World Bank Reprint Series: Number 124

Helen Hughes and Shamsher Singh

EcolotnOfic Re2nt:Incldence in SelectedRinetals a frd RNsu rl1S

Rleprinted ivith permission from Resotirces Policy (June 1978), pp. 135-45

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Economic rent

Incidence in selected metals and minerals

Helen Hughes and Shamsher Singh

The magnitude of the 'economic rent' and its distribution among producing countries,mineral exploitation companies and consumers has become a dominant issue innational and international policy formulation, but the difficulties in measuring the rentadd,to the problems of determining its equitable distribution. This paper examines thenature of the rent and estimates its incidence in bauxite, copper, iron ore, phosphaterock, tin and petroleum. Rents were found to be low for bauxite and iron ore. Bauxite,phosphates and petroleum producers have increased their sharm of the rent, though thistrend now seems to be reversing for bauxite and phosphates. Only in tin, and to a lesserextent petroleum, have the exporting countries captured significant shares in total rerht.Otherwise, the rent is largely concentrated at the processing stage, which suggests thatprocessing plant would have to shift to the producing countries if they are to claim alarger share.

The Industrial Revolution greatly increased demand for resources. The magnitude of the 'economic rent' and itsminerals with a consequent growth in the scale of production distribution between the host country and a foreignand international trade. The industrializing countries, in companly. or between exporting and importing countries, hasaddition to greatly increasing mining exploitation at home, become a domitnant issue for national and internationalbegan to seek minerals abroad, notably in the areas of new policy 'ormulationi. Tlhesc issues are particularly importantsettlement and in colonial countries. Growiing economies of lor poorer nationls, wlho are heavily dependent onscale led to vertical and horizontal consolidation and mineral/metal exports f[or their foreign exchange earnings.integration. By the end of World War I the mineral industry Developing countries account for a considerable, though bywas highly monopolistic. The distribution of the benefits of no means dominant, proportion of the world's mineralmineral exploitation began to be questioned in countries output, but the bulk of consumption is in high-incomewhere mining companies were almost uni'.ers:ll,. foreign industrialized countries, many of which are heavilyowned and produced largely for the parent, industrialized dependent on mineral imports. These countries also are thecountr, market. The ensuing history orsporadic conflict is ihome of the major corporations with mineral exploitationwell known. A landmark for mineral-owning countries came expertise. The corporations liave a high degree of horizontalin 1938 when Mexico nationalized its petroleum industry. and vertical integration, anv they are also involved in mineralAfter World War II the pace of disturbance and procecsing.accommodation accelerated. The 'rules of the game' of While a better understanding of the economic rentsmineral exploitation began to clhangpe rapidlN .' inherent in mineral cploitation and f.rocessing is essential

The quadrupling of crude oil prices from January 1974 for formulation of future policieN, the difficulties ofand the short-lived boom of 1973-1974 and subsequent bust n1caMluring them add to the problems of delcrrninirig theirof metal and other mineral prices resLuihed in a remarkable equitable distribution among mineral-richi countries, mineralsurge of interest in the economics ol exhaustible natural exploitation cmpaniiLies and mineral consumers. This paper

examines the nature of the rent and estimates, albeit on the

The authors are with The World Bank, 1818 H Street. NW, asis oi ex post and nragmented empirical evidence itsWashington, DC 20433, USA. incidence.

The authors are grateful to Messrs Choe, Hashimoto. Pollak. The concept of economic rentYang and Mrs Chhabra for their valuable inputs and to MissBeacham for her invaluable administrative assistance. The definition of economic rent dates back to Ricardo, who

0301-4207/78/0402-0135 $03,00 © 1978 IPC Business Press 135

A. cononie reent: Inicidencve in selected mnetals anid minerals

considered land as a 'Free gift of nature' and all its earningsas a surplus or rent. Claksical economists diefined rent aspayments to factors of production over and above theminimum necessary to induice them to wvork. Whlietlhr therent is actLIallY paid to the ossner of the scarce resource isimmaterial. Con reinporary discussion of economic rent hasdeparted almost eirircl% from the sense in wvhich the termwas used by classical economics. Technological innovationshave made the supply of landi more elastic by combining it \with capital, while quasi-rents have become incre:iligls f p - -

important returnis to other factors of production, and rents rVarising fromn market imperfections have grown.v In the f

broader sense, economic rent nma% be composed of severalelements -- rent to land (resource rent), rent io short-rtin cfixitx of ractors of production (quasi reil), rent to marketpower tnmonopol\ rent), rent to entreprenleurial abilh\. rent to A

technology, and so fortl. In practice it is rarely possible to Iseparate andl much less to appropriate separately the Narious L- .. -.-

elements of the economic rent generated fromi, say. the pit Outputhead to processing and fabricating for final use as finishedmetal or mineral product. Figure 1. Perfect compet,tion market.

