Natural Resources, Often a Curse, Can Also Serve the Public

WASHINGTON: Energy addiction is not solely the rich world’s affliction. Instead, oil cravings perpetuate undemocratic regimes. Rising demand from an emerging middle class in the developing world – for the people’s car in China, the Chery, or India’s Nano – will only exacerbate longstanding problems. Policymakers in “petro-states” rarely use energy revenues to alleviate poverty, diversify their economies or enhance access to opportunity. Instead, these governments often become corrupt, authoritarian and unresponsive.

This phenomenon, the “resource curse,” afflicts countries that depend on extractive industries, whether oil, minerals or diamonds, to fuel growth. Policymakers in resource-rich countries often become addicted to extractive-industry revenues and ignore the needs of other productive sectors such as agriculture, education and manufacturing. Instead, officials may pad their personal bank accounts and funnel petrodollars to allies or families to stay in power. Corruption can become endemic. Eventually, such countries are at increased risk for conflict and even state failure. Their citizens may face lower life expectancy and greater inequality, illiteracy and child malnutrition.

The citizens of these petro-states can’t ensure that regulations and laws are fair and address their needs. Not surprisingly, they often blame foreign investors for their desperate straits. But foreign investors are also at great risk when they collaborate with opaque host governments. In such countries, government officials must approve every decision related to exploration, development, and export of oil or minerals. Opportunities for corruption multiply because of such frequent interaction. Executives find it difficult to manage in such countries. Like citizens, they lack the information they need to respond to market forces, influence government decisions, hold policymakers accountable and ensure that governance is equitable and efficient. Thus, citizens and extractive-industry firms have a common interest in improving the transparency, responsiveness and effectiveness of governance of petro-states.

In 2003, the British government proposed a new strategy – the Extractive Industry Transparency Initiative (EITI), to address these problems. This initiative created a voluntary system to which governments rich with oil or minerals agree to adhere. These states entrust an independent administrator to compare extractive sales and revenues as declared by oil companies and recorded by governments. In addition, “all companies operating in the relevant sectors in countries implementing EITI have to disclose material payments to the government” and then make this information public. Such reporting reduces the ability of policymakers to demand bribes of companies, while increasing the ability of citizens to monitor government.

By September 2007, some 26 resource-rich developing countries claimed to have implemented the initiative. But several countries implemented the initiative in name only, prompting the EITI secretariat to add teeth to the requirements.

In December 2007, the Extractive Industry Transparency Initiative secretariat, based in Norway, announced that no country was fully compliant with the initiative. Compliant countries have a credible independent administrator, disclose and disseminate information on all material revenues from extractives, and have the full engagement of a multi-stakeholder group.

However, the secretariat also announced 15 candidate countries: These governments made a public commitment to implement the initiative, worked with business and civil society on an implementation plan, published the plan, and, appointed an individual in charge of their program. Candidates that achieve two years of successful validations will be deemed “compliant.” Although nine governments had taken some steps, the secretariat warned these indeterminate players to beef up their commitment or expect to be dropped. In fact, two countries were dropped from the program.

Some 38 of the world’s largest oil and mining firms and many major extractive-industry associations agreed to support the initiative. But only two firms have actually both disclosed and validated their payments to governments. Moreover, most of the firms supporting the initiative are located in Europe and the Americas. No Indian or Chinese firms yet support it. With India and China increasingly hungry for oil, their support is crucial to the success of this new approach.

Obviously, the initiative is a work in progress. The 15 candidate countries move at different paces to implement the program – a function of culture, commitment, or inadequate incentives. Moreover, some countries such as Nigeria have not consistently involved the public. Congo has arrested open-budget advocates, thereby negating any potential feedback loop. Gabon suspended 22 NGOs, but lifted the ban after the EITI secretariat stressed that it was incompatible with the initiative.

The scheme does seem to help participants improve governance and may over time prevent the resource curse. Using World Bank and Transparency International data, I compared 26 EITI countries, including the two recently dropped, with 25 other “non-EITI” developing-country resource exporters. Preliminary findings suggest that 11 of the 26 countries improved their economic governance and five made significant improvements. Improving governance is central to attracting foreign investment and stimulating growth. Fewer non-EITI countries improved the business climate, and on average these governments performed worse.

Moreover, the initiative facilitated public participation in governance. Using World Bank Voice and Accountability scores, which measure the ability of citizens to influence government and hold it accountable, I found nine countries improved public participation; Liberia, Kyrgyzstan, Sierra Leone and the Congo made dramatic improvements. Eight non-EITI countries made more limited progress.

Ironically however, the initiative has had little impact on public perceptions of corruption. While some implementing countries such as Azerbaijan and Liberia have reduced corruption, many others have yet to make a dent in opacity.

These findings corroborate the initiative’s great promise as well as its mixed results. By empowering reformers and encouraging collaboration, this initiative is changing the behavior of oil exporters without conditionality or force. Moreover, the initiative allows more developing country stakeholders to influence extractive-industry decisions. Thus it links consumers and producers in a feedback loop.

The scheme also represents a new approach to governance. While no international organization or law has mandated the initiative per se, the World Bank requires countries to show that, before the bank invests in extractive projects, the borrowing country must put policies in place to advance the needs of the poor and foster transparent and effective public and corporate governance. Several governments, including the UK, Norway, Canada and the Netherlands, have contributed to a trust fund at the World Bank, to help extractive countries assist the poor, for example, with investments in education.

The World Bank has also provided grant funding for civil-society groups in extractive-industry countries, designed to enhance their capacity to influence government policies.

These results reveal that the initiative promotes better governance overseas without direct conditionality. But it will need additional support from governments and firms to succeed over time. Norway aims to be the first resource-rich industrialized country to implement the initiative, hoping to set an example. Adoption by other advanced resource-exporting nations – Chile, Australia, the US or the UK – would also help.

The US has made a rhetorical commitment to the scheme, with little press or congressional attention. The US is home to many of the world largest extractive firms, and policymakers should exhort these firms to do more to promote the initiative. The US and other governments should also prod national oil companies to support this initiative. China and Brazil have some of the world’s largest oil firms, and the scheme would certainly benefit from their support.

It’s rare when the business interest and the public interest are aligned, but EITI presents both an opportunity and a process to allow such collaboration. Trade is supposed to be about mutual benefit; this initiative provides a means to ensure that the citizens of petro-states as well as energy producers and consumers reap benefits from trade in oil.