A Role for the Domestic Private Sector?  
Thursday, September 19, 2013
Daron Acemoglu and James Robinson

In our last two posts, we discussed transparency initiatives in the context of natural resource management (see here and here).

Though we believe these initiatives, by attempting to shift political power away from incumbent elites towards civil society, all move us in the right direction, the voluntariness of them will no doubt limit their impact.

At the margin this may be all one can do. But our discussion of the book by Jones-Luong and Weinthal suggests a complementary approach.

Jones-Luong and Weinthal argue that the evidence from Central Asia suggests that even in a context of fairly dysfunctional national institutions, smaller changes in the way the resource sector is governed, in particular who owns the resources, can have major implications for development outcomes.

Thus the analysis of Jones-Luong and Weinthal points to some interesting policy options to improve the economic consequences of natural resource rents. In particular, it suggests that getting the domestic private sector involved in the extraction or natural resources and the distribution of rents would probably mitigate the resource curse.

Precept 10 of the Natural Resource Charter does mention the private sector, but it is not about getting the private sector involved in the resource economy. Instead, it simply suggests that resource wealth should help to strengthen the domestic private sector more generally (a theme mirrored by the 2013 Africa Progress Report).

But Jones-Luong and Weinthal’s analysis suggests something more radical: that getting the domestic private sector involved in resource exploration, extraction and rent distribution has positive impacts on exactly the sorts of institutions that might help to reverse the oil curse.

In fact, in their Appendix, Jones-Luong and Weinthal extend their coding of the ownership and control of the oil sector to a large international sample of countries. According to their coding all African countries are in categories without significant private sector involvement. Angola and Nigeria have state ownership without control, while Cameroon, Chad, Congo Brazzaville, Equatorial Guinea, Gabon and Sudan all have foreign ownership and control.

This situation reflects the fact that neither the state nor the private sector has sufficient human and physical capital to exploit natural resources like oil on their own. Thus the only possibility is some type of hybrid regime with heavy foreign presence and investment.

Though this means one cannot have full private ownership and control, it also implies that one cannot have the worst possible structural situation of state ownership and control.

Thus through their own weaknesses, African countries have avoided the worst possible option.

Nevertheless, the glaring omission from this list, which according to Jones-Luong and Weinthal ought to really make a difference, is the lack of involvement of the domestic private sector. This is understandable in terms of the human capital deficit of these countries. But it may also be a pressing matter in terms of shifting the political economy of the resource sector in more functional directions.

It could be that finding strategies to develop the domestic private sector and get them involved in the resource sector could be an important bulwark against the resource curse. Compared to foreign private interests they may have a much greater stake in better national institutions. In some circumstances, they may also have greater leverage in domestic politics than foreigners.

Overall, the involvement of the domestic private sector could have important beneficial institutional externalities, in particular, helping empowerment of groups outside the extractive political elites of African nations.

This suggests that transparency initiatives such as the EITI could be complemented with ideas about how to leverage the resource sector to empower non-elites in these countries. This, by bolstering the private sector and getting it involved in contracting and the development of national resources, can perhaps change not only the economics but the politics of resources in Africa.

Article originally appeared on Why Nations Fail by Daron Acemoglu and James Robinson (http://whynationsfail.com/).
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