Yet in the exploitation ot minerals the Ricardian conceptof rent remains relevant.+ Minerals cannot be exploited patterns ol' horizontal (as in petroleum) and vertical (as inwithlout technology and capital. Their elasticity of supplv is bauxite) integration. This meant that transfer pricingalso dependent on these inputs. However, there are betseenl the various stages of mining and processing does notsubstantial variations in the quality of mineral deposits. Thie take place at arm's length, and cornpetiti%e market prices atcorresponding costs of linding. mining and processing any particular stage of production are very difficult, if notminerals of diverse quality vary conisiderablv from deposit to itnposstble, to determine. In mintng and mineral processingdeposit even if all other costs ire equal. MNIineral deposits thus output prices have to be thouglht of not as beinghase an economic rent elemenilt which is related principallh to inidepenldently determined, but as a mobile network linked bythe quality of the mineral, the ease u itlt -. hich it may he ;ieriical and horizontal integration. A vertically integratedmined, andl its location. A high mineral content ore with few producer can push prices up and dowvn the chain to declareundesirable impllUrities wkould have a higher rent than a loxw profits at various stages of the produ .z-.n process accordingcoa tent ore with high undesirable impurities. An open-cast to osvnerslhip, taxation and othe'r conditions. Thesemined mineral of a given quality would generally% have a coniditions give rise to monopolistic rents which can behigher rent than an undergrouind mined mineral of the same captured by a monopoly (or oligopolh ) engaged in mineralquality. Physical *re characteristics also affect smelting e\ploitaltion or in mineral processing. The monopolistic (andproperties and hence the resource rent. Conceptually, the monopsonistic) rent that can accrue to mineral operationsamount of economic rent accruing to a given deposit should are shown in Figure 2.amount to the difference between the cost of productf'i for agiven deposit and the cost of production l'or a marginaldeposit, assuming all inputs and factor payments are pricedso that their marginal cost equals ni,rginal revenue. Thii :sillustrated graphicallh in Figure 1.

Under a perfectll comripetiti.e market, the equilibrium F -

price P of a product will be determined by the inLer'.ection o' Mcthe marginal cost curve .MCt and the demand curve D. Total \output demanded will amount to OQ. Efficient operation at p.

Q* will be enjoving a resource rent BC as compared to thenm.irgin,il deposit at Q. The total economic rent accruing to a p ----

all firms will be .4PE. Other rents accruing to firms are also 0.

explained by .:igure 1. In this case economic runt will equal K r--IHowever4 mineral markets are typicall\ imiperfect withi a /

strong tendency towards oligopoly. There exist complex A D

'Mines a'. well as land, generally pay a rent to their owner: Iand this rent, as well as rent of land, is the effect and never the 0 0m acause of the high value of their produce. D. Ricardo. The OutputPrinripals of Political Economy and Taxation, London, 1948, p46, Figure 2. 'Monopolistic market.

136 RESOURCES POLICY June 1978

Econiomnic' retit: Inicidenice in selected in eials ciand rmineralsLet us suppose that OQ was beinig produced at equilibriubru DdlIrewinil rent of producer of product 2 at Q* has risen

price P under perrect competition before the enterprise by BoB j.proceeded to restrict output. The quantity produced. OQ,, Overall loss of consumer surplus P- PIPrE' = 1.nP?PLEowill be determined by the marginal revenue curve ?IR. -2Fd L.

Total revenue = OFGQrn Consider a s;lua.tion where nlonopoliptic rent is not capturedTotal cost of prodctioll = OAGQm by the mineral exporting country. The product is processedTotal profit -. AFG in an industrial mineral importing couintry's few large firms.

A KG + KFGX; Suppose the product under consideraLion; is Poorite and it is-4-AKG -- KPnJG lprocessed into RICIUha1minr1. Poorite antd Riclhamina are

resource rent i monopoly rent co'npetitm'.clk priced to begin with, bult at somae stage the

Thus, the economic rent will be reduced from 4PE under Richlamina producers entier into a tacit collusion and resortperfect competition to AKG. But KPHG, part of the to m ioly pricing. Suppose for sirpliciiN that pre,Sillgcosts are zero and inpiut output coefficient is unitv.economic rent foregone, is recovered by the monopoly t

Net additionial rentearnedi bv the monopoly ~,PPm,1]'-GHE.

D for PR under perfect cornpelttionIn real life, virtually all products have subsUituiUCs in most F 0 for RM in both casesend-uses. Let us examine the incidence of rent in twoproduct market (Figure 3). MC for PR I

MC tor RM

MG2 \ 2 1Ii\D 'Otu

Prouct I Product| o2! iue.ihmnpouesoooy

oi o IlO ao2

Is' F iptZ,.,t Illgli 0os torve PndR ee

CC

-2 E. D. fo PRte eretcmTei

2KII 0 Om une MmnpiA' I II IOutput

_____ ot j P. Figure 4. Richamina producer's monopoly.Output Output As slroonv in Figure 4. Poorite (PR) and Richanina (R1 rI

have identical maarginal cost curves unider perfectFigure 3. Markets of related products (substitutes). competition as ssell as under Richamina monlopoly. They

hlave identical demand curves D uider perfect competitionSuppose product I doniiniates the market andi has a but tindier Richamnina nionopol%.. thle demand curve Di for

substitute. product 2, which is produced at a much higher Poorite shifts it, [the left.price Ion a coninarable e basis). Suppose theemciecv . Under perfect competition:producers of product I exercise thleir market power and raisethe price igniticaril% from PI to P,. This would reduce Fcounomic ret t for Poorite A.4PEdemand fromn Q to Qrand product I will gain a sigiiificint Economic recnt for Richlamiiina <A PE'nionopmol\ rent. A part of the, miarket shiare of product I willbe captured by produt. 2 itS demland curve will shift to thSe (In practice fli&c rents unav not be equal, It appears so hereright, its output will expand fromi Q` to 02 and its price will becaulSe the samne figure is Lused for bothi products)..

