Thursday, 15 March 2012

How do we solve the resource curse? Try multiple channels for giving away resource revenues

by Mick Moore

Over the past decade, we have learned an enormous amount about the resource curse. Ten years ago, few people had even heard of the term. Others were sceptical that the discovery of large amounts of oil, gas or minerals could bring about less economic growth than originally expected.

There were also sceptics about whether resource reliance could worsen the quality of governance.

Today, there are few sceptics left. We now know that countries often do suffer from resource curse problems, sometimes massively so.

Looking for solutions to the resource curse

In recent years, a large number of intelligent and committed people have put a great deal of effort into seeking practical solutions. And solutions are really needed: the list of poor countries likely to become mineral and energy exporters is expanding steadily.

But we cannot stop countries using the resource they have. Once found, oil, gas, coal, copper or other minerals will inevitably be extracted and exported. How can we shield countries like Ghana, Mongolia, Mozambique and Uganda from the worst effects of the resource curse?

Who should control public revenues from resources?

The fundamental question is: Who will control the enormous amounts of money that can be earned from exploiting energy and mineral deposits? Countries have chosen to hand control to one of three bodies:

Candidate 1: Central government

Almost inevitably, central governments get their hands on most of the money. And governments are, arguably, best placed to use it for transformative developmental investments.

Most of the policy thinking has focused on how to make resource revenues more transparent: including the volumes, sources and uses of the money, and how to reduce the scope for ruling elites to go on spending binges, steal the money, or use it to keep themselves in power and in clover.

There is a range of good policy ideas, including institutional arrangements like the Extractive Industries Transparency Initiative, regulation in rich countries that obliges energy and mineral companies to be transparent about their payments to governments if they want to be listed on prime sharemarkets like New York (e.g. the Dodd-Frank Act passed by the U.S. Congress in 2011).

Investing some of the money in various kinds of long term funds is also a good solution. However no poor country has been spectacularly successful so far. – Poor countries tended to have poor quality governance institutions even before they became resource wealthy. It is however early days. Progress will be gradual and patchy. 

Candidate 2: Sub-national government

But should only central governments control resource revenues? Why not provincial, regional or local governments too? In some countries, especially those that have experienced strong local opposition to new oil or mining projects, sub-national governments have a right to a portion of revenues.

This seems like a good idea. But it can also backfire.

In 2004, Peru introduced a radical policy to transfer mining revenues to local governments. When world prices for silver, zinc, copper and tin soared, some Peruvian municipalities became very wealthy. Through careful empirical and statistical research, Javier Arellano-Yanguas showed that this new wealth brought few lasting material benefits and actually generated new political conflicts. (See J. Arellano-Yanguas, 'Aggravating the Resource Curse: Decentralisation, Mining and Conflict in Peru', Journal of Development Studies, 47(4), 2011)

Again, the core problem is that too much money is concentrated in too few hands. Spreading the money more widely can lessen the resource curse. Sub-national governments should have rights to share in resource wealth, but careful thought is needed on how best to implement sharing.

Candidate 3: Individual citizens and households

The most radical proposal is that resource profits should be redistributed as an entitlement to individual citizens or households. The American state of Alaska has long been practicing this idea on a limited scale. Iran recently introduced something similar, albeit without any clear entitlement.

Redistribution is a serious idea that has a future. But how much future, and where? Researchers with the Center for Global Development (CGD) have been promoting redistribution and exploring ways to implement it.

The CGD group’s research shows that one of the obstacles to redistribution is becoming less fundamental: the difficulties of proving personal identity and thus citizenship and entitlement. Taking advantage of new information technologies, some poor countries are quickly establishing comprehensive national identity systems.

Yet the CGD group underplay a potential problem: Unique individual identity numbers will give the recipients de facto citizenship and strong claims to local residence. In those parts of the poor world where large populations have been displaced by conflict or drought, or have migrated for work, the perception that ‘outsiders’ might suddenly win citizenship and a share in new oil or mineral wealth could stimulate serious conflict or even ‘ethnic cleansing’.

Concerns about identity are not a reason to abandon the idea, but a lot of thought, care, and experimentation is needed about the implications of these policies.

Who should control resource revenues? They should be split between the candidates

Each of the three main candidates for ownership of public resource revenues has potential, and each has problems. Any two of them combined are likely to be more effective than one alone.

Splitting revenues between the candidates will spread the money more widely, and also let us compare the performance of the different channels. This option allows us to shift some money from one channel to another, providing incentives for each ‘owner’ to show that that they are using the money well. By the same logic, we are likely to get better results if we use of all three channels simultaneously rather than two.

In the next few years, we can expect a lot of progress in finding solutions to the resource curse. Progress will be faster if we build institutional pluralism and competition into our experimental designs.

3 comments:

  1. There is little doubt that that some form of institutional pluralism is necessary if there is to be accountability in the management of [public] natural resource revenues in future.

    The Extractive Industries Transparency Initiative (or EITI – referenced above) is certainly a step forward in this regard. Since its launch almost a decade ago, the EITI has gained a global reputation for itself as a ‘multi-stakeholder’ initiative promoting transparency in the governance of extractive industry revenues.

    However, even for the EITI – one of the practical institutional “experiments” that is said to be working – success is hardly ‘spectacular’ and there are many lessons still to be learnt.

