2 July 2014

South Africa: The Economics of Illegal Mining

analysis

On 22 June, four suspected illegal miners were found dead with gunshot wounds to the head at a gold mine near Johannesburg. Earlier this year, a rescue operation to remove illegal miners from the abandoned Gold One mineshaft on South Africa's East Rand, revealed a reluctance to be rescued for fear of arrest. This brings to attention the scale and intractability of efforts to curb illegal mining.

Illegal mining is not confined to abandoned mines, and appears to be especially prevalent where improperly sealed, abandoned tunnels meet operational tunnels.

Safely rehabilitating South Africa's abandoned mines to prevent access would cost approximately US $2.7 billion. Most of the companies responsible no longer exist, making it difficult for the state to recover its costs. It should, however, signal its plans for how to deal with the matter and how to prevent it in the future.

To confound matters further, Sibanye Gold reported that some of its own employees were involved in illegal mining while off-duty, making the distinction between illegal and legal miners particularly difficult from a governance perspective. The company called for the army to be brought in to address the problem, amid general complaints that the government was not doing enough.

Former Mineral Resources Minister Susan Shabangu suggested that illegal mining costs the economy about US $550 million a year. It is unclear whether this pertains to lost tax revenue or production losses from operational mines.

By its nature, illicit activity is not amenable to accurate statistics, but estimates indicate that about 14,000 people are involved in illegal mining activities in South Africa: 6,000 underground and 8,000 at surface level. The prevalence and persistence of illegal mining tells us three uncomfortable things, and shows that a multipronged approach is required.

First, regional poverty largely accounts for the supply of illegal miners, who are predominantly from countries outside South Africa (Lesotho, Swaziland, Malawi, Zimbabwe and Mozambique). These countries have some of the world's highest child mortality rates (a sensitive and reliable measure of poverty) and lowest scores on the UN's Human Development Index (HDI).

Child mortality rates range from 77 deaths per 1,000 births (Malawi) to 102 deaths per 1,000 births (Lesotho). Swaziland scores highest on the HDI score with 0.522 and Mozambique lowest with 0.322 (all figures from 2011). It is also rather alarming that miners would prefer to stay trapped rather than be rescued for fear of arrest. Mining sociologist Philip Frankel makes the point that immigration statistics by definition underestimate the number of people driven to South Africa as a function of regional poverty.

These undocumented poor 'then become victims of a largely silent xenophobia intrinsic to the struggle for scarce resources.' Many become victim to criminal syndicates who traffic refugee labour into both operational and abandoned mines.

He argues that this is facilitated by illegal labour brokers who recruit mineworkers through collusion with mine officials up to senior management, local police and human traders within the labour movement. High levels of coercion within these dynamics would explain why miners incur the risk of operating illegally (in addition to the small remittances that may be sent home, upon which many family members are dependent).

Second, demand for illegally mined minerals is clearly strong. The activity must be profitable for illicit labour brokers and traffickers to incur the risk of transporting and recruiting people illegally.

In a classic paper on the economic theory of illegal goods, Becker, Grossman and Murphy argue that if the social value of a good is lower than the private value of a good, it is more optimal to tax that good than to declare it illegal, given the substantial costs and low probability of success associated with policing.

But they were examining goods such as narcotics, which generally do not have a legal competitor. Clearly, more research is required to understand the demand elasticity for illegally extracted minerals, and the relevant income and substitution effects so as to design better policies for prevention.

Where parallels exist between abalone poaching and illegal mining, lessons from that domain could be helpful. In particular, focusing on syndicates that facilitate movement of ore from shafts to processing facilities to illicit markets may be more productive than trying to stop the supply of illegal miners per se (though both are necessary).

Third, the profitability of illegal mining points to inefficiencies within the formal industry. A growing industry with functional labour relations would absorb more employees, crowding out opportunities for illicit labour broking and illegal mining. Clear, uncomplicated and coherent minerals and labour legislation is a necessary if insufficient condition for growing the industry.

Some of the sufficient conditions, such as continued high commodity prices, are beyond South Africa's control. Even if these conditions were satisfied, however, the mining industry cannot be expected to absorb the entire over-supply of unskilled labour from across the region.

In the absence of complete rehabilitation and the presence of over 6,000 accessible abandoned mine shafts, regional poverty will continue to incentivise illicit activity. A more functional formal industry would however ameliorate some of these problems.

In light of this analysis, a brisk rethink of the governance mechanisms required to foster a growing formal industry and reduce the incentive for illegal activity is clearly necessary.

Regional cooperation at the highest level is also necessary to alleviate poverty and create more sustainable employment opportunities. All the relevant roleplayers in South Africa and the rest of SADC therefore need to think more carefully about economic cooperation on mining, energy and water management that would produce positive regional spillovers. For that to happen, political will – the ultimate but sometimes elusive elixir – is a prerequisite.

Ross Harvey is a visiting Research Fellow with SAIIA's Governance of Africa's Resources Programme in Cape Town.

AllAfrica editors' note: This article has been amended since first published.

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