As tlle Richamina producers exercise in o'nopk bl\ power:For product ': Eiconomic rent lor Poor'ite A Irrd(;

Economic renit tinder cnipmtiiction A. '1'' 'conomie rent for Richelaina. ea R aEconomic rent under ioniuiAl -A 'IKG' M nd lprolht for Richt:minimL PrPlumun rlMronol\il rent aPer Ren-t loss for Poikorite PrPHG 4 GIlll o

Gain in renit P'IA 'il G bPJ'P7PiIG is the loss of rent takeni awai\ by the Richamina

For product 2: prodlucers anid GHL'E is thle loss fromi reduced demnand forPoorite resultinig from the priice increase by RichanminaIEconoimic rent before shft.12 'P.E,, producers. Suchi a state will occur whienever naturalFconoinic renit after shiift . /j resources are beinig exploited under a comnpctitive situaition orGain in ret -t i so prieed uider a verticaill iiitegraied operation and

RESOURCES POLICY June 1978 137

i;c'OnICOt( I'ein': In1c'dencte llt selccicdLz mrelals anEd OlOnerals.

processed products are being marketedl under tmonopolistie to dletermiile the magnitude r1 thie 'hiidden rent' toi whicil theyconditions. The situatioll where the Poorite prodLiucers are mnla he eiiiiiled as owners of the exlitiauible naturalL-traciting a monopoly rent is akin to the situation illustrated resoutrce. It' a .etter understanding ot' the magnitude of' thisin Figure 2. If hothi sides have a monopoly. this would be a rent is not developed and mineasuires are not taken to allocateduopolv case with the appropriation of the 'hiidden rent' the renL of its souree, this would tentd to encour,ige foriiili independing on their reslpective bargaining powers. of tinlopollep .

Estimal;tion of' renltPractical problems

We itow\ estiatc one an ' ex p)ost baSiS, th1e ecooicO1)n rentAttliougillii ret icll\easy tlo explain, in practice it is alnimost e trolclesl ila oil a n e are, (lie )silate ric lill

Althugh allsextracted in bauxite, copper. iron ore, phosphate rock, tinimplo(ssible to dletermiie, let alonie captuire in entirety, the rent andILI petroileiim in I 9)72 . We also examine the di',iribtiiOndLe to the o\wners oh' a natural resource. Thlere are usuallv o lthe rent betk eetn the exporting and importinig countries.substanitial leaks to suppliers of inputs, flactors employed and Ior bauxite. copper. phlospate rlck, tin and petroleum, ato consummteers oi the mine ral product. T he ptroblem oli tbroald dlefillitoll olf economic renit is uisedl by examining allaisecrtaiiliiie thle arm's lengthi competitive miarket prices Costs to get the product to the final consumner (niethod I ). I.etmakes it difficult to measure rents as an ad lition to sticl 1' bie the price paid by the final consumers for the prodtLiuctprices. In the samne seinc the monopolistic renits may tnot be * C tandlt C' tlhe Costs iILcilrredi In theC 1:l1`r.gl i l1.1 0a prOdiUCt Iromcaptured by the owners ot' the natural resoturce and instead a-a giVCII tlepIos1 to tlhe tirnal uiser. rhle econioiici renit l'or amay be appropriated bv the corporations themselses or bythe coiisunuers in the corporations' home countries.

A large transnational mining corporation maya hame non l R f' Cmarket access to material inputs througi sutbsidiaries orassociated companies. It may wkish to price these above

arm s l h c n imarket, in the l'actors of' production. aiid Ill the market f'oramslengthl prices in a g:ineunr to buildlei upits cuiut\-. i- l pnliiiishiedl products. It takes intt) account the rents arising fromtil

1r{s 6- rils local partriers or lo r taxationl purploses. nremoplitcirogpl,icretsA lmernam iel\ . if' it lfaces a relatively la'sourable tax situatioin i i i m

;quai renits to ow tiers of iechtito l ovs and capital, and e\enin the country' in *~ hich mining tak;es pzlace (an .i~ul(l imig w (indlmll gains or losses diiriiig market A.ditis inient process. In

national tax regulations and international tax agreements I Imake it worthwshiile! it miav underprice material inputS to practice. the economlic rent \as estimated by ieconiiioiinglowcr its overall tax al~inhi the price paid by hlie final consumner. the rent accruing to ilic

exportinig coutilr is taken ias the sum ol' the royalties, taxesThie pricitig ol' services IS particulalrly cmiiplex. .Ntining Txanid duties being levied or thie diflerence between folb pricesnroectls are olten situated in undeveloped areas. lackinc and nroiiuctior costs. IFor llle irnptitrllg coulltrv. economicirfrastructure facilities. These mav be suppliedl by the rent iS detileCd aS the difTerenice between the wvholesale pricegme krnnient. hv tile mining cormpans . oir bs- hoth. Tlie and processinig and iuirketing costs (inclidine normal protlit.attribution ol the costs of' suclh projject' is usudlly dilticmlt. or markups) plus import price, or as the sum of importAn appropriate market price of capital is also lmt ticiili to duties, les ies and other internal taxes.

dletermine. Equitv anid loan capital is usually part o01 ot*' I"or irr;, ,i> ecolltnkiiic rent accruing to a giveni mineralpll;ckage w9ith management t,eclinclogy anid access tomarkets. Wages and salaries introduce furtiher distortionis. mneltiding itnland srans,pori iiion) and ocean transportationMoreo- er. all these distortions \arv fromi olperatioin to cost of, a gien ore, and retiniiig costs in producing a unitoperation and 1rom countrv to couiuiiry

