Tuesday
Sep102013

How to Combat the Resource Curse  

A while ago we discussed the economic and political dimensions of the resource curse (see here, herehere, here and here). We did not end on a happy note. The evidence suggests that countries with bad institutions are likely to experience the natural resource curse.

This is particularly bad news for Africa, which is rich in natural resources and many of the countries of the continent heavily depend on revenues from these resources. What’s more, historically, there has been underinvestment in exploration for natural resources in Africa and there is probably a lot more resources there to discover; high resource prices will guarantee that this happens.

How can these societies stop the resource curse from coming into operation?

It would be no surprise to the readers of this blog that one obvious answer is to improve institutions.

For example, we saw how resources have been a curse for Cameroon. It would be great in many dimensions to improve the institutions of the Cameroon. In fact, the international community and many in Cameroon have been trying to do just that. But readers of this blog will also know that improving institutions is a hard thing to do.

In the 1990s, Cameroon democratized. But this just meant that President Paul Biya effortlessly re-invented himself as a democratic politician, and since then, he has won every election. This is exactly the type of democratization that has not led to better development outcomes in Africa as Masa Kudamatsu has shown in his paper “Has Democratization Reduced Infant Mortality in sub-Saharan Africa? Evidence from Micro Data”.

Importantly the level of institutional quality attained in the Cameroon and many other African countries and the politics that lie beneath it imply that some types of policies that appear to be solutions to the oil/natural resource curse, such as petroleum funds of the sort used by Norway, are unlikely to be of any use. This is because to be of use, they have to realign the political incentives of powerful actors, and it seems very unlikely that such funds can have this effect.

The clearest illustration of how this type of approach to the problem of managing resource wealth is unlikely to be successful is the famous Chad pipeline case.

In 1999 the World Bank invested $190m in the construction of a 650 mile pipeline to the Gulf of Guinea so that Chad could start to export its oil. It only agreed to do this if Chad’s parliament passed a Petroleum Revenue Management Law (PRML). The parliament obliged.

One laudable goal of the law was in fact transparency. It required that Chad’s 12.5 percent share of direct revenues from oil production flow into a London-based Citibank escrow account (monitored by an independent body created to oversee the account’s management).

Another main, and equally laudable, goal was to channel Chad’s revenue into poverty-reduction programs. The “future generations” fund accounted for 10 percent of annual revenue and was created to provide Chad with reserve funds after the oil reserves are exhausted. Eastern Logone, Chad’s oil-producing region, received 5 percent of the royalties, while 15 percent of royalties and dividends went to the federal government.

But such laws under extractive political institutions mean little. In December 2005, President Idriss Déby overhauled the PRML, doing away with the future generations fund, and doubling the portion of money that would go directly to the federal government to 30 percent. Another change to the law was the inclusion of security as one of the priority poverty reduction measures to allow more arms spending.

Soon the government simply stopped complying with the expenditure earmarking of the PRML.

This is just a reiteration of the conditional resource curse we discussed previously:

resources are a blessing with strong institutions but a curse with weak, extractive ones.

This is no surprise. This notion has been long understood in policy circles as has the notion that what works in Norway probably will not work in Gabon.

This understanding is probably at the root of efforts by various governments and NGOs to develop innovative policy proposals to try to reform the set of institutions that connect natural resource wealth to economic development.

One of the most important is the Extractive Industries Transparency Initiative (EITI) promoted by former British Prime Minister Tony Blair in 2002 that became an independent NGO in 2007.

As of 2010 37 countries had voluntarily signed up to this initiative and of these 16 have been rated by the EITI as being compliant. The main point of this is to get governments to publish adequate accounts of their receipts from natural resources and to create mechanisms by which society and voters can become informed about this. To become compliant there are 6 criteria that must be satisfied and these include most centrally:

  1. Regular publication of all material oil, gas and mining payments by companies to governments (“payments”) and all material revenues received by governments from oil, gas and mining companies (“revenues”) to a wide audience in a publicly accessible, comprehensive and comprehensible manner.

  2. Where such audits do not already exist, payments and revenues are the subject of a credible, independent audit, applying international auditing standards.

Also significant is the provision that:

Civil society is actively engaged as a participant in the design, monitoring and evaluation of this process and contributes towards public debate.

In fact, there has been progress on other transparency initiatives over the past decade.

Central has been the role of several other NGOs.

One NGO, Global Witness, has driven a campaign called “Publish What you Pay” which puts pressure on extractive industries to reveal how much they transfer to governments. Another, Revenue Watch Institute, promotes the use of natural resource wealth for the public good.

Finally, the Natural Resource Charter, launched in 2009 by academics and civil society, has developed 12 precepts that a country should follow if its natural resource wealth is to be used for the common good. This is aimed both at governments but also members of civil society to inform them of how the policy of their government might be deviating from what is socially desirable. African governments have themselves been getting into the action by endorsing the Africa Mining Vision along with the 2011 Action Plan and a great deal of pressure towards institutional change in the natural resource sector is coming from the Africa Progress Panel’s 2013 Report.

Any of these initiatives can and have been criticized. Many independent evaluations are quite scathing about EITI. They question, for example, whether it has had any impact on anything important.

Empowering civil society and voters through transparency is a sensible objective. But it is also a difficult task, particularly since quite a few of the EITI countries are fully autocratic regimes. Azerbaijan and Kazakhstan, for example, are EITI compliant, but both are autocratic, renowned for their corrupt politics, and consistently repressive of civil society activism.

Equatorial Guinea and Gabon have been judged as non-compliant with EITI. But what are the implications? No sanction or punishment so far as we are aware of.

In April 2006, for example, the government of Congo-Brazzaville locked up Christian Mounzeo and Brice Makosso, the coordinators of Publish What You Pay, which in response withdrew from the country. So information is power, but civil society must be able to organize and use this information effectively. Just information is probably not enough.

This is not to unduly criticize the EITI. Like many other schemes aimed at transparency, it is taking the right perspective on the importance of information, transparency and civil society. But if extractive political institutions are at the root of the problem, these schemes are unlikely to be enough by themselves and may need other methods of empowerment for non-elites in society.

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