    An independent evaluation of the EITI recently concluded that EITI implementation has had a limited impact on natural resource governance and accountability, and on the public benefit derived from petroleum and mineral wealth in implementing countries. Many of the EITI stakeholders from the 35 implementing countries have expressed similar concerns.

    Of the concerns raised, some civil society stakeholders have questioned the depth of their governments’ commitment to the EITI and complained of a formalistic approach by officials. There have also been comments that some governments do not see much value for themselves in EITI implementation, and a widespread view (amongst civil society at least) that the EITI needs to be embedded within national law in implementing countries as a way of ensuring that governments remain committed to it and provide the necessary financing.

    More relevant to the topic of this blog, the EITI still hasn’t properly answered the question of how to engage with the citizens of resource-rich countries and in particular, local communities in regions where resource extraction takes place. This feeds into the ‘sub-national question’ too, as the EITI does not set out to target provincial, regional or local governments or the issues emanating from revenue-sharing and transfers (although some countries have chosen to do so as part of their EITI processes).

    Perhaps it is unfair to lay blame with the EITI for such ‘failures’ – since these were not the issues the EITI was ostensibly set up to address.

    The broader point remains though, which was laid out at the outset of this blog: we have learnt an enormous amount over the course of the last decade. The policy landscape has changed dramatically (and the global competition for natural resources has intensified); thus so too do the solutions developed in response to it need to evolve.

    To give credit where due, the EITI has itself recognized this. The EITI standard, negotiated a decade ago, was an appropriate response to the issues that EITI sought to help address then, but the EITI stakeholders must now identify strategic options that will assure the Initiative’s continued relevance over the medium term, while motivating EITI countries to continue and improve their implementation, and at the same time maintaining the tripartite consensus amongst the three main EITI constituencies (governments, the private sector and civil society).

    These are the debates that currently dominate the EITI's own internal discussions. And these are the kind of debates needed more widely if we are to hope for real progress in coming up with solutions to the resource curse.

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    Replies
    1. Mick Moore says:
      This is a very useful comment. Opinions on the value of the EITI are very diverse. It was from the start very ambitious, aiming to commit governments and energy companies to patterns of action that were not very evidently in their interests – and with no real sanction for deviations.

      There has been a great deal of 'gaming' of the system: companies and governments knew that the main sponsors of EITI could not afford for it to visibly fail, and were therefore able often to comply only formally, not substantially. But many good things have very rocky beginnings. And it is important that the EITI staff themselves seem to be seeking ways of making the arrangement more effective.

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    2. Seeeking solutions to the resource course is very useful but contentious especially in countries like Nigeria where extractive commodities remain the main source of export. With very limited capacity, the contracts have been structured in form of Joint Venture Agreements(JOAs) where host goverments own the resource and IOCs carry out the extraction after which profit is declared, then shared. This arrangement gives undue advantage to IOCs to 'declare what they wish' in an industry full of 'technicalities'. Any profit motivated entity will maximise such opportunity and that is likely what the IOC have been doing for more than fifty years in a country Nigeria. This broad leverage backfired in Nigeria in the nineties and IOCs paid heavily with a huge reputational loss in the Niger Delta. However as far as the JOAs exist, both the IOCs and the Nigerian government are guilty of the same offence. As someone involved in EITI since its 'fame' in Nigeria, I must submit that it has recorded a modest success. However its success is more related to transparency(information sharing) than accountability. The EITI global template as far as I know focuses on publishing what was paid by IOCs to host governmnents. This is a rather too simplistic approach to a huge dark room of corruption in the extractive industry. It ignores completely the fundamental process arithmetics that produce the revenue paid. What about the cost of production? Why is it that one barrel of oil cost lets says 5USD to produce in Nigeria and 2USD in a similar terrain elsewhere? What are the fiscal systems and tax regimes currently governing the operations? Do they compete with good practice in Alaska or Scotland? We cannot talk about revenue without unearthing these tiny issues that affect it. That the Nigerian government and the IOCs came out clean after the EITI audits(1994-2004)is not only bizarre but reduces the initiative to either a caricature or a public relations excercise. The same set up people that distributed the Halliburton 'presents'.
      That said, the biggest success of EITI is the awareness it created among civil society to demand information/transparency. The capacity to understand and utilize the information provided to ask the right questions still remain weak but the of tentacles of civil society have been raised by EITI in search of any ammunitions for advocacy. The constructive temper and debates around the Petroleum Industry Bill(PIB) and the petroleum subsidy removal drew momnetum from the EITI movement.
      Futhermore the multistakeholder approach of the EITI provided a platform for government and IOCs to sit on the same table with the 'adversarial civil society' for a conversation. The confidence building has begun but the expected partnership is still on the way.In all I must say the network of the EITI- in more than 35 countries provides a forum for the urgent dialogue on deepening. That said, an exploration of the linkages ultimately to development must follow. That is the only way we can hope to reverse the so called curse. The Nigerian EITI legislation commendably provided for the monitoring of the application of the revenue derived from the extractive industry by government at all levels. That is a huge challenge as well as an opportunity. Budget fraud and dubious procurement is common in countries where both politics and bureacracy is corrupt. We must continue the conversation which EITI has brought to our attention and take it full blast across the value chain.Transparency as provided by EITI(no matter how limited) is an important first step. Accountability is not a given- it must be demanded.With new discoveries in Uganda, Kenya and Ghana.Africa needs more EITI not less.

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