- - aillli Ill t metland the coarrespn(7ninig cost s urn of aThe Orgapniiatoil ot' Petroleumn Exporting Countries amotint of' etaln) dsmarginal ore lnelhm.d II). For an ore not being processed in(01`1E C )as demonstrated thiat N ith inelalstic supply anid * tie e\porting co>!:itrv, economic rent can be defined as:demanid, it is possible not onily to slift the econorlic rentsFrom minleral eorporations and conisuniers to the producing ER.i: am(CAn i Clii, a C,I .(.i:)coulitries. but also to increase the monopolistic rentts andtlhen appropriate a .Uht:iili.il proportion of thiem for the cx,min1eral owning nations. In bauxite and phosphate rock therehas also been a signiiic:ant shift in econoimiic rents as well asi wliere ERg ecotnlomIic rent (per unit of a giveIn ore) accruinigappropriation ol' an increased share of' highier monopolistic to a gis in oire, ('1P production cost, incluLlidig inlandrents in favoNUr ot' producling countries. But such action has transportatioil ceist (per utnit Nveight of' ore). C '1 oceannot yet been poNsible for olher metals and minerals. parilt transportation cost (per ullit wteig7ht o1f ore), a orebecause the producing :%porting countries have nout been requirements to produce a unit oh' metal, and -a give ore,able to agree on a market sharinig arrangement insolving whereas in a marginal (ire or it, nearest substitute which canproduction controls, and partl% because the financially ss eak te produced ainid transported %% ith tlie minimiuimi cost.sellers have litdle room to manoeuvre and dis ers1if s.ilhioll ille ccoiilnmic rent thius defined is market-specific as wellmassive inieritatimnal assistance. as mnile pleitlic. [lihrelore. strictly speaking. rent can be

For mineral -sporting countries, anid particulirh\ for the measutred 00nl- on a milne hb nin1e basis aned market bv-des eloiplg countries amrong them lor wvhich rents can be market basis. However, the need for its measurement on acritical developmental inputs, an important economic issue is world scale necessitated aggrepgtion.

138 RESOURCES POLICY June 1978

I'(cIl(iomlic t',ent: Incide'n1ce in 'schLte'd nclotAs undtC milt',Iw s

Table 1. Incidence of economic rent as percentage of final price

Bauw. Copper Iron ore Phosphate Tin Potroleumrock Shell OPEC

Exporting country1972 3 8 10 4 18 16 91973 9 3 18 19 111974 7 9 33 21 47 341975 7 * 2 28 20 46 331976 7 4 13 24 43 32Importing country1972 5 3 10 23 2 48 551973 7 8 24 5 48 561974 1 6 9 13 35 391975 3 9 30 2 43 411976 7 * 7 37 4 36 41Total1972 8 11 20 27 20 64 651973 5 1 7 27 23 66 671974 8 15 42 34 82 731975 10 * 11 58 22 89 741976 14 * 11 50 28 79 73

* Negative.

Results ()ne has to he clutious in dra%%ing concluisoions fromt suchp)artial coverag,e ttie sarnlple comer% onl1 ctlicietit producer%.The econiomic rents estimated in the above manner. antd r tAlso. a comparati:se analysis is nadetli dilicl1l by the fact thatshown in greater detail in the Appendix, are summarized it

Tabic I. These refer to a specific exporting and a specific produecl t.~ roditica NonetCl iessothel results nlsdcarte that:inilportin', country and not to total trade in a particular metalor mineral. Generally speaking, the de%eloping countries * Tlic total economic renlt, as a percenlage ot the linalchosen were the efficient producers -- rents enjoyed by other pric, is lowv lor bauxite atnd iron ore.producing countries would be significantly lower. 0 BaauLite, phiospliate rock and petroleum producers hate

There are wide fluctuations from year to year in the total beenl able to increalse their share in econormic renit (anrent and its distributioni between the e-xporting developing obvious result). but after an initial jpimp, tlihe share of theand the importing developed countries. The percentage bauxite and phosphate rock exporters in total rent hasshares are shown in Table 2. The wide fluctuations are the been eroding.direct result of the fluctuations in the market price of the rinal 0 Only in tin, and to) a lesser extent petruletini. hae theproduct. Except for petroleum, prices of metals and minerals exportinig coulitries been able to capttire a large share oftare notorious!y tinstable. the total rentt tin and petroleum are not so abundant in

Table 2. Distribution of economic rent between producers and consumers

Bauxite Copper Iron ore Phosphate Tin Petroleumrock

Shell OPEC

Exporting country1972 36 49 14 90 25 151973 - 53 13 78 28 171974 93 61 78 61 57 471975 68 21 49 92 52 441976 50 40 27 85 55 44Impolting country1972 64 51 86 10 75 851973 - 47 87 22 72 831974 7 39 22 39 43 531975 32 79 51 8 48 561976 50 60 73 15 45 56

