Written by Kishan Bansal - City of London Freemens School
In recent years, clean energy has been the clear way forward, making it one of the biggest industries in the world. According to the International energy agency, 2023 saw its largest investment into clean and renewable energy, $1740 billion, whereas the investment into fossil fuels was a much lower $1050 billion. International efforts to combat climate change have intensified the demand for clean energy technologies, which rely heavily on critical minerals such as lithium, cobalt, and rare earth elements. These minerals are essential components in renewable energy systems, electric vehicles, and advanced battery technologies. Material-rich developing countries find themselves in a unique position to capitalize on this increasing demand. By strategically leveraging their natural resources, these nations can foster economic growth, attract investment, and advance sustainable development.
The first strategy I would like to propose is to aim to attract a greater amount of Foreign Direct Investment (FDI). Developing, material rich countries such as Chile, who have become a leading country in lithium production, could use corporate tax rates to attract investment from wealthier countries. Reducing corporate tax rates provides a competitive edge to the country which reduces the tax. Other countries will be attracted due to the higher after-tax returns. With this, the developing country will see a wave of investors that are interested in investing in mining of rich resources. The operating costs with a reduced corporate tax rate will be lower hence increasing profit margins for investors. Using the AD equation: AD = C+I+G+(X-M), if investment increases, we will see AD increase therefore displaying growth, ceteris paribus.
Figure 1 - Aggregate demand and supply diagram
In the graph on the left, you can see the effects of reducing corporate tax. Firms can increase their prices and produce more (P2, Q2). This causes an outward shift in aggregate supply and aggregate demand (AS1 and AD1). An outward shift in AD displays growth which is a macroeconomic objective that a developing country should capitalise on. A boost in prices and output will result in more profit. This profit can be hypothecated into the mining and production of the desired materials allowing the same effect to occur but at a greater level.
One effective way for developing countries to benefit from the demand for critical minerals is by processing and manufacturing these materials locally. Instead of just exporting raw minerals, they should build facilities to process and refine them within the country. This can create jobs, increase revenue, and boost related industries. Governments can encourage local processing by offering tax breaks, subsidies, and setting up special economic zones to attract both local and foreign investors to build processing plants and manufacturing units.
Figure 2 - Adobe Stock
Partnering with international companies can also help by bringing in advanced technology and expertise. For example, Chile and Argentina, major producers of lithium, could develop local battery manufacturing industries. This would allow them to capture more of the global market for lithium-ion batteries, which are essential for electric vehicles and renewable energy storage. Local processing creates jobs across various skill levels, from manual labour to specialized technical roles, improving living standards and reducing poverty. Moreover, a skilled workforce is needed for these industries, so investments in education and training are crucial. Governments and private companies can work together to create vocational training centres and technical institutes, equipping the workforce with necessary skills. Over time, this focus on skill development can lead to a more capable workforce, driving innovation and increasing productivity. Processing minerals locally can significantly increase their economic value. By exporting finished products instead of raw materials, countries can earn more revenue and improve their foreign exchange earnings, helping to balance trade deficits and stabilize currency. Higher revenues can allow governments to invest more in public services like infrastructure, education, and healthcare, further stimulating economic development and improving quality of life.
Figure 3 - iStock
Material-rich developing countries have a great opportunity to grow by taking advantage of the rising demand for critical minerals needed in clean energy technology. However, they face several significant challenges. Firstly, many developing countries lack the necessary infrastructure, such as roads, railways, and ports, to efficiently transport minerals from mines to processing facilities and export markets, and building this infrastructure can be both expensive and time-consuming. Secondly, these countries might not have the advanced technology and skilled workforce required to extract, process, and refine minerals efficiently, making it difficult to add value to raw materials and compete in the global market. Additionally, attracting investment for mining and processing projects can be challenging due to political instability, weak legal systems, or corruption, which makes investors hesitant to commit funds. Furthermore, mining activities can lead to environmental damage, such as deforestation, water pollution, and loss of biodiversity, and can also negatively impact local communities, causing displacement and health issues. Balancing economic growth with environmental protection and social well-being is a major challenge. Finally, the global market for minerals can be volatile, with prices fluctuating due to changes in demand, trade policies, and geopolitical tensions, making it difficult for developing countries to plan and sustain long-term growth strategies. Addressing these challenges requires comprehensive planning, international cooperation, and investment in education, technology, and infrastructure to ensure that these countries can effectively capitalize on the demand for critical minerals and achieve sustainable growth.
In conclusion, processing and refining critical minerals locally can transform the economies of resource-rich developing countries. By moving up the value chain and exporting higher-value products, these nations can boost their income and foreign exchange earnings. This provides the financial resources needed for vital investments in public services, driving broader economic development and improving living standards. Embracing local processing is a strategic path for sustainable growth and long-term prosperity in the global clean energy transition.
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