracts minerals (such as ferronickel and gold), fossil fuels make up the bulk of the country’s extractive resource wealth, with coal reserves estimated to be more valuable (at current prices) than its oil and gas reserves (though coal currently provides a much lower contribution to fiscal revenues and the export basket). Coal is most at risk of becoming a “stranded asset” (i.e., it is no longer commercially viable to produce it), followed by oil. So even though Colombia’s extractive resources are diversified between oil, gas and mining, most of its resource wealth will be threatened by the energy transition to green technologies. This is all the more important because some regions of Colombia depend heavily on coal.

Mongolia is endowed with a variety of extractive reserves, particularly gold, copper, coal and iron ore. Among these, coal is most at risk of becoming a stranded asset due to the energy transition.

Although the graphic below shows that Mongolia’s fossil fuel exports were slightly higher than mining exports (in 2018), the country’s MINDEX scores reveal that the broader economic weight and potential of the non-coal mining sector exceeds that of the country’s fossil fuel industry. Furthermore, Mongolia’s mineral reserves (not including coal) are considerably more valuable than the country’s fossil fuel reserves. In the future, the non-coal mining sector to will likely overtake fossil fuels as a main source of exports, especially as demand for coal declines with the energy transition.

NB: in this figure, coal is classified as a fossil fuel rather than part of the mining sector.

Assessing policy changes amid evolving resource dynamics: Democratic Republic of the Congo

The DRC’s economy is highly dependent on the extractive sector. Extractives account for as much as 99 percent of the country’s exports in some years. Time analysis of the DRC’s MINDEX scores suggest that more resource revenues accrued to the government of DRC in 2014 than in 2010. This could be explained by the efforts from government to encourage more investment in mining, notably through a mining code revision process that began in 2012. However, resource production remains extremely low in comparison to the value of extractive reserves and the level of export dependency on extractives, suggesting that extraction capacity may be limited, or that there could be smuggling of extracted commodities.

In conclusion, examining the different dimensions of extractives dependency can help us to understand the challenges facing resource-producing countries, and how to address them. The country profiles mentioned above present these kinds of insights, as well as a template for analyzing a country’s resource dependence.

For further information about the MINDEX, consult this published study.