RESOURCES POLICY June 1978 139

Econtomie relit: lIc identce inl selected inetals atnd minerals

nature, in relationi to dlemnand at current price. freight costs. Thc USA is the largest aluminium prodLIcinlg* Unlcss the etporting countries are able to exploit their country (29%) in 7')t) and so is the largest bauxite

market powscr. the economic rent is largely captured at consumer in the world, About 50"%o of US bauxite importsthe processing stage. This suggests that fabricating conie from Jl,maica.industries would i have to shift to the producing counitries Jamaica, a ili1L'CLI in1 member of the Iniernatioial l3ausiileif thev are to claim a large, share ol thc reilt. Otl.r' ice. Association, has implemented a production levy on bauxiteeven collusive action (phosphate rock, bauxite) is exports since 1974±t The rent elements accruing to Jamaicalikely to yield themil substantive and lasting gains. are conisidlere(d amnong the largest of the bauxite producinlg

counttries.Referencs 13aixite is first processe(i inito ailinififiia. and thenl into

alumiinium. No suibstitute for blauxite is commerciallyI Helen Hugihles. 'leonomic rents, the distributioni of gains from available at batxite's current price level, although vast

mmneral exploitation, and mineral de\ elopnient policy', Iforil sources of aluminia bearing clavs (1lurnitc. d asvsonite) couldDeveleopoient Vol 3. Nos II and 12. 1975. p 8I1. become potentially economic at muchi higher prices. The

2 J.M. Currie. J.A. Nfurph\l and \. Sclhmitz.. 'Sle :oncept of' substitution bv othler rnetals suclh as copper and steel foreconoimic surplus and its use in econlomic analYsis. Elcontic aluminium could be signilicani in determining rent elementsJournal, tDecemher 19'i in the aluminium ptice. Hiowever, this wvas not taken into

consideration, partly because aluminium productiln could beAppendix increased si .fifcanil1 wvithin the likely range of future

Estiao o r miarket prices, and aluminium maintains considerableEstimation of rent In individual minerals and metals adntgsmrtlrmelsiistaiiolue.advantages over other metals in its traditional uses.Bau.xite Trade can take place in primarv, intermediate and finalTo estimate the rent element in aluminium and its ftrrms bauxite, alumina and aluminium. Jamaica exporteddistribution bietween bauxite exporting and aluminium about 35"to of its output in the form of alumina in 1976producing countries, Jamaica and the USA wvere chiosen as (a.lumlainiutm1 w as zero). Rent elements are affected by thethe corresponding countries. Jainaica is one of' the major diegree of dLi0c'.ric processing which, hovever, was not takenbauxite producing amid exporling countries in the world (in itnto account in computing the rent.1970, its share amounted to 14.3%'o in world production and rhe results lor Jamaicani US trade arc shown in Table 3.19.2% in wvorld exports). About 85"o of Jamaica's bauxiteexports go to the LSA. Despite a lower aluminium contenit. t The prodiuctiorn levy was first implemented in 1974. and isJamaica's bauxite enjoys a substantial ad'.aniage over other tie(i to tie alumirnium price. The current levy rate is on averagecountries in the US market because of lows mining and ocean about 7 5'., of aluminium i lot i)rice

Table 3. Estimates of rent elements for aluminium, Jamaica - US case (US $/tonnel

1972 1973 1974 1975 1976

A. Mining, inland transportationcosts 25 28 34 38 39

B. Export price, fob Kingston 41 41 87 98 106C. Economic rent to Jamaica

(B - A) 16 13 53 60 67D. Ocean freight, insurance, and

costs (Jama,ca- USA) 11 13 13 11 11E. Production costs in USA,

excluding costs of bauxite 502 535 648 740 792F. Production costs in USA,

including costs of bauxitelB + D + E) 554 589 748 849 909

G. Aluminium price 582 551 752 877 977H. Economic rent to USA

(G - F) 28 -38 4 28 68k. Total economic rent (C + H) 44 - 25 57 88 135J. Percentaqe share of Jamaica in

total economic rent(C - I x 1 00) 36 - 93 68 50

Source Line G 99 5'., of ingot, New York, Metals Week. (various issues). Others World Bank estitnates.

140 RESOURCES POLICY June 1978

Economic rent: Incidenice in selerted metals anid minierals

Table 4. Economic rent estimates for copper. Chile to Japan (USi/lb)

1972 1973 1974 1975

A. Production costs a 44-0 73-0 940 56-0B. fob priceb (E - D) 48'5 64'8 90-6 55.8C. Economic rent to Chile (B A) 4'5 - 8'2 3-4 - 0.2D, Ocean freight and insurance 1'0 1.0 2.0 3.0

costsE. cif price 49-5 65'8 92-6 58.8F. Wholesale distribution 2'7 4'0 4.8 3.0

costscG. Japanese market price 54-0 80-6 97-9 60-3H. Economic rent to Japan 1-8 10.8 0-5 -1 .5

(G - F - E)I. Total economic rent (C + H) 6.3 -J. Share of Chile in total rent 71.4 - - -K. Share of Japan in total rent 28.6 - - -L. Total rent as % of price 11.7 -M. Chile's rent as % of price 8-3 - - -N. Japan's rent as % of price 3.3 13.4 0.5 -

a Includes operating profits of companies.b Actual unit values of export per pound for Chile in 1972-1975 were 41 c. 63c, 82c and 51 c per pound respectively.c Assumed as 5°6 of the Japanese market price.Sources: A and D from Codelco (for five largest mining companies in Chile).

E from Japan, Ministry of Finance, Japan Exports and Imports. Vol I, various issues.G from Japan. Conm,ittee of the Outlook of Non-Ferrous Metals Industry. 1976.

