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Tchiatura and the Resource Curse

Tchiatura is a small but resource rich and picturesque town, situated in the province of Imereti in Western Georgia. The abundance of an important natural resource, manganese ore, was the main reason for establishing the town in 1879. Akaki Tsereteli, the famous Georgian writer from the same region, initiated the manganese mining back then. To increase efficiency in transportation of the mineral, a railway was built in 1895.

By this period, up to 6000 workers were employed in the Tchiatura mines and the extracted material made up about 50% of total world’s manganese exports. Tchiatura abounds with steep rocks and mountains on which the manganese placers are located, and so transporting workers to the mines and manganese to the railway terminals was a main challenge in the development of the industry. For developing the whole capacity of the industry, the Soviets decided to build a web of cable cars above the city. The first of these “rope roads” was established in 1954, and more than twenty more followed ever since. These connections were used for transporting workers, material, and just for bringing citizens to the upper parts of the town. Besides their functional value, rope roads also added much to the panorama of the rocky town.

 

A worker in a cable car (photo: Amos Chapple)

A worker in a cable car (photo: Amos Chapple)

Since the collapse of the Soviet Union, however, the mining industry of Tchiatura began to deteriorate. The town, once the main manganese ore supplier for the steel production of the entire Soviet Union, is in a deep crisis now. One can see many run-down buildings all over the place, shabby cabins are hanging on the ropes, and in the last 20 years several accidents happened with the cable cars. The working conditions for the miners are unpleasant and sometimes unbearable, and they are paid low wages. Except for mining, Tchiatura does not provide any economic opportunities to its residents. Finally, there are severe ecological problems.


WHERE DO THE PROFITS GO?

It is not the case that there is no manganese ore production in Tchiatura anymore. The manganese ore from Tchiatura accounts for 10 percent of total Georgian exports, just after the export of reimported cars. The Tchiatura mines have a capacity to produce about 261,000 metric tons per year, and each of these tons has a current world market price of 2,200 US dollars. Yet unlike in Soviet times, the Tchiatura mines are now privately owned.

The natural resources of Georgia belong to the Georgian people, and therefore the profits made by extracting these resources should not flow into private pockets, but should benefit all Georgians. While it is true that mining companies invest in machinery and facilities and they take certain risks, they are essentially selling what belongs to the citizens.

The fact that Tchiatura, a town abundant with valuable resources highly demanded on the world market, is in such a bad shape, gives rise to suspicions that most of the profits made through the manganese production are not returned to the society. A similar argument may be made about other mining activities in Georgia. What is going wrong?


THE RESOURCE CURSE

The “Resource Curse” or the “Paradox of Plenty” refers to the observation that many countries rich in natural resources experience long-run economic stagnation. Frequently, despite the abundance of raw materials, their populations suffer from painful poverty. Somehow these countries, many of whom are located in Africa, cannot fully exploit the advantages of the resources and cannot transform the revenues made by exporting raw materials into economic development.

One problem caused through the exports of raw materials is the induced appreciation of the local currency. This problem is also known as the “Dutch Disease”, a term coined by The Economist in 1977 to describe the effect of the discovery of natural gas fields on the Dutch manufacturing sector. When resource exploitation develops rapidly, exports soar, leading to an appreciation of the local currency. Prices of local goods in terms of foreign currency increase, and the export chances of all other industries of the country are impaired. Natural resources, however, are exhausted sooner or later, and then the country has lost its competitive industries, while the resource exports have also ceased to generate revenues.

Another reason why the abundance of natural resources can be a curse is rent grabbing. When there is a boom in resource extraction, people try to benefit as much as possible from these windfall profits. Instead of working creatively and investing their resources into optimizing their production outputs, the money is spent on lobbyism and outright bribery in order to get access to the resources. This problem is most virulent in countries with a low level of institutional development, low transparency, and poor democracy.

The third reason explaining the “Paradox of Plenty” is the usage of the revenue generated through selling natural resources. Optimally, a country should invest the money it gets from natural resources in long-term sustainable projects, such as the building of infrastructure, buying international assets, investing into the capacities of other industries, and education. Yet politicians tend to spend these windfall profits on current consumption. Exceptions are Norway and, to a lesser extent, some of the Persian Gulf countries. Norway has used its oil revenues to set up a huge state-owned investment fund, and only the capital returns of this fund are available to the government. Countries like the United Arab Emirates have also created huge funds, and in addition they try to establish industries, like airlines, that will generate income once their oil is exhausted.


BACK TO TCHIATURA

Of the three reasons that account for the “Paradox of Plenty”, the first one is the least probable to apply to Tchiatura. For years, Georgia has a negative balance of trade, and even though our country delivers raw materials to the world markets, these exports do not push up the value of the Lari in an unhealthy way.

The third reason is also rather unlikely to explain the Georgian situation. Arguably, the government does not spend unreasonable amounts of money on short-run consumption.

In my personal view, rent grabbing can most satisfactorily explain the situation in Tchiatura now. Some years ago, before the Rose Revolution, there was no private investor, and people were extracting the mineral in small private enterprises and sold it for themselves. Even though there was fierce competition between these small businesses, the profits essentially went to the residents of Tchiatura.

Today, the residents of Tchiatura do hardly feel that they are living on such a valuable resource.

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Guest - RT on Tuesday, 10 September 2013 17:54

> The natural resources of Georgia belong to the Georgian people, and therefore the profits made by extracting these resources should not flow into private pockets, but should benefit all Georgians.

That's a very simplistic statement and not particularly correct. What belongs to Georgian people is a certain share of profits net of extraction costs, which can be raised via taxes, license on extraction, etc. The other share belongs to whoever makes sure the resources are extracted and sold. Without the second share, the resources will remain underground, benefiting no one.

> The natural resources of Georgia belong to the Georgian people, and therefore the profits made by extracting these resources should not flow into private pockets, but should benefit all Georgians. That's a very simplistic statement and not particularly correct. What belongs to Georgian people is a certain share of profits net of extraction costs, which can be raised via taxes, license on extraction, etc. The other share belongs to whoever makes sure the resources are extracted and sold. Without the second share, the resources will remain underground, benefiting no one.
Guest - Danae Olsen on Saturday, 05 October 2013 00:01

Mostly, I agree with RT. Although, it would be nice to see the people of Chiatura benefit more from this "black gold" industry that has a considerable impact on the quality of everyday life in Chiatura. From the black river, impure drinking water, to the dirty old soviet trucks, cable ways, and trains that transport the stuff through town, Chiaturans are effected. It's hard to know what the exact health implications of such exposure to Manganese will be, but it can't be good. Citizens of Chiatura have rights and it's time that more people spoke up about the current Manganese operations.

Mostly, I agree with RT. Although, it would be nice to see the people of Chiatura benefit more from this "black gold" industry that has a considerable impact on the quality of everyday life in Chiatura. From the black river, impure drinking water, to the dirty old soviet trucks, cable ways, and trains that transport the stuff through town, Chiaturans are effected. It's hard to know what the exact health implications of such exposure to Manganese will be, but it can't be good. Citizens of Chiatura have rights and it's time that more people spoke up about the current Manganese operations.
Guest - Danae Olsen on Saturday, 05 October 2013 00:04

Also, great job Giorgi for choosing to write about your hometown who live here.

Also, great job Giorgi for choosing to write about your hometown who live here.
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