by Degol Hailu and Chinpihoi Kipgen
- The Extractives Dependence Index (EDI) is a measure to monitor a country’s dependence on the extraction of oil, gas and mineral resources.
- The EDI measure the share of export earnings from extractives; their share of revenue in total revenue; and their value added in GDP.
- Persistent dependence on the extractive sector subjects an economy to volatile economic growth and affects its sustainability.
- Measuring a country’s dependence on extractives allows the crafting of better policies for diversification strategies.
Persistent dependence on the extraction of oil, gas and minerals for export earnings and fiscal revenues poses concern for the sustainability of growth in resource-rich countries. Understanding the degree of dependence on these non-renewable resources and where the dependence originates from is helpful in crafting the right policies for diversification.
To measure and monitor such dependence on resource extraction, we develop what we call the Extractives Dependence Index (EDI). The EDI is a composite index made up of three indicators: 1) the share of export earnings from extractives in total export earnings; 2) the share of revenue from extractives in total fiscal revenue; and 3) the extractive industry value added in GDP. We adjust each of these indicators to capture the productive capabilities in each country to determine the presence of alternative sources of export and tax revenues as well as industrial capacity for diversification, which are important for reducing dependence on extractive resources.
The EDI ranks 81 countries in terms of their dependence on oil, gas and mineral extraction.