The rent elements in aluvninium price accruinig to Jamaica the susnect nature of the available data, an enquiry intoincreased substantiallN in 1974, ushen the production levy econiomic rent for copper iad to be deferred.was first implemented. Rent elements accruing to the L'SA.which are the sum ol' various rents such as the economic Iroti or'erent, monopolistic rents, labour rent and windfall gains or World production of iron ore in 1976 was shiared betweenlosses, have fluctuated considerably. The lower (even the developed. developing countries and the CPEs in thenegati%e) rent elements for the USA in 1973 and 19?'4 could rationl 40:25:35. However, the de% eloping countries' share inbe attributable to delived increase in the price of aluminium wvorlld exports wvas imluch higher (440o) and nearly equalledand increases in power prices respectively. lihe developed countries' share (46%o). Australia, Brazil,

Canada, the USSR, Liberia, India, Sweden and VenezuelaCopper are the main exporters.World copper production is distribuied among the The developed countries accounted for S5'n of worlddeveloped, de%eloping and the centrally planned countries imports. The largest iron ore importers are Japan (36"%l. the(CPEs) in the ratio 2:2:1. The CPEs are more or less self- EEC countries (34%(0) and the USA (12(1o). Major trade flowssufficient in copper. Consumption in the developing countries of' iron ore are frnom Australia and Brazil to Japan and theis relatively small (6%o of world consumption in 1973-75). ltC. and from Africa to the EEC'. African iron oreThey produce mainly for export to the developed countries, producers are coIsidercd to have a comparative advantagewhere over 50% of their production is refined. Principal over Latin Americanl and Australian prodticers in the EECexporters ol copper are Chile (19%0), Zambia (160o), Zaire nmrkeis. because of' favourable geographical location. Thus(11%)I and Canada (15%o). Copper is by far the miost the i-F(' as an iniplrorier and Africa as an (eflicienil exporterimportant metal exported by thle developing countries and with Australia as a nmagiial supplier wcre analysed.the rent involved and its disirih.tioit has a major The nmletod`ol0eg! useCd in nMC:isuinng economlic rentsignificance. EIstination o' the rent Was attempted by accruing to iron ore was described earlier (mliethod 11. Thedacompoi.Ning tle Japanese price with Chile as a tiuppfier, but in.cestigiition w as limited to the iron ore stage and rentsserious difficulties were encounitered in estimating the acciuiniig at the iron andi steel stage were not examined. Theeconomic rent For example. the cost of production for results are shown in Table 5.copper in Chile reported by Coidelco, including reportedprofit'. Was consistertlyI higher than the fob price for every PleishlVhah' rockyear (Table 4). PIhospplite rock is an essential raw material for phosphate

An attempt was made to analvse the pricing in trade fertili/ers tsuperphoNphaie.s. diammonium phosphaties. etc)betwveen Gernyanv and Chile. but the results seemed even less . for which no substitute now exists. It is produced motlyVmeianingful than in the case of Japan and Chile. In view of t'rom open cast mines of sedimentaiVr deIposits. The major

RESOURCES POLICY June 1978 141

Hconotnic 'eni: Incidence in selected miietals and minerals

Table 5. Rent accruing to irotn ove imported from Africa and Australia tin EEC markets)

1972 1973 1974 1975 1976

Africa Australia Africa Auistralia Africa Australia Africa Australia Africa Auistralia

A. Production costs and iidaid Iranspirriatitm 96 11 I 11 4 131.6 14 0 158 15 8 16 7 16;0 117 (

costs (f Iron ore(US $/ton gross w ..qijtl

B. Ocean trsnsporlatuori cists (US $. ton 3 0 50 6 (t 9 0 l) 9 0 4 0 0 n 4 0 1 091.iss weight of -ron ore)

C. Total costs UJS S rnrn l-;i weight of 126 167 1 14 226 200 24 8 198 23 7 200 240

Iron ore) !As *II0 Iron ore rec irements per ton olf 1 6 1 5 1 6 1 5 1 6 1 1 I fi 1 5 1 6 1 5

Fe content (tons gross weight)E. Total costs per ton of Fe contsent 20 2 25 1 27 8 33 9 320 37 2 31 7 35 6 320 :36 0

(US S) $C + D)F Rent per ton of F`ecorotent lUJS $) 4 9 0 6.1 0 5.2 0 3 9 0 4.0 0

G. Rent per ton i. rgross weight ol 3 1 0 3.8 0 3 3 0 2 4 0 2 5 0

œron ore IUS $l I F D)H Rent per ton in gross weight of iron sirS

gained by producingcountries (US Sl 1.5 0 2 0 0 20 0 0 5 0 1 0 0

I. Rent per ton in gross weight of iron ore 1.6 0 1 8 0 1 3 0 1 .9 0 1 5 0

gairied by consuming countries (US StJ. Estimated price cif in the EEC markets of 15 7 16 7 21 2 22 6 23 3 24 8 22 3 23 7 22.5 24 9

iron ore (US Stton gross weight) IC l GIK. EEC impo.t5 of iron ore from Africa arid 29 8 34 10 38 11 30 9 .31 9

Aisrl.wa Irh iiI.nd or'; ,n ; .i.'n si'rlL. Total rent (million USS) ICG x K) 90 a 129 0 125 0 72 0 78 0

M. Total rent gained by producing countries 44 0 68 0 76 0 15 0 31 0

(million US S1 (H x K)N. Total rent gained by consuming counmlos 46 0 61 0 49 0 57 0 47 0

(million US $1 II x K)

nrodLuCillg ad xprrrlitE countries are the USA, the USSR. total rent by raising tile export price. It shlows an increase toand Moroeio, followed by Algeria. Jordai, Senegal, Tunisia, about 50(o in 1975, wlhiel we may consider as an amraLgeand Tog.i. Western Europe and Japan are the major lor tie 1974-76 period.importers. Morocco is the largest and also the least-costproducer among the deLe eloping cot ntries.

The distribution of the economnic rent for phospliate rock I/iis pre;cnt1 largely betwveen the rock exporting countries' The bulk of world tin output comes from developinggovernments and the fertilizer industry of the consuming coulnltries. Six countries Malaysia, Bolivia, Indonesfa,countries. The rent was estimated by decomposing the price I hiladnd. Nigeria and Zaire -- produce 70oo off world tinand the total cost. Table 6 shows a breakdown of the price itrlpuL. D)e%loipirrg countries account for almost 80no ofpaid by farmers in France for phosphate 6Crtillhers made world exports, N1alaksia is by far the largesr exporter. Infrom phosphate rock imported from Morocco. We take up 1976 it accounted for 7(o of total world tin exports.this case because France is ttie largest importer or Norocco's Con-l,llrnrilon or tin is concentrated in developedphosphate rock and is also representative of the other countries, vhichl as a group absorb about 7sio of svorldWestern E'ur0pean countries. pro(duction. Cenirally planned economies account for about

Wide flucLuations in the total rent and its di.tribtIlron 2(1`.,, and the remainder is consumed in developing countries.betwveen Mhorocco and Francrice during the 1970 76 period Tlc USA is the sillgle most impolrtant tin consuLIing countr)reflect the boom in phosplhate rock prices in 1974 75 and the with a share os airhut 25. of total world consumptioli..ubseqiuent collapse 'oarting from the last quarter of 1975. Malaysia and tilc I iSA, tile largest expoirter and the largesiBefore the price rise in 1974, Morocco's sliare in the total importer, werc cioIsen to estimate the resource rent. This wasrent had been oirul IS 25. The estirlr:ies of the shares in dolle througll deconnpsipii n oif price as shlowni in rable 7.Table 6 for the following years are distorted because of tile Mining costs showni are weigied a' crake costs an(d include

time lags involved. Tile rock export prices shown in Table 6 inland transportation antd apital costs. Import dltilc atndare the prices realized in thut year. ifowever, it takes some taxes are nolt imposed by thc consuming developed countries.time until the exported rock reaches the farmers in the form 'Tulie Malavslian eo'ernnicnt taxed tin at a lower Rat rateof phosphate felrcilil.crs and becomes reflected in the prices to fr 'ni1 96() to 1974, which resulted in a tax on metal of aboutthe farmer. Information onl this is not available. The estlinnit l6ho at a priee ofI US$8 025. 'onnc. In 1974 a progrcssikeof Msorocco's shiare for 1974, therefore, is clearly an ;sirchtarge related to market prices was enacted, whichoverestimnate and that for 1976. an underestimate. resulted in an additional tax of 8%ho at a price of $8025.

Nc urtheless, a clear i-ndication emerges from Table 6 that Thus. expoirt taxes and ro alties vary according to marketMorocco was able to increase substantially its share of the price.

142 RESOURCES POLICY June 1978

LEncooinit rentl: IlcidncWe in selected metals and mnierals

Table 6. Economic rent estimates for phosphate rock, Morocco to France (US $ionne)

1972 1973 1974 1975 1976

A. Mining, beneficiation, 26 31 38 43 44inland transportation costs

B. Export price, fas Casablanca 34 40 160 197 106C. Economic rent to Morocco 8 9 122 154 62

(B - A)D, Ocean freight, insurance, and 15 24 29 19 15

costsE. Production costs in France, 76 84 91 100 105

excluding costs of phosphaterock

F. Production costs in France, 125 148 280 316 226including costs of phosphaterock (B + D + E)

G. Wholesale and retail distribu- 40 48 59 67 68tion costs

H. Price paid by French farmers 214 258 373 544 465I. Economic rent to France 49 62 34 161 171

(H - G - F)J. Total economic rent (C + t) 57 71 156 315 233K. Percentage share of Morocco in 14 13 78 49 27

total economic rent (CiJ x 1 00)

Source: Line H --based on 18% P2 05 superphosphate prices reported in Foreign Agricultural Service. USDA, 7 June 1977.Others World Bank estimates.

Table 7. Economic rent estimates fortin, Malaysia to USA (US $/tonne)

1971 1972 1973 1974 1975 1976

A. Production costs a 2 611 2 782 3 445 5 068 5 207 5331B. Export price, fob (A + C) 3 272 3 497 4 338 6 895 6 728 7 309C. Economic rent to Malaysia 661 715 893 1 827 1 521 1 978D. Ocean freight and insurance 60 65 75 85 100 115

costE. Imported cif price (B + D) 3 332 3 562 4413 6980 6 828 7 424F. Wholesale costsb 255 270 350 610 525 585G. Wholesale price (USA) 3 688 3 913 5018 8 737 7 491 8373H. Economic rent to USA 101 81 255 1 147 138 364

(G - E - F)I. Total economic rent 762 796 1 148 2 974 1 659 2 342

(H + C)J. Share of Malaysia in total 86.7 89.8 77.8 61.4 91.7 84.5

rentK. Share of USA in total 13.3 10.2 22.2 38.6 8.3 15.5

rentL. Total rent as % of price 20.7 20.3 22.9 34.1 22.1 28.0M. Malaysia's rent as % of price 17.9 18.3 17.8 20.9 20.3 23.6N. US rent as II of price 2.7 2.1 5.1 13.1 1.8 4.3

a Includes inland transportation costs and capital costs.b Assumed as 7%6 of .he wholesale price.Sources A and C from International Tin Council and World Bank.

D fronm US Maritime CommissionG from American Metal Market.

RESOURCES POLICY June 1978 143

Economic rentt; Incidence in selected metals and minerals

Table 8. Economic rent of petroleum, Saudi Arabia to Western Europe

1972 1973 1974 1975 1976

A. Export price of the marker crude (US $/bbl) 1.90 2.70 9.78 10.72 11.51B. Economic rent to Saudi Arabia 1.60 2.30 9.10 10.10 10.90

(revenue of the government) (US $/bbl)C. Company margins and various cost 6.00 6.80 7.30 8.20 9.30

elements (US $/bbl)D. Economic rent to Western Europe 9.40 11.40 10.30 12.70 13.90

(taxes by consuming countrygovernment) (US $1bbl)

E. Weighted average price to consumers 17.00 20.50 26.70 31.00' 34.10in Western Europe (US $/bbl)

F. Total rent (B + D) (US $/bbl) 11.00 13.70 19.40 22.80 24.80Total rent as % of price 65 67 73 74 73Share of exporting country (%) 15 17 47 44 44Share of consuming country (%) 85 83 53 56 56

Source; 1972-1975 Ali M.Jaidah, Secretary General of OPEC, 'Pricin of Oil, the Basic Facts'.1976 and * World Bank estimates.

Petroleum

World energy production and consuinption is dominated by 0 The substitution poisibility is linited to a certain s.bsetcrude oil. In 1975, crude oil represented 55%t' of world energyproducion, followed by natural gas and coal, both with * A n eror no-econir

abou 18 .cnrbto. T ,, wol make is doiae b, A number of non-economic cOnsiticrationisabout 18% c, n T, w d m t is d cnvironmcntal. political, etc - add to the costs orOPEC countries whio together exported $117 billion worth of substitution.crude oil En 1976. c Over an extended period, the costs of the alternativeSubstitutes for petroleum are coal, natural gas, sources, as compared with petroleum, are certain tohydro/nuclear electricity, and a number of non-commericaland non-conventional energy sources. Several factors make increase, and the long-run marginal costs from theseit difficult to evaluate economic rent of petroleum on thebasis of its least-cost substitutes: The cstimniates of the economic rent in Table 8 consist only of

Table 9. Economic rent of petroleum

1972 1973 1974 1975 1976

Cost of oil industryoperations (US$/bbl)l 4.10 4.65 4.15 5,60 5.70

Rent to exportingcountry (US $/bbll 1,80 2.60 10.55 11.10 11.80

Rent to consumingcountry (US $/bbl) 5.40 6.60 7.85 10.40 9.70

Average consumer price (US $/bbl) 11.30 13.85 22.55 27.10 27.20Total rent (US $/bbtl 7.20 9.20 18.40 21.50 21.50Rent as % of price 64 67 82 79 79Share of exporting country (%) 25 28 57 52 55Share of consuming country (%) 75 72 43 48 45

a Including oil industry integrated margin on a replacement cost basis.b Apparent decline due to currencY conversion factors.Source: 19 73-1 976 - Shell Briefing Service.

1972 -World Bank estimates.

144 RESOURCES POLICY June 1978

Economic rent: Incidence In selected metals anid mintteralstthosc parts that the producing and consuming country Cgovernments take in the form of taxes and duties. The Cestimates would, therefore, understate the total economic 32 0 Consumer governmentrent to the extent of the rent elements contained in the 3 Exporting governmentcompany margins and various cost categories. Data for 24decomposition of this category are not available. L.

Estimates of the economic rent are shown in Tables 8 and I9 and Figure 5. Before the exploitation of monopoly rent 1 6 Fthroughl exercise of market power in 1974, the oil exportingcountries received a comparacivel) small share of total rent. 8,\The total rent has also increased since then. Buit the detailsdif'fer according to the source used. OPEC data (Table 8) - . ,> \ N >*,,^ &Qshow that in the trade betNveen Saudi Arabia and Western OEurope during 1972 and 1973, exporting countries receivedronly 15 17%o of the rent, Shell data (Table 9) place theexporting countries' share at 25-2,3%u (the countries involved

32are not specified and the data may not be comparable).Another important difference is thlat OPEC data show thatSaudi Arabia still receives a smaller proportion of the total = 24 -rent, whereas Shell now places importing countries' share at n

a lower level.

16t;

Figure 5. Consumer price breakdown for petrol. oSources top-Shelf;bottom -OPEC. 1972 1973 t974 1975 1976

RESOURCES POLICY June 1978 145

THE WORLD BANKHeaidquar/ters:1818 H Street, N,W. UWashington, D.C. 20433, U.S.A.European Office:66, avenue d'I6na75116 Paris, FranceTokyo Office:Kokusai Building,1-1 Marunouchi 3-chomeChiyoda-ku, Tokyo 100, Japan

The full range of World Bank publications, both free and for sale, isdescribed in the World Bank Catalog of Publications, and of the continuingresearch program of the World Bank, in World Bank Researchl Prograni:Abstracts of Current Studies. The most recent edition of each is availablewithout charge from:

PUBL ICATIONS UNITTHE WORLD BANK1818 H STREET, N,W.WASHINGTON, D.C. 20433

U.S.A.